The Commissioners for HMRC v Burlington Loan Management DAC

Article 12(5) of the UK-Ireland double tax convention is an anti-abuse provision. It is not confined to artificial arrangements, but it does not apply merely because an assignment produces a saving of UK withholding tax.

The tribunal must determine, from all the circumstances, whether a person concerned with the assignment had a main subjective purpose of improperly taking advantage of article 12(1). Knowledge of tax consequences and economic arbitrage are relevant evidence, but are not conclusive of that purpose. A genuine arm’s-length sale of a debt claim to an Irish beneficial owner was capable of falling outside article 12(5), even where the purchaser expected treaty relief and could therefore pay more than the seller’s post-withholding-tax value.

SICL, a Cayman Islands company in liquidation, assigned a debt claim against LBIE through a broker to BLM, an Irish-resident investment company. The claim carried post-administration interest. BLM expected to obtain repayment of UK withholding tax under article 12(1) of the UK-Ireland double tax convention.

HMRC withheld 20% of the interest and contended that article 12(5), the treaty’s anti-abuse provision, denied article 12(1) relief. The First-tier Tribunal held that neither BLM nor SICL had a main purpose of taking advantage of article 12(1), and allowed BLM’s appeal: Burlington Loan Management DAC v HMRC [2022] UKFTT 290 TC.

HMRC appealed on construction, evaluative-error and perversity grounds. BLM’s respondent’s notice contended that article 12(5) was confined to artificial arrangements.

1. Appeal dismissed. The FTT’s conclusion that article 12(5) did not apply disclosed no material error of law and was within the range of permissible evaluative conclusions.

2. Article 12(5) is an anti-abuse provision. Read in the light of the treaty’s object and purpose and relevant OECD materials, it addresses improper use of treaty benefits. It is not limited to arrangements involving artificial steps, conduit companies or treaty shopping. The absence from the amended provision of the former bona fide commercial-reasons qualification reinforced that conclusion.

3. Conversely, article 12(5) is not a domestic UK withholding-tax avoidance rule. The starting point is that interest beneficially owned by an Irish resident is taxable only in Ireland under article 12(1), unless the particular assignment abusively takes advantage of that allocation of taxing rights. A seller’s knowledge that a purchaser is exempt from UK withholding tax is not, without more, determinative.

4. The FTT had erred in treating knowledge that the purchaser would rely on article 12(1) specifically as a necessary condition for article 12(5). Knowledge of the treaty may be relevant evidence in the factual inquiry, but the error was immaterial. The FTT’s detailed assessment did not depend on that supposed condition.

5. The FTT was entitled to treat the withholding-tax difference and the expected profit as relevant indicators rather than conclusive proof of purpose. It had considered the economic effect, competing purchasers with other tax attributes, the arm’s-length market, and each party’s subjective objective. It was open to find that BLM acquired the claim to profit from expected cash flows and risks, with article 12(1) forming the setting for that investment; and that SICL’s purpose was to obtain the best sale price, not to abuse the treaty.

6. An appellate tribunal does not redo a multifactorial factual evaluation. It may intervene for an identifiable flaw, such as a logical gap, inconsistency or failure to consider a material factor. HMRC established none, and the Edwards v Bairstow challenge also failed.

• Upper Tribunal (Tax and Chancery Chamber): HMRC’s appeal was dismissed: [2024] UKUT 152 (TCC).

• First-tier Tribunal (Tax Chamber): Held that the assignment did not engage article 12(5) of the UK-Ireland double tax convention: Burlington Loan Management DAC v HMRC [2022] UKFTT 290 TC.