Main Purpose Test Met in Share Buyback Despite Absence of Actual Intent to Secure Income Tax Advantage

In the matter of Osmond and another v HMRC [2024] UKFTT 378 (TC), the First-tier Tribunal (FTT) adjudicated that taxpayers who executed a share buyback with the objective of crystallizing Enterprise Investment Scheme (EIS) relief from capital gains were deemed, as a matter of law, to have a main purpose of obtaining an income tax advantage, notwithstanding their actual intentions.

Case Context

The taxpayers had subscribed to shares in X Ltd under EIS. Due to concerns about the potential withdrawal of EIS relief, they initiated share buybacks to crystallize their gains and secure the tax relief. HMRC contended that this transaction fell under the anti-avoidance regime for transactions in securities.

Tribunal Analysis and Findings

The FTT concluded that, factually, securing an income tax advantage was not the taxpayers' principal motive in conducting the share buybacks. Their primary aim was to preserve EIS relief, and had it been feasible without extracting value from X Ltd, they would have pursued such an alternative. However, sections 684 and 687 of the Income Tax Act 2007 (ITA 2007) legally mandated that their main purpose was construed as obtaining an income tax advantage. This interpretation hinges on the inclusion of a comparative transaction within the definition of an income tax advantage under section 687(1)(a).

The FTT also dismissed the taxpayers' argument regarding the nature of the consideration received from the buybacks. The taxpayers argued that the consideration did not constitute "relevant consideration" under section 685(6) of ITA 2007, which excludes amounts representing a return of sums paid by subscribers on issue. The FTT clarified that section 685(4) of ITA 2007 caps the maximum relevant consideration at the amount of distributable reserves, with only distributable capital being excluded from these reserves.

The Tribunal determined that although the counteraction notices issued by HMRC lacked certain requisite details, the accompanying documentation provided sufficient information for an objective reader to comprehend the basis of the adjustments and assessments. Additionally, the Tribunal ruled that the statutory six-year limitation period for issuing a counteraction notice under section 698(7) of ITA 2007 is not overridden by the four-year limitation period stipulated in section 34 of the Taxes Management Act (TMA).

Conclusion

This case underscores the intricate legal interpretations associated with tax avoidance measures and the statutory definitions that influence such determinations.

Case Citation: Osmond and another v HMRC [2024] UKFTT 378 (TC) (8 May 2024) (Judge Popplewell and Mr. Sims).