Hugh Edward Mark Osmond v The Commissioners for HMRC

For the transactions in securities regime, a taxpayer’s main purpose must be determined by reference to subjective intention. An income tax advantage within Income Tax Act 2007, section 687 may be an effect of a transaction without being a purpose for entering into it.

A purpose of securing enterprise investment scheme capital gains tax disposal relief does not, without more, constitute a main purpose of obtaining an income tax advantage. Section 687 defines whether an advantage has been obtained; it does not deem a purpose which the taxpayer did not in fact have.

The Taxpayers entered into company share buybacks in March 2015. The consideration was treated as capital and attracted enterprise investment scheme disposal relief, with the result that no capital gains tax was payable.

The First-tier Tribunal held that their main purpose was to crystallise that relief. It also found that obtaining an income tax advantage was not a main purpose as a matter of fact. Nevertheless, it held that the purpose of obtaining the capital gains tax relief necessarily amounted, under section 687 of the Income Tax Act 2007, to a main purpose of obtaining an income tax advantage and upheld HMRC’s counteraction notices.

The Taxpayers appealed on the construction of sections 684 and 687. The central issue was whether obtaining EIS disposal relief necessarily supplied the statutory main purpose required by section 684(1)(c).

1. Appeal allowed. The First-tier Tribunal erred in treating the Taxpayers’ purpose of obtaining EIS capital gains tax disposal relief as necessarily a main purpose of obtaining an income tax advantage under section 684(1)(c) of the Income Tax Act 2007.

2. The main-purpose inquiry requires ascertainment of the relevant party’s subjective intentions. The Tribunal accepted that the Taxpayers’ purpose was to dispose of shares and secure EIS relief so that no capital gains tax would be payable. The FTT had also found that obtaining an income tax advantage was not a main purpose, but a consequence of the Buybacks.

3. Section 687 determines whether the transaction has produced an income tax advantage by comparing the relevant capital gains tax liability with the income tax that would have been payable on a qualifying distribution. It does not deem a taxpayer to have a purpose of obtaining that advantage merely because the transaction has that statutory effect.

4. The distinction between purpose and effect remained decisive even where the tax consequence was inevitable. The reasoning in Blackrock HoldCo 5 v HMRC [2024] STC 740 confirmed that inevitable consequences are not, without more, purposes. On the unchallenged factual findings, the income tax advantage was an effect of securing EIS relief, not a main purpose of the Buybacks.

5. The Tribunal allowed the appeal. Any costs application had to be made and served within one month of release under rule 10(5)(a) and (6) of the Tribunal Procedure (Upper Tribunal) Rules 2008.

• Upper Tribunal (Tax and Chancery Chamber): Allowed the Taxpayers’ appeal and reversed the First-tier Tribunal’s conclusion that their EIS-relief purpose necessarily constituted a purpose of obtaining an income tax advantage.
• First-tier Tribunal: Decision released on 8 May 2024. It upheld HMRC’s primary case under section 684 of the Income Tax Act 2007, while finding that obtaining an income tax advantage was not a factual main purpose of the Buybacks.