Nearly a year ago, we wrote about the First-tier Tribunal’s (FTT) decision in Osmond and ors v HMRC [2024] UKFTT 00378. Our view was that, while the recent case law concerning main purpose tests in Transactions in Securities legislation and elsewhere has given rise to some disparate results, the FTT’s decision in Osmond seemed particularly surprising as it applied the main purpose test in a way that effectively ignored the subjective intentions of the parties. The Upper Tribunal’s (UT) decision on appeal ([2025] UKUT 00183 (TCC)) represents a return to more familiar territory.

The factual background

As a refresher, the appellants entered into a share buyback transaction, for consideration no greater than a return of capital, in order to crystallise the Enterprise Investment Scheme (EIS) disposal relief on their shares. As a result, no income tax was payable, and no Capital Gains Tax (CGT) was payable owing to the EIS disposal relief.

The FTT’s decision

The FTT found on the facts that, in entering into the share buyback, the appellants had a main purpose of crystallising their EIS disposal relief, and that the appellants would not have structured the transaction in any other way (as it would not have achieved their aim). On the basis of this, the FTT were persuaded by HMRC that, because the appellants’ main purpose was to secure EIS disposal relief, it necessarily followed that they also had a main purpose of obtaining an income tax advantage, because the CGT payable was less than the income tax that would have been payable if they had taken a distribution from the company instead.

The appellants appealed to the UT solely on this point of law.

The UT’s decision

The UT held that the FTT had erred in law in accepting HMRC’s argument that a main purpose of obtaining EIS relief necessarily equated to a main purpose of obtaining an income tax advantage.

Their key reasons were as set out below.

• Purpose vs Effect: The UT distinguished between the effect of a transaction and the taxpayer’s purpose in entering into it. The fact that a transaction results in an income tax advantage does not, without more, mean that obtaining such an advantage was a main purpose. The UT cited the Court of Appeal’s decision in BlackRock, which made clear that purpose must be distinguished from effect, and that even inevitable consequences are not necessarily purposes. Sophie Rhind previously commented on the BlackRock decision in an article for PLC magazine.

The UT rejected the argument that having the purpose of obtaining EIS CGT relief automatically resulted in a main purpose of obtaining an income tax advantage. That the tax consequences of the transaction are capital in nature (albeit exempt in this case) is a natural consequence of pursuing a capital transaction of this sort. An income tax advantage will naturally exist in these circumstances because the taxpayer is paying capital gains tax rather than income tax and the capital gains tax against which one compares the hypothetical income tax exposure is reduced by the available relief. Again, however, that is the natural effect of the transaction; it is not the main purpose.

• No deeming: The UT found that s.687 does not have the effect of deeming a consequential income tax advantage to be a purpose of entering into a transaction that is motivated by realising capital gains. In reaching this conclusion, the tribunal referred to the background to the introduction of the new sections 684 and 687 ITA 2007 in 2010, and specifically the HMRC consultation document which referred to amendments which would “make it clear that the TIS legislation does not apply to TIS where an advantage in relation to tax on chargeable gains is obtained”.

The UT considered that this background to the updated legislation suggested that an intention to obtain a CGT exemption should not constitute a purpose of obtaining an income tax advantage. The UT found that the arguments advanced by HMRC would not have been possible under the preceding legislation and so, on HMRC’s case, the purported effect of the updated legislation would represent a fundamental change to the operation of the rules. In the Tribunal’s view, however, this was not the intention or effect of the 2010 changes.

• Actual subjective intention: The UT confirmed that the main purpose test in section 684 ITA 2007 requires an inquiry into the subjective intentions of the taxpayer given there is no “deeming” of the kind contended by HMRC. The FTT’s factual finding was that the taxpayers’ main purpose was to crystallise EIS disposal relief, not to obtain an income tax advantage. HMRC had not appealed against this finding and therefore the Tribunal did not consider this point further (albeit they conceded that the FTT’s findings may have been “generous” in this regard). The FTT had emphasised that the taxpayers had no interest in extracting money outside of the desire to bank EIS relief, so there was never an intention by the taxpayers to gain an income tax advantage by extracting money for general purposes. Their actions were wholly motivated by finding a way to make use of EIS relief.

In conclusion, the UT held that, although the effect of the share buybacks was to confer an income tax advantage (as defined), this was not a main purpose of the transactions. The taxpayers’ main purpose was (as the FTT found) to secure and “bank” the availability of a CGT benefit (EIS relief), and the income tax advantage was merely a consequence.

The UT’s decision in Osmond avoids giving judicial support to a line of argument that did not appear consistent with how these types of tests have been applied to date. It is also more consistent with how these provisions have generally been understood by practitioners. It is notable that, although they were keen to emphasise that it formed no part of their decision, the UT set out their own view as an expert tribunal (based on the earlier TIS legislation) that, in situations such as this one, “…the general understanding amongst practitioners was that the TIS provisions simply did not apply”. 

This raises an interesting general point about the approach of the Tax Tribunals. On the one hand, it is strictly difficult for a Tribunal to take judicial notice of “how things work” outside of exceptional cases involving judicial review or expert opinions. On the other hand, tax rules are applied in the real world and the whole point of matters being heard by a specialist Tribunal is because the experience of such judges is valued. Arguably, the current position is unsatisfying in that the influence of “practice” on a decision may be unspoken and dependent on a judge’s own experience. To an extent, Osmond demonstrates that tension.