The main purpose test

Tax practitioners will be well aware of the need to consider whether a main purpose of particular transactions is to avoid tax or to secure a tax advantage, either in general or of a specific type.

It is, among other places, going to be relevant (as a 'main benefit' test) to the application of DAC-6 and to determining, in that context, whether cross-border arrangements are reportable.

It is also found in the transactions in securities ("TIS") code, where the provisions are in point only if securing an 'income tax advantage' is a main purpose of the transaction in question.

A recent First-tier Tribunal ("FTT") decision on those provisions contains some helpful guidance: Allam v HMRC [2020] UKFTT 216 (TC)

The judgment says:

"206.     ...it is not necessary ... to show ... a commercial purpose for the transaction. The legislation is clear. It can only apply if the obtaining of an income tax advantage was the main purpose or one of the main purposes of the transaction. It does not matter if the purposes of the transaction were “commercial” or “personal”. The only question is whether or not a main purpose of the transaction was to obtain an income tax advantage."

This is, in my view, right in law. It is also a helpful response to HMRC's usual practice, which is to expect the taxpayer to prove some other purpose. The FTT decision goes on:

"207.     ...the mere fact that the result of the transactions might have been achieved in a different manner which would have given rise to an income tax receipt... does not automatically give rise to the inference that a main purpose of the transaction that was undertaken was to obtain an income tax advantage. In support of that submission, we need only refer to the well-known statement of Lord Upjohn in Brebner to which we referred by both parties.  

“My Lords, I would only conclude my speech by saying, when the question of carrying out a genuine commercial transaction, as this was, is reviewed, the fact that there are two ways of carrying it out - one by paying the maximum amount of tax, the other by paying no, or much less, tax - it would be quite wrong, as a necessary consequence, to draw the inference that, in adopting the latter course, one of the main objects is, for the purposes of the section, avoidance of tax. No commercial man in his senses is going to carry out a commercial transaction except upon the footing of paying the smallest amount of tax that he can. The question whether in fact one of the main objects was to avoid tax is one for the Special Commissioners to decide upon a consideration of all the relevant evidence before them and the proper inferences to be drawn from that evidence.”"

This is a timely reminder that Brebner remains good law on this point. It is also helpful to note that the FTT considered that one should not infer too much from the fact that a tax reduction is a result of a transaction. The FTT judgment continues:

"210.     Our reasons are as follows.

(1)          As we have stated above, we found Dr Allam to be a credible witness. He gave clear reasons for the transfer: the need to unite ADL and AML under common corporate ownership to support the bank financing of the development at the Melton site and the desire to create a cash fund for his retirement. Dr Allam was consistent in the reasons that he gave for the transaction at all stages. Those reasons are either “commercial” or “personal” reasons, to adopt the terminology used by HMRC, but the crucial point is that they are not the purpose of obtaining an income tax advantage."

This shows that, as so often, good evidence from a credible witness is key. The FTT also stated that the fact that the taxpayer had not proceeded with an earlier transaction because he had failed to obtain TIS clearance should not be taken as evidence that he had securing a tax advantage as a motive of this transaction. The decision then states:

"The other surrounding circumstances do not support the inference that Dr Allam was seeking to obtain an income tax advantage: he received significant dividends from the companies in the tax year in question including the dividend of ￡550,000 from ADL representing almost 50% of the retained profits in that company."

This again demonstrates the importance of good and consistent evidence. It is important, in preparing a case, to ensure that the assertions of witnesses will not be undermined and will rather be supported by the documents and, where relevant, the wider picture in general.

The FTT concluded: "...The income tax advantage was merely an incidental benefit that was obtained as a result of the transaction."

The TIS provisions are widely drafted and the purpose test is an important line of defence. The following key points emerge from the judgment:

(1) good evidence is important;

(2) credible witnesses are to be preferred;

(3) a tax efficient transaction will not always have securing a tax advantage as its main purpose;

(4) unless required by legislation, the question of what other motives there might be for a transaction are not determinative but are relevant only to showing whether or not securing a tax advantage was a main purpose.

In other areas of legislation with motive defences or purpose tests, the same issues are likely to be relevant.