In HMRC v Euromoney Institutional Investor PLC [2022] UKUT00205, the Upper Tribunal (UT) confirmed that an ordinary share for redeemable preference share exchange, in amending a prior agreement from a direct shares for cash exchange in a takeover, was undertaken for bona fide commercial reasons, without the main purpose of tax avoidance. Relief under the Reorganisation provisions was available.

  • 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 (SSE) 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 unsatisfied that the exchange did not form part of a scheme or arrangement to avoid tax.

Despite the denial of tax clearance, 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’s Appeal to the FTT was allowed.
  • HMRC appealed to the UT.

The UT found that:

  • The FTT had considered the right transaction. HMRC’s contention that the transaction which should have been considered was limited to the preference share exchange and subsequent redemption (the part which lead to the perceived avoidance) was dismissed.
  • The FTT had not erred in law in concluding that the transaction was carried out for bona fide commercial reasons: when considering that the main purpose of the transaction was not tax avoidance, the FTT was entitled to consider:
    • The small relative tax benefit of the arrangement was a relevant consideration.
    • That the limited tax analysis indicated any tax benefit was not important in the context of the transaction.
    • That the limited time spent considering the preference share side of the transaction was a relevant factor in determining the main purpose of the transaction.

HMRC’s appeal was dismissed.

Useful guides on this topic

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.

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 and 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 links

HMRC v Euromoney Institutional Investor PLC [2022] UKUT00205

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