Delinian Limited v The Commissioners for HMRC

Section 137(1) of the Taxation of Chargeable Gains Act 1992 imposes two separate conditions on share exchanges. The entire exchange must be effected for bona fide commercial reasons, and must not form part of the taxpayer’s whole scheme or arrangements whose main purpose, or one of its main purposes, is tax avoidance.

The tribunal must consider the whole scheme or arrangements, rather than isolate a tax-driven element. Tax avoidance includes using a statutory deferral mechanism to achieve eventual non-payment of tax that would otherwise be due, even where the later exemption is deliberately provided by Parliament.

Euromoney exchanged shares in Capital Data Limited for ordinary and redeemable preference shares in Diamond Topco Limited. It claimed deferral under sections 135 to 137 of the Taxation of Chargeable Gains Act 1992. HMRC denied the relief and assessed corporation tax on the gain.

The First-tier Tribunal allowed Euromoney’s appeal, finding that tax avoidance was a purpose of the arrangements but not a main purpose. The Upper Tribunal dismissed HMRC’s appeal: [2022] UKUT 00205 (TCC). The central issues before the Court of Appeal were whether the relevant scheme or arrangements comprised the whole transaction or only the preference-share element, and whether exploiting the substantial shareholdings exemption constituted tax avoidance.

1. Disposition. HMRC’s appeal was dismissed. Euromoney’s cross-appeal, advanced through its Respondent’s Notice, was also dismissed.
2. Two-limb statutory test. Section 137(1) requires separate inquiries. The entire exchange must be effected for bona fide commercial reasons. It must also not form part of a scheme or arrangements whose main purpose, or one of its main purposes, is avoidance of liability to capital gains tax or corporation tax. A transaction may be commercially bona fide even if it is wholly or partly tax-driven; tax purpose is examined under the second limb.
3. Whole scheme or arrangements. The relevant scheme or arrangements are the whole scheme or arrangements undertaken by the taxpayer of which the entire exchange forms part. The tribunal is not required to select one scheme from numerous permutations or isolate a tax-avoiding component. A minimal tax purpose attributed to an insignificant element cannot defeat relief where tax avoidance is not a main purpose of the arrangements viewed as a whole. This construction was consistent with the reasoning discussed in Snell v HMRC [2007] STC 1279 and the whole-scheme approach supported by IRC v Brebner [1967] 2 AC 18.
4. Application. The First-tier Tribunal had identified the entire exchange and the entire scheme undertaken by Euromoney. Its finding that the exchange was for bona fide commercial reasons, and that tax avoidance was not a main purpose of the whole arrangements, was not challenged. The Upper Tribunal therefore reached the correct result.
5. Meaning of tax avoidance. The context of sections 135 to 137 is decisive. They provide deferral, not exemption. If the arrangements lead to non-payment of tax that would otherwise have been payable, even after an initial deferral, that is tax avoidance for section 137(1). The distinction discussed by Lord Nolan in IRC v Willoughby [1997] 1 WLR 1071; [1997] STC 995 concerned a different statutory situation and did not alter the result.

1. Court of Appeal (Civil Division): dismissed HMRC’s appeal and Euromoney’s cross-appeal through its Respondent’s Notice.
2. Upper Tribunal (Tax and Chancery Chamber): dismissed HMRC’s appeal from the First-tier Tribunal: [2022] UKUT 00205 (TCC).
3. First-tier Tribunal (Tax Chamber): allowed Euromoney’s appeal, finding that tax avoidance was a purpose of the arrangements but not one of their main purposes.