Tax avoidance not main purpose of reorganisation

In Euromoney Institutional Investor PLV v HMRC [2021] TC08046, HMRC was unsuccessful in blocking a company's claim for share-for-share relief on a reorganisation, the First Tier Tribunal (FTT) found no main purpose of tax avoidance.

• Euromoney Institutional Investor PLC (Euromoney), agreed a sale of shares in Capital Data Limited (CDL) to Diamond Topco Limited (DTL)
• In exchange for its shareholding, it was to receive 15.5% shares in DTL and cash of $21m.
• After the deal was agreed in principle, the Tax Director of Euromoney’s parent suggested that the cash consideration was instead paid in preference shares which were redeemable at par a year after the transaction.
• The third party agreed to this request.
• The intention was that the capital gain on the sale of CDL shares would be rolled into the ordinary and preference shares by the Reorganisation share-for-share exchange provisions and when the preference shares were redeemed Substantial Shareholding Exemption would apply to exempt the gain.
• Clearance was sought from HMRC for the share-for-share exchange after the deal had been agreed.
• HMRC denied clearance: they were not satisfied that the exchange did not form part of a scheme or arrangement to avoid tax.
• Euromoney submitted tax computations on the basis that there was no chargeable gain on the disposal of CDL shares as the reorganisation provisions applied.
• On 17 January 2016 Euromoney’s entire preference shareholding in DTL was redeemed for cash.
• The redemption was treated as exempt from Corporation Tax in the relevant return on the basis it qualified for SSE by virtue of Euromoney’s ordinary shareholding in CDL.
• HMRC Enquired into the Corporation Tax Return for the year to 30 September 2015 and issued a Closure Notice contending:
  • The share exchange was undertaken as part of a scheme one of the main purposes of which was the avoidance of tax.
  • As a result, s.137(1) TCGA 1992 prevented the share exchange provisions in s.135 TCGA 1992 from applying.
• The additional tax due as a result of the amendment was £10.5m.
• Euromoney Appealed.

The FTT considered that:

• The transaction should be viewed as a whole and not with reference to only the exchange of cash for preference shares.
• The transaction involved tax avoidance, although benefitting from Substantial Shareholding Exemption was not designed to defeat the intention of parliament.
• The intention of Euromoney swapping cash consideration for preference shares was to avoid taxation. Tax was a purpose of the transaction however the purposes of the arrangements were exclusively commercial.
• Witness testimony showed that Euromoney did not consider the tax advantage to be significant in the context of the transaction as it represented only 5% of total sale consideration.
• The time invested in the tax-saving exercise was insignificant in the context of the transaction as a whole.

The FTT allowed the appeal. It concluded that the exchange in this appeal was part of a scheme or arrangements where one of the purposes was the avoidance of Capital Gains Tax but, that purpose was not the main purpose or one of the main purposes of the arrangements.

Useful guides on this topic

An Index to Reorganisations and Demergers
You can reorganise or separate company activities and different subsidiaries using a variety of different methods. This series of super practical tax guides provide an outline of the tax treatment together with step guides and tax clearance templates.

Substantial Shareholding Exemption (SSE)
What is SSE?  When does SSE apply?

How to appeal an HMRC decision
Disagree with a HMRC decision? How to appeal, what type of decision can you appeal, what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

Closure Notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights?

External link

Euromoney Institutional Investor PLV v HMRC [2021] TC08046