In Hugh Edward Mark Osmond & Anor v HMRC [2025] UKUT 00183, the Upper Tribunal (UT) found that the First Tier Tribunal (FTT) made an error in law. A main purpose of crystallising Enterprise Investment Scheme (EIS) relief was not automatically, as a matter of law, the obtaining of an Income Tax advantage, even though this may have been its effect.
On 16 and 17 March 2015, the taxpayers entered into share buybacks totalling £20 million.
- The disposals were included on their 5 April 2015 tax returns, and Enterprise Investment Scheme (EIS) disposal relief was claimed, meaning that no Capital Gains Tax (CGT) was payable.
- The taxpayers were concerned that the upcoming election would remove EIS relief and so arranged the buybacks to crystallise EIS relief.
- HMRC opened enquiries into the tax returns in January 2017 but closed them without amendment in September 2017.
- On 31 March 2021, HMRC issued counteraction notices and assessments under the Transactions in Securities (TiS) legislation.
- In November 2021, the taxpayers Appealed to the First Tier Tribunal (FTT).
The FTT considered two submissions made by HMRC.
- The primary submission was that, as a matter of law, the taxpayers’ main purpose of using the share buybacks to crystallise their EIS relief was also a main purpose of obtaining an Income Tax advantage.
- The secondary submission was that the evidence showed that the taxpayers did have a main purpose of obtaining an Income Tax advantage when they entered the share buybacks.
- The FTT rejected the secondary submission, noting that the taxpayers’ main purpose was to crystallise an EIS disposal. The Income Tax advantage was a consequence of doing so and not their main purpose.
- The FTT did, however, agree with HMRC’s primary submission. They concluded that the TiS legislation meant that one main purpose of entering the share buyback was also a main purpose of obtaining an Income Tax advantage. They rejected the appeal.
The consequence of this decision was potentially wide-ranging, as it meant that where the main purpose of entering a transaction is to obtain a CGT relief, the transaction potentially falls within the scope of the TiS legislation.
The taxpayers appealed to the Upper Tribunal (UT), which found that the FTT had made an error in law in its interpretation of the TiS legislation.
- It was necessary to consider the subjective intentions of the taxpayer when determining their main purpose in being a party to a transaction in securities.
- The FTT had confirmed that the taxpayers’ intention was to crystallise a benefit under EIS, not to obtain an Income Tax advantage.
- Even if inevitable, effects or consequences are not necessarily the same as purposes.
- The Income Tax advantage received by the taxpayers was an effect rather than the purpose.
- The UT did not consider that the TiS legislation had the effect of automatically deeming a main purpose to exist that did not exist.
- The UT considered that the argument advanced by HMRC would not have been possible under earlier provisions of the TiS legislation.
- The consultation document for the relevant iteration of the TiS rules also contained no evidence of an intention to make a main purpose of obtaining a CGT relief constitute a purpose of obtaining an Income Tax advantage.
The taxpayers’ appeal was allowed.
Useful guides on this topic
Transactions in Securities
What are the Transactions in Securities rules? When do they apply?
EIS: Enterprise Investment Scheme (Subscriber guide)
When can EIS relief be claimed? What are the conditions for EIS relief? What are the benefits of EIS relief?
How to appeal an HMRC decision
Disagree with an HMRC decision? How do you 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?
TiS blocks EIS disposal
Attempts to claim EIS disposal relief on share buybacks were denied by the First Tier Tribunal (FTT). The FTT determined that the Transactions in Securities (TiS) legislation applied because the main purpose of the transaction was to obtain an Income Tax advantage.
External link