Business Tax Briefing

Court of Appeal dismisses HMRC’s appeal in ‘share-for-share’ exchange main purpose case

The Court of Appeal has unanimously dismissed HMRC’s appeal in the corporation tax case Delinian Limited (formerly Euromoney Institutional Investor plc) v HMRC. The taxpayer agreed in principle to sell shares it held to a third party for consideration in the form of cash and shares. The substantial shareholding exemption (SSE) would not have applied to the disposal of the shares, and so a chargeable gain was expected to arise on the proportion attributable to the cash consideration. However, prior to completion, it was decided to replace the cash-element with redeemable preference shares. Assuming that the ‘share-for-share exchange’ rules in sections 127 and 135 TCGA 1992 applied, an immediate taxable gain would not arise and, once a year had passed, the SSE would then apply to exempt the deferred gains crystallising on the redemption of the preference shares for cash. HMRC considered that section 137 TCGA 1992 applied – i.e. that the exchange formed “part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to capital gains tax or corporation tax” – which would disapply the share reorganisation tax treatment and cause the entire initial disposal to be taxable. Both the First-tier and Upper Tribunals decided in favour of the taxpayer that the condition in section 137 was not met.

HMRC submitted that the Tribunals ought to have looked separately at the element of the arrangements that led to the preference shares replacing the cash. If they had done so, they would have had to conclude that a main purpose of that part of the arrangements was tax avoidance. The Court of Appeal has disagreed, holding that, when applying the main purpose test in section 137, the arrangements that must be considered are the whole of the arrangements undertaken, not a selected part or parts of them. The Court dismissed the idea that a Tribunal might be required to sift through every permutation of the elements of a scheme to see if it can find such a combination that has as its main purpose, or a main purpose, tax avoidance. It noted that, if that were the case, a taxpayer could find itself unable to avail itself of the relief if a tax avoidance motive, which might be minimal when viewed in light of the overall scheme, could be found for an insignificant part of the arrangements. The Court of Appeal also separately dismissed an alternative counterargument put forward by the taxpayer, that its use of a tax measure such as the SSE, as deliberately provided for by parliament, should not be construed as the avoidance of liability to corporation tax for the purposes of applying section 137 to its circumstances.

Supreme Court upholds Danish tax authority’s jurisdiction to pursue alleged tax fraud claims

The Supreme Court has handed down a unanimous judgment, in favour of the Danish tax authority (SKAT), in Skatteforvaltningen v Solo Capital Partners LLP (In Special Administration) and Others. The judgment forms part of ongoing court actions being pursued by SKAT in England and Wales to recover purported dividend withholding tax refunds of approximately £1.4 billion in total that it alleges were fraudulently induced. When SKAT brought proceedings before the Commercial Court, a number of parties argued against the claims, inter alia, on the basis that they were protected by the so-called ‘revenue rule’: a principle of international law under which claims to enforce the tax law of a foreign state are inadmissible before courts in another jurisdiction. The Commercial Court considered this as a separate preliminary issue and held that SKAT’s claims fell within the scope of the rule. In 2022, the Court of Appeal reversed the decision. The Supreme Court has now agreed and upheld the Court of Appeal’s conclusion. In the present case, the Supreme Court considered that, whilst the amounts paid may have been described as “refunds”, those making the refund applications had not suffered the withholding tax and were never taxpayers. In its view, the alleged claims lack the required character of a charge by a foreign state pursuant to its tax laws. The main trial in the litigation is listed to commence in the Commercial Court in April 2024.

Department of Health: smoking consultation and potential duty on vaping
In the King’s Speech on 7 November 2023, reference was made to the government’s intention to introduce legislation to create a smokefree generation. This follows on from the consultation Creating a smokefree generation and tackling youth vaping published last month by the Department of Health and Social Care. Included in the proposals under consideration is a new duty on vapes. The consultation states that there is currently a significant difference in price between vapes and tobacco products (due to the latter being subject to duty), and this could encourage smokers to switch from cigarettes to vapes. However, this also means that vapes are more readily accessible to young people and other non-smokers. A number of countries have introduced a tax on vapes, although research on the effects of e-cigarette taxes on use shows that whilst taxes are associated with reductions in vaping, it is at the potential risk of increasing youth smoking. The consultation closes on 6 December 2023. (Contact: Andrew Clarke)

Dbriefs webcast

The next EMEA Dbriefs Tax webcast is on Tuesday 14 November 2023 at 12.00 GMT/13.00 CET. UK Tax Monthly Update November is from our UK Tax Focus series and will be hosted by David Walters. During this webcast our panel will discuss what your organisation needs to know to keep up to speed with the latest UK tax developments, with updates on news in corporate tax, employment tax, and indirect tax.