© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
Avoidance and advantage
AVOIDANCE OF TAX
- Course of action designed to conflict with or defeat the evident intention of Parliament
"[59] In general, it may be said that it is not tax avoidance to accept an offer of freedom from tax which Parliament has deliberately made, but that it is tax avoidance to adopt a course of action designed to conflict with or defeat the evident intention of Parliament by taking advantage of a fiscally attractive option afforded by the tax legislation without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in tax liability (Inland Revenue Commissioners v Willoughby [1997] 1 WLR 1071 (“Willoughby”), 1079B-G, 1081B-D).
[60] It may also be said that where there are two ways for a taxpayer to carry out a genuine commercial transaction, it is natural for the taxpayer to choose the way that will involve paying the least amount of tax, and that the taxpayer by making that choice cannot for that reason alone be said to be acting with a main purpose of avoiding tax (Commissioners of Inland Revenue v Brebner (1967) 43 TC 705, 718H-I). However, it follows from the previous paragraph above that a taxpayer in this situation may well be acting with a main purpose of avoiding tax if the chosen way conflicts with or defeats the evident intention of Parliament. The mere fact that the taxpayer is carrying out a genuine commercial transaction does not mean that no means adopted for effecting that transaction can ever be tax avoidance." (The Tower One St George Wharf Limited v. HMRC [2022] UKFTT 154 (TC), Judge Staker)
- Reducing liability to tax without incurring the economic consequences Parliament intended to be suffered for such reduction
"In order to understand the line thus drawn, submitted Mr Henderson, it was essential to understand what was meant by 'tax avoidance' for the purposes of s 741. Tax avoidance was to be distinguished from tax mitigation. The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability. The hallmark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the tax legislation, and genuinely suffers the economic consequences that Parliament intended to be suffered by those taking advantage of the option. Where the taxpayer's chosen course is seen upon examination to involve tax avoidance (as opposed to tax mitigation), it follows that tax avoidance must be at least one of the taxpayer's purposes in adopting that course, whether or not the taxpayer has formed the subjective motive of avoiding tax.
My Lords, I am content for my part to adopt these propositions as a generally helpful approach to the elusive concept of 'tax avoidance', the more so since they owe much to the speeches of Lord Templeman and Lord Goff of Chieveley in Ensign Tankers (Leasing) Ltd v Stokes (Inspector of Taxes) [1992] 2 All ER 275 at 290–291 and 295, [1992] 1 AC 655 at 675–676 and 681 respectively. One of the traditional functions of the tax system is to promote socially desirable objectives by providing a favourable tax regime for those who pursue them. Individuals who make provision for their retirement or for greater financial security are a familiar example of those who have received such fiscal encouragement in various forms over the years. This, no doubt, is why the holders of qualifying policies, even those issued by non-resident companies, were granted exemption from tax on the benefits received. In a broad colloquial sense tax avoidance might be said to have been one of the main purposes of those who took out such policies, because plainly freedom from tax was one of the main attractions. But it would be absurd in the context of s 741 to describe as tax avoidance the acceptance of an offer of freedom from tax which Parliament has deliberately made. Tax avoidance within the meaning of s 741 is a course of action designed to conflict with or defeat the evident intention of Parliament. In saying this I am attempting to summarise, I hope accurately, the essence of Mr Henderson's submissions, which I accept." (IRC v. Willoughby [1997] 4 All ER 65 at 73 - 74, Lord Nolan)
"[78] The decision in Willoughby v IRC 70 TC 57 confirms that there is a critical distinction between acceptable tax mitigation, which would not affect the application of s741, and unacceptable tax avoidance, which would prevent the application of s741. The most widely accepted definition of this distinction was set out by Lord Nolan, as follows:..." (Rialas v. HMRC [2019] UKFTT 520 (TC), Judge Gillett)
- Tax mitigation does not derive from arrangement but from the reduction of income accepted or expenditure incurred
"Income tax is mitigated by a taxpayer who reduces his income or incurs expenditure in circumstances which reduce his assessable income H or entitle him to reduction in his tax liability. Section 99 does not apply to tax mitigation because the taxpayer's tax advantage is not derived from an "arrangement" but from the reduction of income which he accepts or the expenditure which he incurs." (CIR v. Challenge Corporation [1987] AC 155 at 167, Lord Templeman)
- Avoidance where T reduces liability without involving T in loss/expenditure that entitles him to that reduction
"Section 99 does not apply to tax mitigation where the taxpayer obtains a tax advantage by reducing his income or by incurring expenditure in circumstances in which the taxing statute affords a reduction in tax liability.
Section 99 does apply to tax avoidance. Income tax is avoided and a tax advantage is derived from an arrangement when the taxpayer reduces his liability to tax without involving him in the loss or expenditure which entitles him to that reduction. The taxpayer engaged in tax avoidance does not reduce his income or suffer a loss or incur expenditure but nevertheless obtains a reduction in his liability to tax as if he had." (CIR v. Challenge Corporation [1987] AC 155 at 167, Lord Templeman)
- Parliament's intention frequently not evident at all
"[80] Unfortunately it is not always easy to ascertain the evident intention of Parliament. Indeed, it is frequently not evident at all." (Rialas v. HMRC [2019] UKFTT 520 (TC), Judge Gillett)
- No need for the tax advantage to have crystallised in cash terms (e.g. tax-free uplift in base cost)
"[76] Furthermore, we do not agree with Ms Shaw's submission that the intended avoidance in this case only arose in the future.
[77] The transactions implemented pursuant to the step plan were intended to give Tower One a base cost in the Tower Lease equal to the market value of the Tower at the time of the Transaction, ie as if Tower One had acquired the Tower Lease for its market value (of £200m) but without any company in the group having to pay tax on the profit of (£170m) that would arise on a direct sale of the Tower or the Tower Lease to Tower One for such a price. The cash benefit of this would only arise to Tower One and the group in the future, or contingently, on the disposal of units. However, the avoidance of tax, namely an increase in the base cost without any company being liable for CT on the "gain" from approximately £30m to £200m, formed part of the arrangements themselves and was not a result of future or contingent events." (The Tower One St George Wharf Limited v. HMRC [2024] UKUT 373 (TCC), Judge Zaman and Judge Bowler)
- Misusing rather than using a relief
"[91] Tax avoidance is an extremely elusive concept and I propose to follow Lord Nolan's meaning of a course of action designed to conflict with or defeat the evident intention of Parliament. My understanding of what he was saying is not, I think, much different from what Mr Vallance is contending. It is not enough to say that if you find a relieving provision then it is the evident intention of Parliament that the taxpayer should be entitled to use it whatever the circumstances. As Furniss (Inspector of Taxes) v Dawson shows it is quite possible to misuse a relieving provision. To give an example in the same area as this case, suppose the taxpayer had formed Personal Services solely to give him a non-resident employer in order to obtain the foreign emoluments deduction. If that company had been funded entirely by the United Kingdom companies and had done nothing other than employ the taxpayer, it might be the case that the taxpayer would have been avoiding tax because he was misusing a relieving provision. That example of course is deliberately different from the facts of this case where Personal Services was funded from non-United Kingdom profits with no corporation tax deduction for services which benefited the United Kingdom companies. Mr Vallance went as far as claiming that Parliament's purpose in enacting the foreign emoluments deduction was to encourage, or at least not discourage, people from abroad to work in the United Kingdom so that someone in the taxpayer's position who had spent all his working life in the United Kingdom, could never qualify. While this may have been in Parliament's mind, I cannot accept that the relief was not available to a non-domiciled person working for a non-United Kingdom resident employer whose remuneration is borne by a non-resident, however long the non-domiciled person has been resident (I note that the amount of relief was reduced after nine years' residence). All this shows is how difficult it is to discern the evident intention of Parliament but I do not think there is any substantial disagreement between the parties if Lord Nolan's dictum is understood in the way I have suggested that the taxpayer must do more than point to the existence of a relieving provision; he must be using, rather than misusing, the relieving provision in a way consistent with Parliament's evident intention." (Carvill v. IRC [2000] STC (SCD) 143, Judge Avery Jones)
Examples: avoidance
- Using a deferral relief to then claim a full exemption is avoidance of tax
"[54] Lord Nolan in Willoughby was contrasting tax avoidance with the acceptance of a deliberate offer made by Parliament of freedom from tax. That was not the situation in this case. Euromoney's scheme or arrangements involved deferring tax in order later to take advantage of the substantial shareholdings exemption. That was to rely on a provision intended to defer tax to secure an outcome where no tax was paid. The meaning of tax avoidance in section 137(1) is clear without the need to refer to Willoughby. If the scheme or arrangements lead to the non-payment of tax that would otherwise have had to be paid, even if deferred, then that is tax avoidance for these purposes." (Delinian Limited v. HMRC [2023] EWCA Civ 1281 Vos, Snowden, Whipple LJJJ)
"[36] I have difficulty in understanding why the dictum of Lord Nolan in IRC v Willoughby [1997] STC 995, 1003 is relevant to the construction of that part of s.137(1) as requires one of the main purposes of the scheme or arrangements to have been the avoidance of liability to capital gains tax. The passage on which counsel for Mr Snell relies deals with the difference between tax mitigation and tax avoidance. No such distinction is drawn in s.137. S.137 is concerned with the terms on which a liability to capital gains tax may be deferred. It provides for a right of deferral to be lost if it is to be used for the purpose not of deferral but of avoidance altogether. If that is a main purpose of the scheme or arrangements it matters not whether the scheme etc. was formed for purposes of tax mitigation, avoidance or indeed evasion. The plain fact is, as the Special Commissioners recognised in the concluding sentence in paragraph 6 of their decision, that the main purpose of the scheme is the avoidance of a liability to capital gains tax." (Snell v. HMRC [2006] EWHC 3350, Sir Andrew Morritt)
- Using deferral relief prior to becoming non-resident
"[39] While the sentence: "The critical finding was that they had a substantive intention to become non resident which was demonstrated by their subsequent actions" could have been better expressed as it suggests that hindsight was used to make, rather than support, the finding, it is clear that he meant that subsequent actions supported the finding that Mr Coll always intended to become non-resident. It is also unclear what he meant by "substantive" intention but a finding of intention on its own is sufficient. There was therefore a finding of fact for the purpose of s 137 that the exchange was part of a scheme and that a main purpose of the scheme was avoidance of capital gains tax, and so s 137 applied." (Coll v. HMRC [2010] UKUT 114 (TCC), Judges Avery Jones and Walters QC)
- Deferring gain post sale to third party by rolling into securities in buyer for 1 year to qualify for entrepreneur's relief
"[46] During the negotiation of the deal, Mr Wilkinson was aware that selling his and Mrs Wilkinson’s shares in P Ltd would give rise to a charge to CGT; he was also aware (and this is well illustrated by the “Wishes of the Gift” letter he and Mrs Wilkinson wrote to the daughters on 14 July 2016) that, under certain conditions, the CGT payable by him, Mrs Wilkinson and the daughters (viewed a single economic unit, given the close family ties between them) would be significantly reduced. The conditions were:
(1) that he and Mrs Wilkinson transfer ordinary shares in P Ltd to the daughters, prior to those shares being sold to TF1 Ltd;
(2) that the daughters exchange their P Ltd shares for loan notes or shares of TF1 Ltd, which could be redeemed or sold after a one-year holding period;
(3) that the daughters (a) receive shares equating to 5% of the ordinary share capital of TF1 Ltd and allowed for 5% of the voting rights in TF1 Ltd; and (b) be appointed to directorships in trading companies with the P Ltd group; and
(4) that the daughters hold their notes, shares and directorships for one year.
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[87] I make the further finding, again for completeness, that the purpose of enabling the Wilkinsons’ CGT planning to proceed, was a purpose of avoidance of liability to CGT. I do not therefore accept the appellants’ argument that the Wilkinsons’ CGT planning was (per Willoughby at p1004c) merely “the acceptance of an offer of freedom of tax which Parliament had deliberately made” – as
(1) securing the CGT planning affected the deal in the material ways just outlined; and
(2) one of those ways – satisfying the condition at [46(3)] – went against the commercial grain of the deal – being, to have BCA take over P Ltd from its former shareholders; that element therefore
(a) required significant negotiation (and, as the emails of 11 July 2016, caused there to be some risk of the deal failing) and
(b) led to the insertion into the deal of significant features that otherwise would not have been present (the daughters’ post completion holding of B ordinary shares and directorships).
All this is a far cry from the concept described in Willoughby at p1004c." (Wilkinson v. HMRC [2023] UKFTT 695 (TC), Judge Citron - on the facts, the tax purpose was held to not be a main purpose)
- Transferring UK properties asset to non-UK company to cap tax on income at basic rate (virtually a paraphrase of what TOAA is aimed at)
"[48] The first was the suggestion that transferring the property to Jersey companies would limit the UK charge to tax to the basic rate, whilst there would be no such limit if the property were held by non-resident individuals. I rather endorse the proposition that in the period in question there was some level of assumption that the then Inland Revenue would not pursue non-resident individual taxpayers for tax above the basic rate in relation to UK source income. The basic rate would be charged either on the manager or agent or by deduction at source, and there was a certain level of expectation that the further tax chargeable on individuals would not be sought or collected. HMRC disputed this in argument. The points that seem to me to be particularly relevant in the present case, however, are that the tax could be collected by remedies geared to the presence of the property in the UK, and that all advisers would have been far less relaxed about the higher rates of tax where the individuals who would have been in direct receipt of the income but for the transfers would be present regularly in the UK (and at risk of becoming resident in the UK). I thus accept the Respondents' proposition that (whether or not it was one of the purposes of the transfers in this case) insulating the UK source income from rates of tax above the basic rate would indeed have been a very good and relevant idea, if possible, rather than a step that would have been regarded as pointless.
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[58] I deal first with the feature of trying to cap the level of charge to income tax at the basic rate. This advantage seems to me to be in the category of tax avoidance. I entirely accept that, under section 739, tax advantages that have nothing to do with income tax can be the relevant advantages that occasion (or fail to preclude) liability under section 739. In the context of the section, and of the wording in the preamble however, it seems to me to be difficult to argue that a transaction designed to reduce income tax by the mechanism of the transfer of UK property to a non-resident person (virtually a paraphrase of the opening wording of section 739) is mere mitigation." (Burns v. HMRC [2009] UKSPC SPC00728, Judge Nolan)
- UK resident transferring assets to a non-resident from which transferor can benefit is avoidance
"[304] By having UK source income arise to non-resident companies held by a nonresident trust, the Respondent could receive that income as foreign source income (dividends from non-resident companies and distributions from a non-resident rather than UK source income), and thereby avoid UK income tax (and with the income only bearing corporation tax at a lower rate than income tax or basic rate income tax paid under the non-resident landlords scheme).
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[306] The Respondent submits that the mere fact that non-residents are liable to less tax than UK residents is not avoidance but a deliberate choice of Parliament as to how it wishes to tax non-resident persons. The mere fact that non-residents may not be liable to UK tax is not avoidance, but the transfer of assets to a non-resident trustee or company in order to mitigate potential UK tax is not a deliberate choice of Parliament: indeed, it is precisely what the Transfer of Assets Abroad Legislation is intended to prevent.
[307] To the extent necessary, it is a reasonable inference that an individual with considerable ties to the UK, and who subsequently became UK resident, would have been motivated by UK tax considerations when transferring assets to a non-UK trust." (HMRC v. Mattu [2021] UKUT 245 (TCC), Judes Herrington and Jones)
- Transferring UK situs asset to non-UK company to reduce IHT exposure
"[59] I would certainly accept that if a non-domiciled person arranged to hold foreign situs, rather than UK situs, assets, and then died, no tax advantage would have been sought. Thus if a UK house was sold, and a French house purchased, that would simply be a case of genuinely changing the assets held, and were some section 739 point to hinge on whether the change was effected for the purpose of avoiding UK tax, the answer would be that it was not. And if UK bank deposits were withdrawn and deposits placed elsewhere, then again, that would be a pure investment switch, and not a step the purpose of which would involve the purpose of achieving a UK tax advantage. Indirectly retaining a UK real property, and simply achieving the technical change in status by putting the property into a non-UK resident company in a case where one of the purposes is to achieve the potential Inheritance Tax advantage, implicit by effecting those steps, does seem to me to cross the border between mitigation and tax avoidance. This is because it has involved no real change of investment, as in the two previous examples, but the retention of the UK property, accompanied by a step to change the normal tax consequences of that. Thus where it is shown that the CTT or IHT considerations were one of the purposes of the transfer, or rather where the Appellants have not displaced the reasonable presumption that UK advantages were one of the purposes, I conclude that those purposes involve tax avoidance and not merely mitigation." (Burns v. HMRC [2009] UKSPC SPC00728, Judge Nolan)
- Inserting non-resident trust between settlor and UK situs assets to reduce IHT exposure
"[85] Mr Wilson argued that even though Mr Rialas had sought to protect his estate from Inheritance Tax what Mr Rialas had done was not tax avoidance because he had merely taken advantage of an opportunity which had been intended by Parliament by inserting a non-resident trust between himself and his UK assets. Mr Wilson attempted to reinforce this argument by referring us to Finance (No.2) Act 2017, which amended the excluded property rules in the Inheritance Tax Act by the insertion of a new Schedule A1 to that Act, with effect from 6 April 2017. The effect of Schedule A1 was to deny excluded property relief where the non-UK property in question was directly owned by a trustee of a settlement created when the settlor was domiciled outside the United Kingdom, but the value of that property could be traced to residential property situated in the United Kingdom.
[86] By this provision, he argued, Parliament had, by implication, intended that excluded property relief was available as long as the UK property in question was not UK residential property. In this way, what Mr Rialas had done was within an exemption intended by Parliament and was not therefore tax avoidance.
[87] This was an interesting argument, but it does of course refer to a legislative change made in 2017, when the position regarding non-domiciled individuals had been changed dramatically as well as a number of other related changes. We cannot therefore regard it as showing anything other than the fact that, in 2017, in the context of a very different tax environment for non-domiciled individuals, Parliament decided not to deny excluded property relief for UK property held via a non-resident trust other than where the property was UK residential property.
[88] We therefore agree with Mr Nowlan that the interposition of a non-resident trust between Mr Rialas and UK property, ie the shares in Argo, did have a tax avoidance motive." (Rialas v. HMRC [2019] UKFTT 520 (TC), Judge Gillett)
- Purchase of company with losses but not assets
"In the present case the taxpayer subsidiaries seek to reduce their assessable income by a loss of $5.8 million which was sustained by Perth and suffered by Merbank and was not sustained by the taxpayer subsidiaries or suffered by the taxpayer. It is true that the taxpayer expended $10,000 in purchasing the shares in Perth but this purchase price is not deductible against the taxpayer's assessable income. Apart from the risk of losing $10,000, the Challenge group never risked anything, never lost anything and never spent anything but now claim to deduct a loss of $5.8 million. The taxpayer has practised tax avoidance to which section 99 applies. The taxpayer has not practised tax mitigation because the Challenge group never suffered the loss of $5.8 million which would entitle them to a reduction in their tax liability of $2.85 million. The tax advantage stems from the arrangement with Merbank and not from any loss sustained by the taxpayer or the Challenge group." (CIR v. Challenge Corporation [1987] AC 155 at 168, Lord Templeman)
- Substituting wages of employee for annuity
"In Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1 the Duke avoided tax by reducing his assessable income without reducing his income by the method of substituting an annuity for a wage payable to his gardener. So long as the gardener continued to work, the Duke gained a tax advantage over other taxpayers who paid wages to their working gardeners." (CIR v. Challenge Corporation [1987] AC 155 at 169, Lord Templeman)
- Converting earnings into instalments of income
"In Black Nominees Ltd. v. Nicol (1975) 50 T.C. 229 an actress sought to avoid income tax by reducing her assessable income without reducing her income. She converted her earnings into instalments of capital by a number of transactions each designed to take advantage of some specific exemption or relief provision of the taxing statute. She attempted to obtain a tax advantage over other actresses and other taxpayers who paid tax on their earnings." (CIR v. Challenge Corporation [1987] AC 155 at 169, Lord Templeman)
- Seeking to make trust beneficiary a purchaser of trust asset without beneficiary incurring purchase price
"In Chinn v. Hochstrasser [1981] A.C. 533 the trustees and beneficiaries under a settlement attemped to avoid capital gains tax payable on the distribution of trust property. By a number of transactions each designed to take advantage of some specific exemption or relief provision of the taxing statute, the beneficiary entitled to trust shares was converted into a purchaser of the shares without involving him in the expenditure of a purchase price. The beneficiary attempted to obtain a tax advantage over other beneficiaries who paid capital gains tax when they became entitled to trust property." (CIR v. Challenge Corporation [1987] AC 155 at 169, Lord Templeman)
- Inflating expenditure over that which T was ever liable to spend (using non-recourse loan)
"My Lords, this appeal is concerned with a tax avoidance scheme, a single composite transaction whereunder the tax advantage claimed by the taxpayer is inconsistent with the true effect in law of the transaction. In the present case the taxpayer claims for itself and its partners capital allowances for expenditure of $14m. although the partners were never liable to spend more than $3¼ m. of their own money.
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This analysis ignores the fact that by reason of the non-recourse provision of the loan agreement, the loan was not repayable by Victory Partnership or any one else. A creditor who receives a participation in profits in addition to repayment of his loan is of course a creditor. But a creditor who receives a participation in profits instead of repayment of his "loan" is not a creditor. The language of the document in the latter case does not accurately describe the true legal effect of the transaction which is a capital investment by the "creditor" in return for a participation in profits." (Ensign Tankers (Leasing) Ltd v. Stokes [1992] 1 AC 655)
- Structuring property purchase through non-UK resident company owned within life policy structure to avoid UK tax
"[25] The FTT concluded that the Appellants had not shown that they could rely on the exemption. The FTT’s reasoning was as follows:
[...]
[88] The taking out of life policies per se does not constitute tax avoidance. However, unlike in Willoughby, that is not the only transaction in this case. The creation of a special purpose vehicle was primarily for the purpose of creating an entity to complete the purchase in SAP’s place. The selection of Mauritius as the jurisdiction for this vehicle, however, was specifically for tax reasons: to avoid paying tax in the UK under the terms of the Treaty. In addition, the purpose of creating a vehicle to replace SAP was to avoid SAP becoming liable to UK tax on income from the property development as well as to avoid losing its deposit. 89. [89] It cannot therefore be said that “avoiding liability to taxation was not…one of the purposes for which the transfer or associated operations [or “relevant transactions” in the ITA 2007 exemption]…were effected”.
[90] Can it be said that “the transfer and any associated operations were bona fide commercial transactions and were not designed for the purpose of avoiding liability to taxation”? There were certainly commercial elements to the overall transactions: the underlying property development was a trading activity and the purchase of a life policy is a commercial transaction. However, considering the overall arrangement that was put in place, with the deliberate choice of Mauritius for its tax treaty with the UK, to ensure that tax was not paid in the UK on the profits of the UK based property development, we are not able to conclude that 20 the arrangements “were not designed for the purpose of avoiding liability to taxation”.”
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[42] Mr Way did not submit that there was any statement in the FTT decision which was wrong as a matter of legal principle. Mr Way relied heavily on the decision of the 15 House of Lords in IRC v Willoughby (1997) 70 TC 57 but he did not show us anything in the FTT decision which amounted to a misdirection having regard to the statements of principle in that case. Mr Way stressed that in Willoughby the taxpayer’s purpose was to obtain a pension and he succeeded in showing that tax avoidance was not one of the purposes of the transaction. However, the facts in that case were different from the 20 facts in the present case. [43] We consider that it has not been shown that the FTT made any error of principle and, having applied the correct principles, they reached a decision on the facts which was open to them." (Davies v. HMRC [2020] UKUT 67 (TCC), Morgan J and Judge Andrew Scott)
Examples: not avoidance
- Genuinely covenanting away income
"Thus when a taxpayer executes a covenant and makes a payment under the covenant he reduces his income. If the covenant exceeds six years and satisfies certain other conditions the reduction in income reduces the assessable income of the taxpayer. The tax advantage results from the payment under the covenant." (CIR v. Challenge Corporation [1987] AC 155 at 168, Lord Templeman)
- Settlor genuinely depriving himself of the capital and thereby reducing income
"When a taxpayer makes a settlement, he deprives himself of the capital which is a source of income and thereby reduces his income. If the settlement is irrevocable and satisfies certain other conditions the reduction in income reduces the assessable income of the taxpayer. The tax advantage results from the reduction of income." (CIR v. Challenge Corporation [1987] AC 155 at 168, Lord Templeman)
- Paying a premium on a qualifying insurance policy, incurring expenditure
"Where a taxpayer pays a premium on a qualifying insurance policy, he incurs expenditure. The tax statute entitles the taxpayer to reduction of tax liability. The tax advantage results from the expenditure on the premium." (CIR v. Challenge Corporation [1987] AC 155 at 168, Lord Templeman)
- Genuinely incurring business expenditure
"A taxpayer may incur expense on export business or incur capital or other expenditure which by statute entitles the taxpayer to a reduction of his tax liability. The tax advantages result from the expenditure for which Parliament grants specific tax relief." (CIR v. Challenge Corporation [1987] AC 155 at 168, Lord Templeman)
- Use of a genuine loss
"When a member of a specified group of companies sustains a loss, section 191 allows the loss to reduce the assessable income of other members of the group. The tax advantage results from the loss sustained by one member of the group and suffered by the whole group." (CIR v. Challenge Corporation [1987] AC 155 at 168, Lord Templeman)
- Selling and repurchasing the same shares to crystallise a real loss
"There is nothing magical about tax mitigation whereby a taxpayer suffers a loss or incurs expenditure in fact as well as in appearance. A taxpayer who carries out a "bed and breakfast" transaction by selling and repurchasing shares establishes a loss for capital gains tax because he has actually suffered that loss at the date of the transaction. In "back to back" transactions the taxpayer is entitled to any reduction in tax which Parliament has attached to each transaction. " (Ensign Tankers (Leasing) Ltd v. Stokes [1992] 1 AC 655 at 676)
- Buying shares and then transferring property using group relief not SDLT avoidance
"[74] However, what if there is a decision to purchase shares (or units) and then subsequently take advantage of the group relieving provisions relating to the SDLT? What if the two steps (as happened in this case) take place relatively soon after one another? And, what if, as in the present case, forethought was applied and a plan set in place at the outset detailing the steps, the order and the timeframe in relation to each step and then executed in line with the plan? To my mind this makes no difference and does not take what would otherwise not be 'tax avoidance' into the realms of that which is. Putting the two steps (purchasing the shares and then using group relief to move the property inter-group) together (in time and in planning) does not, to my mind, mean that the parties are not facing the economic consequences of their decision or using a tax relief for a purpose or way not intended by Parliament. The parties are not, in the sense required at least, thereby engaged in 'tax avoidance'." (Brindleyplace Holdings Sarl v. HMRC [2024] UKFTT 808 (TC), Judge Malek)
- Deferring tax to a time Parliament intended
"I do not see why the choice of an offshore bond or policy, for the taxation of which Parliament has made express and recent provision, should be regarded as tax avoidance at all. The tax is not avoided, it is deferred. Moreover it is deferred to an event which Parliament has prescribed not to a time of the taxpayer's choice. If it were otherwise, the purchase by the self-employed of a retirement annuity, which attracts tax relief on the premium:, favourable tax treatment of the income and gains arising in the underlying fund and beneficial options when the policy matures would amount to tax avoidance. It does not because, as Lord Templeman pointed out in Challenge, in such a case the taxpayer has genuinely paid the premium and complied with all the other conditions on which these advantages are available." (CIR v. Willoughby 70 TC 57 at 108, CoA, Morritt LJ)
- Genuinely swapping UK situs assets for non-UK situs assets to reduce IHT exposure
"[59] I would certainly accept that if a non-domiciled person arranged to hold foreign situs, rather than UK situs, assets, and then died, no tax advantage would have been sought. Thus if a UK house was sold, and a French house purchased, that would simply be a case of genuinely changing the assets held, and were some section 739 point to hinge on whether the change was effected for the purpose of avoiding UK tax, the answer would be that it was not. And if UK bank deposits were withdrawn and deposits placed elsewhere, then again, that would be a pure investment switch, and not a step the purpose of which would involve the purpose of achieving a UK tax advantage. Indirectly retaining a UK real property, and simply achieving the technical change in status by putting the property into a non-UK resident company in a case where one of the purposes is to achieve the potential Inheritance Tax advantage, implicit by effecting those steps, does seem to me to cross the border between mitigation and tax avoidance. This is because it has involved no real change of investment, as in the two previous examples, but the retention of the UK property, accompanied by a step to change the normal tax consequences of that. Thus where it is shown that the CTT or IHT considerations were one of the purposes of the transfer, or rather where the Appellants have not displaced the reasonable presumption that UK advantages were one of the purposes, I conclude that those purposes involve tax avoidance and not merely mitigation." (Burns v. HMRC [2009] UKSPC SPC00728, Judge Nolan)
- Setting up insurance holding company for group in Bermuda as a neutral territory
"[92] In the light of my findings above, I can summarise that the purpose of setting up International Holdings, and accordingly the purpose of the taxpayer's transfer of the old majority shares to it, was to create a vehicle for the ultimate management of the group from a neutral territory and in the meantime it was the vehicle for determining the strategy for setting up in the United States. I have no hesitation in finding that this was a bona fide commercial transaction. I find both that there was no tax avoidance purpose in the sense I have described, and that tax considerations did not form any of the taxpayer's purposes in designing the transaction. Obtaining any tax benefits from the employment arrangements were not a purpose of the transfer but were matters which followed from it and for which a holding company was not necessary. None of the potential tax benefits, such as payment of dividends, was a purpose of the transfer. Accordingly I hold that the taxpayer has satisfied the exemption in s 741(b)." (Carvill v. IRC [2000] STC (SCD) 143, Judge Avery Jones)
TAKE ADVANTAGE
- Has a negative sense and requires awareness of what is being taken advantage of
"[136] We agree with both parties that the ordinary meaning of the phrase “take advantage” where it appears in Article 12(5) has a negative sense, as the OED definition acknowledges is frequently (albeit not invariably) the case. In this case, the negative sense which the relevant provision is conveying is that entering into an assignment of a debt claim with a main purpose of benefiting from Article 12(1) by means of that assignment is an abuse of that article.
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Thus, we agree with [the taxpayer] that, for this purpose, if a seller can be said to be “taking advantage” of a provision of UK domestic law or a treaty when it sells a debt for a price which reflects its purchaser’s exemption from UK withholding tax pursuant to that provision, and we will address that question in due course, the seller needs to be aware that the relevant provision is Article 12(1) specifically before Article 12(5) can be said to be engaged. Merely knowing that the purchaser is entitled to an exemption from UK withholding tax but without knowing the precise basis for that exemption is insufficient to engage Article 12(5) even if, as it transpires, the purchaser’s exemption stems from Article 12(1)." (Burlington Loan Management DAC v. HMRC [2022] UKFTT 290 (TC), Judge Beare)
TAX ADVANTAGE
- Comparison need not be with a transaction in similar legal form or one that gives rise to similar economic effects
"[72] We accept that on the facts of this appeal there is no indication in any of the scheme documents that the loans would not be repaid and HMRC have not pleaded that the loan agreements are a sham. In our judgment this does not result in there being no tax advantage. We would agree with and adopt the comments of Judge Beare in HMRC v Premiere Picture Limited [2021] UKFTT 58 (TC) that IRC v Parker was not limiting the comparison required to be made to one involving a transaction in similar legal form or even one giving rise to similar economic effects. Those comments were adopted and summarised by the Tribunal in HMRC v AML Tax (UK) Limited [2022] UKFTT 114 (TC) ("AML Tax"):
"[82] However, we do not agree with Mr Waldegrave's submission that the comparator must leave all participants in the same economic position. We agree with the analysis of Judge Beare in Premiere Picture Ltd in which he said [at para 73]:
"I do not read [IRC v Parker] as limiting the comparison which is required to be made to one involving a transaction in a similar legal form or even one giving rise to similar economic effects… Instead, as is made clear by the extract from Jonathan Parker LJ's decision in Sema … It is perfectly possible for a taxpayer to obtain a tax advantage from entering into a transaction where the taxpayer's tax position as a result of so doing is more favourable than that in which it would have been had the taxpayer done nothing."
[83] The extract from Sema referred to by Judge Beare is in the context of where Parker LJ was himself considering the observation of Aldous J about the meaning of the words "tax advantage" in another statutory context, where he said :
"the words "tax advantage" … presuppose that a better position has been achieved. However, I respectfully differ from him when he goes on to answer the question "An advantage over whom or what?" by saying: "advantage over persons of a similar class"… In my judgement, the simple answer to that question is that a better position has been achieved vis a vis the Revenue." (HMRC v. Asset House Piccadilly Limited [2025] UKFTT 206 (TC), Judge Geraint Williams)
- Must be comparison with another way of receiving the same asset
"I do not think that this can be right. If, as the Crown contend, the tax advantage was obtained by the receipt of the Pelkem shares, then in my judgment the question whether or not a tax advantage was obtained has to be decided according to Lord Wilberforce's test by contrasting the actual and the hypothetical receipt of those shares; it is not legitimate to contrast actual and hypothetical means of achieving an 'end result' (being an end result different from the receipt of the shares) and then seek to quantify the tax advantage by contrasting the actual receipt accruing to the taxpayer with another way in which he could have achieved the same end result. To put it another way, if the Crown were to have alleged (as against Kenyon) that the relevant tax advantage was the stripping of Kenyon of its assets, then the relevant comparison would have been between the actual method adopted to strip Kenyon and other possible methods of achieving that result. But as the Crown are alleging a tax advantage to the taxpayer arising from the receipt of the Pelkem shares, they must in my judgment show another way in which that receipt could have accrued in a taxable way, and it is not permissible to look to some wider 'end result' aimed at. I therefore reject counsel for the Crown's broader approach.
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Counsel for the taxpayers seeks to meet counsel for the Crown's hypothetical case by saying that the shares received would not be the same as those actually received. In the actual state of facts Kenyon is a subsidiary of Pelkem, and shareholders in Pelkem have the benefit not only of the cash in Pelkem but also of the Kenyon shares, whereas under the hypothetical transaction Pelkem would have no interest in Kenyon. I cannot accept that this is a material distinction. First, in both cases the asset received would be shares in the same company, Pelkem; and in my judgment it is not legitimate to say that the shares would not be the same just because the assets of Pelkem would be different. Secondly, there is no real difference between the two cases since Kenyon and its shares are of no real value. Its only remaining assets were the stock bought to meet the tax liability accruing in 250 years' time and £1,250 to cover the nominal value of its issued shares. As against this, at the material time it had the prospect of a huge tax liability if and when the legislation forecast in the press notice was passed." (Anysz v. IRC [1978] STC 296 at 318, Browne-Wilkinson J)
- Need not be an ordinary or unusual alternative transaction
"Counsel for the taxpayers first sought to meet this argument by saying that such a transaction would have been so unusual and extraordinary that the court should not assume the possibility of such a transaction. I cannot accept that, especially from these taxpayers. In my judgment, were such a procedure to have offered tax advantages to these taxpayers, there is no reason to suppose that they would not have done it: certainly it is no more fantastic (in real terms) than some of the steps that they in fact took. But in any event I do not think that any test based on the 'unusualness' of the suggested hypothetical method of achieving the same result is workable. Whose standards of 'unusualness' would the court adopt, its own, the merchant banker's, those of the man on the Clapham omnibus, or those of the full-time tax adviser?" (Anysz v. IRC [1978] STC 296 at 318, Browne-Wilkinson J)
- Need not be an ordinary or unusual alternative transaction
"Counsel for the taxpayers first sought to meet this argument by saying that such a transaction would have been so unusual and extraordinary that the court should not assume the possibility of such a transaction. I cannot accept that, especially from these taxpayers. In my judgment, were such a procedure to have offered tax advantages to these taxpayers, there is no reason to suppose that they would not have done it: certainly it is no more fantastic (in real terms) than some of the steps that they in fact took. But in any event I do not think that any test based on the 'unusualness' of the suggested hypothetical method of achieving the same result is workable. Whose standards of 'unusualness' would the court adopt, its own, the merchant banker's, those of the man on the Clapham omnibus, or those of the full-time tax adviser?" (Anysz v. IRC [1978] STC 296 at 318, Browne-Wilkinson J)
- Receiving cash by way of loan producing a tax advantage compared to receiving cash outright
"[73] We consider that the scheme users' directors/shareholders obtained a tax advantage from entering into the scheme where their tax position as a result of so doing is more favourable than it would have been had they done nothing: they received cash with a legal obligation to repay in 10 years, but without an income tax liability, rather than receiving a slightly larger amount of cash without an obligation to repay, but with an income tax liability and were able to obtain a tax deduction for making contributions. This was a tax advantage. We agree with the Tribunal in HMRC v Curzon Capital Ltd [2019] UKFTT 63 (TC) ("Curzon") that "if the arrangements are presented in such a way as to claim that a tax advantage will (or may) flow from using them, then unless the claim is clearly ridiculous, it can fairly be said that the arrangements "might be expected to enable" the advantage to be obtained." That is the position here.
[74] Even if we are wrong that IRC v Parker is not limiting the comparison that is required to be made, it was accepted by Mr Mullan that a loan from a company would be comparable to a loan from a trust created by a company; one would create a charge, the other one would not and there is a tax advantage. We find that the Arrangements fall within s306(1)(b)." (HMRC v. Asset House Piccadilly Limited [2025] UKFTT 206 (TC), Judge Geraint Williams)
- Every situation in which the position of T is improved vis-a-vis HMRC
"[57] While I understand Ms Wilson's points, for my part I would endorse Jonathan Parker LJ's comments on the meaning of tax advantage and apply them to s.1139 CTA 2010. I do not consider that they should be confined by reference to the facts of Sema.
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[59] Jonathan Parker LJ responded as follows:
"108. In the first place, I reject Mr Gardiner's submissions based on the conceptual difference between exemption and relief. Such submissions seem to me to involve a degree of sophistication which runs entirely counter to the general approach to be adopted to the construction of the relevant statutory provisions, as finally laid down by the House of Lords in IRC v Joiner [1975] STC 657, [1975] 1 WLR 1701...
109. In my judgment, what the draftsman was manifestly trying to do when defining 'tax advantage' in s 709(1) was to cover every situation in which the position of the taxpayer vis-à-vis the Revenue is improved in consequence of the particular transaction or transactions. As I read s 709(1) the distinction between 'relief' and 'repayment' is not based on any conceptual difference between the two; the true interpretation of s 709(1) is in my judgment much simpler than that. In my judgment, 'relief' in s 709(1) is intended to cover situations where the taxpayer's liability is reduced, leaving a smaller sum to be paid, and 'repayment' is intended to cover situations in which a payment is due from the Revenue. In the same way, the references to 'increased relief' and 'increased repayment' are directed at situations in which the taxpayer is otherwise entitled to a relief or repayment, with which the 'relief' or 'repayment' referred to in s 709(1) must be aggregated.
110. It follows that I respectfully agree with the observation of Aldous J in Sheppard and anor (Trustees of the Woodland Trust) v IRC (No 2) [1993] STC 240 that the words 'tax advantage' in the relevant statutory provision (Aldous J was concerned with s 466(1) of the 1970 Act: the forerunner of s 709(1)) presuppose that a better position has been achieved. However, I respectfully differ from him when he goes on to answer the question 'An advantage over whom or what?' by saying: 'Advantage over persons of a similar class' (see [1993] STC 240 at 253). In my judgment, the simple answer to that question is that a better position has been achieved vis-à-vis the Revenue.
111. On this issue, therefore, I would uphold the conclusions of the Special Commissioners and of the judge, holding that in consequence of the buy-backs the trustees obtained a 'tax advantage' within the meaning of the definition of that expression in s 709(1)." (Kwik-Fit Group Limited v. HMRC [2024] EWCA Civ 434, Falk LJ)
- Unreal to distinguish between using up losses and obtaining deduction for interest paid to use them up
"[76] It is right that much of the evidence, and cross-examination, in the FTT focuses on using Speedy 1's brought forward losses. But as already discussed that was clearly with a view to the savings that would be available from the use of the deductions arising in the Appellants. It follows that, with respect, the distinction drawn by Mr Ghosh between a purpose of using Speedy 1's losses and knowledge that a tax deduction would be available is an unreal one on the facts of this case. In effect, referring to using Speedy 1's losses was a convenient, and understood, shorthand for a description of arrangements which had the effect of creating a real tax saving for the group." (Kwik-Fit Group Limited v. HMRC [2024] EWCA Civ 434, Falk LJ)
- Use of losses in unobjectionable way may not be tax advantage for that company
"[73] I see significant force in Mr Ghosh's submission that, on the facts of this case, the reorganisation did not create a tax advantage for Speedy 1. Speedy 1 had existing losses which arose in an unobjectionable way. HMRC say that it is the setting of those losses against income which is the relevant tax advantage, because that avoids or reduces a charge (or possible charge) to tax within s.1139(2)(c) or (d) CTA 2010. But without the reorganisation Speedy 1 would not have a charge to tax that could be reduced, because it would not have the relevant income. In order to identify a tax advantage it is necessary to postulate the existence of income, the tax charge on which is then sought to be sheltered. Echoing Jonathan Parker LJ's comments in Sema it is only in that sense that Speedy 1 is better off as against the Revenue." (Kwik-Fit Group Limited v. HMRC [2024] EWCA Civ 434, Falk LJ)
- Debt v. equity choice
EVASION
- Revenue not informed of all facts relevant to an assessment
"Tax evasion also can be dismissed. Evasion occurs when the commissioner is not informed of all the facts relevant to an assessment of tax. Innocent evasion may lead to a re-assessment. Fraudulent evasion may lead to a criminal prosecution as well as re-assessment. In the present case the taxpayer fulfilled its duty to inform the commissioner of all the relevant facts." (CIR v. Challenge Corporation [1987] AC 155 at 167, Lord Templeman)