Snell v HM Revenue & Customs

For the commercial-reasons condition in section 137 of the Taxation of Chargeable Gains Act 1992, the court must examine the actual exchange, reconstruction or amalgamation undertaken. It need not ask whether the same commercial result could have been achieved by another legal form.

The purpose condition may be established by identifying the scheme or arrangements and determining their main purpose. A taxpayer’s purpose need not be final or unalterable. A contingent or prospective liability to capital gains tax may constitute a liability for section 137 purposes. Using a share-for-loan-stock exchange to defer tax until a later non-resident redemption may therefore amount to avoidance of liability.

Mr Snell appealed against the Special Commissioners’ finding that his exchange of shares for loan stock formed part of arrangements having as a main purpose the avoidance of liability to capital gains tax. HM Revenue and Customs cross-appealed against the finding that the exchange was effected for bona fide commercial reasons.

The Special Commissioners had found that the exchange itself was commercially motivated, but that Mr Snell intended to become non-resident and redeem the loan stock outside the United Kingdom. The central issues were the proper construction of section 137 of the Taxation of Chargeable Gains Act 1992, the identification of the relevant scheme or arrangements, and the meaning of avoidance of liability.

1. Commercial reasons. The cross-appeal was dismissed. Section 137 requires examination of the actual exchange in question. Sections 127–136 are concerned with treating replacement securities as the same asset and contain no requirement to investigate why the parties selected that legal form rather than another. The Special Commissioners were therefore entitled to find that the exchange was effected for bona fide commercial reasons.
2. Identification of the arrangements. The relevant factual questions were what scheme or arrangements existed, whether their purposes included avoiding capital gains tax, and whether that purpose was a main purpose. A scheme or arrangement may be identified by linking the acceptance of loan stock with its intended redemption after the taxpayer became non-resident. The taxpayer’s purpose need not be final or unalterable.
3. Avoidance of liability. Once those arrangements were identified, their main purpose was avoidance of liability to capital gains tax. The word liability in section 137(1) is not confined to an existing liability. In a statutory context permitting deferral on conditions, it includes a contingent or prospective liability that has been deferred. The distinction between tax mitigation and tax avoidance in IRC v Willoughby [1997] STC 995 did not govern the construction of section 137.
4. Disposition. The Chancellor found no misdirection or perversity in the Special Commissioners’ conclusions and no need to remit the matter. The appeal and cross-appeal were dismissed.

The judgment was an appeal from the Special Commissioners’ decision dated 5 April 2006. The Special Commissioners found that the exchange was effected for bona fide commercial reasons but formed part of arrangements having a main purpose of avoiding liability to capital gains tax.