Delinian Limited v The Commissioners for HMRC

This appeal concerned the construction of sections 135 to 137 of the Taxation of Chargeable Gains Act 1992 (TCGA), which govern deferral of tax on share exchanges. The court held that section 137(1) contains two limbs: (i) whether the exchange was effected for bona fide commercial reasons; and (ii) whether the entire exchange forms part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to capital gains tax or corporation tax. The phrase "a scheme or arrangements" requires consideration of the whole scheme or arrangements entered into by the taxpayer, not selected parts. The court also held that, for the purposes of section 137(1), avoidance includes steps that lead to the non-payment of tax that would otherwise have been payable (even if tax would otherwise have been deferred).

Background and procedural history. The appellant (HMRC) appealed from the Upper Tribunal's dismissal of its appeal against the First-tier Tribunal's decision allowing Euromoney (now Delinian) to treat an exchange of shares under section 135 TCGA as qualifying for deferral. The FTT found the whole exchange was effected for bona fide commercial reasons and, although tax avoidance was a purpose of the arrangements, it was not a main purpose of the arrangements as a whole. The UT [2022] UKUT 00205 (TCC) dismissed HMRC's appeal. HMRC appealed to the Court of Appeal.

Facts. Euromoney agreed to transfer its shares in Capital Data in consideration of ordinary shares and an amount that was paid as redeemable preference shares in Diamond Topco Limited, the preference shares later being redeemed and the redemption exempt from corporation tax by virtue of the substantial shareholdings exemption (Schedule 7AC TCGA). HMRC refused clearance under section 138, amended Euromoney's return and assessed corporation tax on the gain claimed to be deferred.

Issues.

• How is section 137(1) to be construed: must the tribunals look to the whole of the taxpayer's scheme or may they isolate parts of the arrangements and treat those parts as "a scheme or arrangements" whose main purpose is tax avoidance?
• Whether the word "avoidance" in section 137(1) is to be read objectively in the sense adopted in Willoughby (i.e. as conduct defeating Parliament's intention) so that taking advantage of a provision deliberately enacted by Parliament (for example the substantial shareholdings exemption) cannot amount to avoidance for the purposes of section 137(1).

Reasoning and disposition. The court decided that section 137(1) requires consideration of whether the entire exchange forms part of a scheme or arrangements whose main purpose is tax avoidance; it does not require the FTT to break the overall arrangements into constituent parts and test each part in isolation. The statutory test is satisfied by asking whether there exists a scheme or arrangements of which the exchange forms part and whose main purpose is avoidance. The court rejected HMRC's submission that any sub‑element of the arrangements could be characterised as "a scheme or arrangements" for section 137(1) purposes. On Euromoney's Willoughby argument, the court held that section 137(1) is clear: if the scheme or arrangements lead to non‑payment of tax that would otherwise have been payable (even if the tax would otherwise have been deferred), that is avoidance for the purposes of section 137(1). The court therefore dismissed HMRC's appeal and also rejected Euromoney's cross‑appeal under its Respondent's Notice.

Appeal dismissed. The Court of Appeal held that section 137(1) requires assessment of whether the entire exchange forms part of the whole scheme or arrangements entered into by the taxpayer whose main purpose is tax avoidance; it is not permissible to isolate and test a selected part of the arrangements as if that part alone were "a scheme or arrangements". The court also held that "avoidance" for section 137(1) includes arrangements that lead to the non‑payment of tax that would otherwise have been payable, even if the tax would otherwise have been deferred.

First-tier Tribunal (Tax Chamber) allowed the taxpayer's appeal (Judge Kim Sukul). Upper Tribunal (Tax and Chancery Chamber) dismissed HMRC's appeal [2022] UKUT 00205 (TCC). Court of Appeal dismissed HMRC's appeal [2023] EWCA Civ 1281.