The decision of the Upper Tribunal (UT) in Allam v HMRC [2021] UKUT 291 (TCC) (reported in Tax Journal, 3 December 2021) covered three distinct issues. The unifying feature of the UT’s approach is its refusal to retry issues of fact. It applied the Edwards v Bairstow ([1956] AC 14) principle: it would overturn a decision on the facts only if it could be shown that the First-tier Tribunal (FTT) had manifestly fallen into error by reaching an irrational decision, or by failing to take into account relevant evidence before it, or by taking into account irrelevancies. This underlines the importance for taxpayers in adducing comprehensive evidence at the first hearing of an appeal.
The three issues before the UT were:
1. The availability of entrepreneur’s relief from capital gains tax on a disposal of shares (TCGA 1992 s 165A). HMRC won before the FTT and the taxpayer appealed.
2. Relief from tax on funds remitted to the UK by a non-UK domiciled taxpayer under what is commonly referred to as ‘business investment relief’ (BIR) (ITA 2007 s 809VN). Again, HMRC won before the FTT.
3. A charge to tax under the ‘transaction in securities’ (TIS) provisions in connection with the same disposal of shares as gave rise to the first appeal. Here, Dr Allam won in the FTT.
In the first appeal, the UT decided the FTT had been right to deny relief on the basis that the relevant company was not trading. It went on to decide that the FTT had not erred in its evaluation of the relevant evidence so its decision on the question of whether, as a matter of fact, the company was trading was not flawed.
In relation to the second appeal, the dispute turned on whether the declaration of a £400,000 dividend which was never paid to Dr Allam by a BIR target company constituted a potentially chargeable event on the ground that it represented a disposal of part of Dr Allam’s holding in the company. Again, the UT found that the FTT had correctly applied the law and that it had not erred significantly in its approach to the facts on the basis of the evidence before it.
The third appeal concerned the disapplication of the TIS provisions in circumstances where the securing of an income tax advantage was said not to be a main purpose of the transaction in question. The UT’s examination of the issue is a helpful appeal decision on the main purpose test, which is increasingly pertinent to many cross-border (as well as domestic) anti-avoidance provisions. The UT held that the FTT had applied the right test. The FTT had said:
‘The legislation…can only apply if the obtaining of an income tax advantage was…one of the main purposes of the transaction. It does not matter if the purposes of the transaction were “commercial” or “personal” ... [T]he mere fact that the result of the transactions might have been achieved in a different manner which would have given rise to an income tax receipt ... does not automatically give rise to the inference that a main purpose of the transaction that was undertaken was to obtain an income tax advantage.’
On the facts, the FTT concluded ‘the income tax advantage was merely an incidental benefit.’
Addressing this, the UT held:
‘[F]or the counteraction provisions to be engaged there will always be an alternative transaction which will involve an income tax charge, as compared to the actual transaction which involved a CGT charge. That is inherent in the requirement that a main purpose of being a party to the actual transaction was to obtain an income tax advantage… It is not clear to us what HMRC mean by their criticism that the FTT only considered Dr Allam’s conscious motives. It was common ground that the test as to Dr Allam’s purposes in being a party to the transaction is a subjective test. We cannot see that sub-conscious motives are to be taken into account, although we accept that inferences can be drawn from the primary facts as to a party’s true motives ... The FTT was invited by HMRC to draw the inference from the surrounding facts ... In rejecting that invitation it is clear that the FTT considered the entirety of the evidence.’
Apart from the importance of good evidence before the FTT, the following key points emerge:
motive tests are subjective;
extrinsic evidence is important only insofar as it assists in determining the intentions of the taxpayer; and
a tax efficient transaction will not always have securing a tax advantage as its main purpose.
Home >Articles > Lessons from the Upper Tribunal’s decision in Allam
Lessons from the Upper Tribunal’s decision in Allam
Motive tests are subjective.
The decision of the Upper Tribunal (UT) in Allam v HMRC [2021] UKUT 291 (TCC) (reported in Tax Journal, 3 December 2021) covered three distinct issues. The unifying feature of the UT’s approach is its refusal to retry issues of fact. It applied the Edwards v Bairstow ([1956] AC 14) principle: it would overturn a decision on the facts only if it could be shown that the First-tier Tribunal (FTT) had manifestly fallen into error by reaching an irrational decision, or by failing to take into account relevant evidence before it, or by taking into account irrelevancies. This underlines the importance for taxpayers in adducing comprehensive evidence at the first hearing of an appeal.
The three issues before the UT were:
1. The availability of entrepreneur’s relief from capital gains tax on a disposal of shares (TCGA 1992 s 165A). HMRC won before the FTT and the taxpayer appealed.
2. Relief from tax on funds remitted to the UK by a non-UK domiciled taxpayer under what is commonly referred to as ‘business investment relief’ (BIR) (ITA 2007 s 809VN). Again, HMRC won before the FTT.
3. A charge to tax under the ‘transaction in securities’ (TIS) provisions in connection with the same disposal of shares as gave rise to the first appeal. Here, Dr Allam won in the FTT.
In the first appeal, the UT decided the FTT had been right to deny relief on the basis that the relevant company was not trading. It went on to decide that the FTT had not erred in its evaluation of the relevant evidence so its decision on the question of whether, as a matter of fact, the company was trading was not flawed.
In relation to the second appeal, the dispute turned on whether the declaration of a £400,000 dividend which was never paid to Dr Allam by a BIR target company constituted a potentially chargeable event on the ground that it represented a disposal of part of Dr Allam’s holding in the company. Again, the UT found that the FTT had correctly applied the law and that it had not erred significantly in its approach to the facts on the basis of the evidence before it.
The third appeal concerned the disapplication of the TIS provisions in circumstances where the securing of an income tax advantage was said not to be a main purpose of the transaction in question. The UT’s examination of the issue is a helpful appeal decision on the main purpose test, which is increasingly pertinent to many cross-border (as well as domestic) anti-avoidance provisions. The UT held that the FTT had applied the right test. The FTT had said:
‘The legislation…can only apply if the obtaining of an income tax advantage was…one of the main purposes of the transaction. It does not matter if the purposes of the transaction were “commercial” or “personal” ... [T]he mere fact that the result of the transactions might have been achieved in a different manner which would have given rise to an income tax receipt ... does not automatically give rise to the inference that a main purpose of the transaction that was undertaken was to obtain an income tax advantage.’
On the facts, the FTT concluded ‘the income tax advantage was merely an incidental benefit.’
Addressing this, the UT held:
‘[F]or the counteraction provisions to be engaged there will always be an alternative transaction which will involve an income tax charge, as compared to the actual transaction which involved a CGT charge. That is inherent in the requirement that a main purpose of being a party to the actual transaction was to obtain an income tax advantage… It is not clear to us what HMRC mean by their criticism that the FTT only considered Dr Allam’s conscious motives. It was common ground that the test as to Dr Allam’s purposes in being a party to the transaction is a subjective test. We cannot see that sub-conscious motives are to be taken into account, although we accept that inferences can be drawn from the primary facts as to a party’s true motives ... The FTT was invited by HMRC to draw the inference from the surrounding facts ... In rejecting that invitation it is clear that the FTT considered the entirety of the evidence.’
Apart from the importance of good evidence before the FTT, the following key points emerge:
motive tests are subjective;
extrinsic evidence is important only insofar as it assists in determining the intentions of the taxpayer; and
a tax efficient transaction will not always have securing a tax advantage as its main purpose.
