Delinian Limited v The Commissioners for HMRC
[2023] EWCA Civ 1281
Hugh Edward Mark Osmond & Anor v The Commissioners for HMRC
8 May 2024
[2024] UKFTT 378 (TC)
First-tier Tribunal
Two business owners got money from their company through a share buyback. They said it was a tax-free return of their investment. The tax man said it was income and they owed taxes. The court agreed with the tax man, saying the owners' actions were mainly about avoiding tax, even if they didn't directly intend to. The court also said the notices and deadlines for paying tax were correctly applied.
Key Facts
- •Two appellants received £9 million and £11 million respectively from a share buyback by Xercise2 Limited in March 2015.
- •Appellants claimed the consideration was a return of capital, exempt from CGT due to EIS disposal relief.
- •HMRC argued the Transactions in Securities (TIS) regime applied, resulting in income tax liability.
- •HMRC issued counteraction notices and assessments in March 2021 for the 2014/2015 tax year.
- •Appellants appealed against the assessments, raising issues regarding main purpose, relevant consideration, counteraction notice validity, and the limitation period.
Legal Principles
The main purpose test under section 684(1)(c) ITA 2007 is subjective and requires a conscious motive, not subconscious motives.
IRC v Brebner [1967] 2 AC 18 and Allam v HMRC [2022] STC 37
Statutory provisions should be given a purposive construction, read in context, and with consideration of the historical situation leading to enactment.
Jason Wilkes [2021] UKUT 150 and Rossendale v Hurstwood [2021] UKSC 16
Section 685(4)(a) ITA 2007 defines relevant consideration, capped by the value of assets available for distribution as dividends, and section 685(6) excludes assets representing a return of sums paid by subscribers on the issue of securities.
Addy v IRC 51 TC 71 and Bamberg v HMRC [2010] SFTD 1231
Counteraction notices must specify adjustments and their basis under section 698(2) ITA 2007; validity is assessed using an objective reader test considering the context, including accompanying documents, and section 114 TMA may cure defects.
Bristol & West v HMRC [2016] STC 1491, R (on the application of Archer) v HMRC [2018] STC 38, and Norton v HMRC [2023] STC 526
Section 698 ITA 2007 provides a six-year time limit for assessments to counteract income tax advantages, potentially overriding the four-year limit in section 34 TMA 1970; interpretation hinges on whether the TMA is considered part of the 'Income Tax Acts'.
Inverclyde Property Renovation LLP [2020] STC 1348, R (Spring Salmon and Seafood) v IRC 2004 STC 444, and Tooth v HMRC [2021] STC 17
Outcomes
Appeals dismissed.
The Tribunal found that the appellants' main purpose in undertaking the share buybacks was to obtain an income tax advantage, as defined in section 687 ITA 2007, because securing EIS disposal relief necessarily resulted in a lower tax burden than a qualifying distribution. The consideration was deemed relevant consideration under section 685, the counteraction notices were deemed valid under the objective reader test and section 114 TMA, and the assessments were within the six-year limitation period of section 698(5) ITA 2007.