Transactions in securities legislation (TISL) is what HMRC uses to combat capital transactions where they think that a shareholder has, in substance, extracted a dividend. They have to issue a ‘counteraction notice’ within six years of the end of the tax year of the transaction. They use this notice to seek to recover the difference between the income tax liability on a dividend and any capital gains tax that has been paid. HMRC was hit with something of a setback in relation to the TISL legislation in a recent Upper Tier Tribunal (UTT) case.
The case of Assem Allam
The key facts of the transaction around which this case revolved were as follows:
1. Mr Allam owned two UK companies, ADL and AML.
2. ADL leased property to AML which was Mr Allam’s main trading company.
3. Mr Allam sold ADL to AML for £4,950,000 in cash (which came out of AML’s reserves).
4. Mr Allam had £2m of capital losses against which to offset the gain.
HMRC sought to assess Mr Allam to income tax of £1,318,298, which was the amount of tax that he would have been liable for had he received consideration by way of an income distribution (and we understand that he could have offset any capital gains tax that he had paid against this). Broadly the whole case revolved around Mr Allam’s defence that obtaining an income tax advantage was not the main purpose, or one of the main purposes, of the transaction. His key reasons for entering into the transaction were as follows:
1. The property needed improving and ADL did not have the reserves to do this, but AML did.
2. He needed this to be a cash transaction because he had always seen ADL as a ‘retirement pot’ and needed the cash to invest in Egyptian real estate.
3. There was a suggestion that he could not have been undertaking the transaction for tax reasons as he had already taken a £550,000 dividend from ADL before the transaction.
4. This would strengthen the balance sheet of AML.
Perhaps surprisingly Mr Allam won the case because he convinced the UTT that tax had not been a material consideration. Much was made of Mr Allam’s personal account because the UTT accepted that the ‘purpose test’ is subjective.
Forbes Dawson view
Many commentators have been surprised by this case and it points to the fact that there may be life in the ‘motive defence’ yet. Even if a transaction has clear income tax advantages (as this one undoubtedly did) that is not enough to infer that those advantages were one of the main purposes behind the transaction.
Tax advisors will now have to be careful to draw a line between when a client asks about a transaction and when they receive advice. If a client is ignorant of tax matters and suggests a transaction which could clearly fall within TISL, then that may be sufficient evidence to suggest that the transaction is not driven by tax matters. Of course, a responsible tax advisor would then advise of the tax advantage and the potential risk of TISL, thus increasing the chances of an income tax advantage being seen (by HMRC) as one of the main purposes. There is a bit of a paradox here because good quality tax advice could sometimes push a client within the ambit of legislation that they would be keen to avoid! However, this case is generally very good news for taxpayers.
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