Memories fade but documents are forever - evidence and the main purpose test

19 May 2022

For the most part, taxpayers have one chance as a witness in the First-tier Tax Tribunal (FTT) to give their side of the story. In cases that turn on whether or not a transaction was primarily entered into in order to obtain a tax advantage, it may be crucial for the taxpayer to navigate partial documentary records and fading memories to establish their credibility.

The recent FTT decision in Wroe, Rimmer and Timms v HMRC (Wroe, Rimmer and Timms) has emphasised the importance of contemporary documentary evidence – and some of the difficulties that witnesses can face – when applying the main purpose test in the context of the transactions in securities rules. 

The case also provides an instructive comparison to Assem Allam v HMRC (Allam), in which the Upper Tribunal gave judgment at the end of last year and which also concerned the transactions in securities rules.

Transactions in Securities

By way of background, the transactions in securities rules give HMRC the power to counter tax advantages that can arise from arrangements that produce amounts that are taxable at the lower rate of capital gains, rather than as income.

In such circumstances, HMRC may issue a "counteraction notice’" which specifies the adjustments that must be made in order to unwind the income tax advantage.

For the transactions in securities rules to apply, certain conditions must be met. One such condition is that the main purpose, or one of the main purposes, of the transaction must be to obtain an income tax advantage (referred to as the main purpose test).

Whether or not the main purpose of a transaction is to obtain an income tax advantage is a subjective test. The mindset and intentions of the taxpayer are therefore of prime importance.  

Accordingly, one of the questions that both Wroe, Rimmer and Timms and Allam addressed was how best to determine subjective purpose: by means of witness testimony, contemporary documentation or both.

Wroe, Rimmer and Timms

Mr Wroe, Mr Rimmer and Mr Timms (together the taxpayers) were shareholders and directors of a company called Proline Engineering Limited (Proline).

In 2013, they sought advice from their tax advisers (CLB Coopers Chartered Accountants, “CLB”) in relation to a potential restructuring of Proline which would allow their shareholdings to be equalised with the shareholding of another director of the company, Mr Jones.

Following CLB’s advice, a new holding company (Jenbest Ltd, “Jenbest”) was inserted above Proline. Each of Mr Wroe, Mr Rimmer and Mr Timms exchanged their Proline shares for 25% of the ordinary share capital in Jenbest and 600,000 £1 preference shares in Jenbest. The taxpayers applied for, and were given, statutory clearance in advance of the reorganisation (albeit that this clearance did not mention the material fact of the subsequent redemption of the preference shares, but rather described the shares as irredeemable).

Jenbest subsequently repurchased all of the preference shares for their nominal value, with each taxpayer therefore receiving £600,000 and a total of £1.8m being extracted from the company. This repurchase was treated as a capital gains tax transaction by the taxpayers, subject to a 10% tax rate.

Application of the main purpose test

As a starting point, the case considered whether the burden of proof should lie with HMRC or the taxpayers.  The FTT suggested that they would determine burden based on the fact that it was the taxpayer who had greatest access to the facts, which is somewhat surprising, particularly as it had apparently been accepted that the burden would lie with HMRC. In any event, the FTT noted that HMRC had done enough to raise valid concerns, which it was necessary for the taxpayers to rebut.  

HMRC argued that the main purpose of the reorganisation was to obtain an income tax advantage. The taxpayers disagreed.

Witness evidence from Mr Timms identified that the main purposes of the reorganisation were to: (i) facilitate a smooth handover of the business upon the retirement of the taxpayers; (ii) place Mr Jones on an equal shareholding with the taxpayers; and (iii) allow the capital value of Proline that had been generated previously to be preserved for the taxpayers.

Any income tax advantage of the reorganisation and subsequent redemption of preference shares was, according to Mr Timms, just the icing on the cake.

In many ways, this is similar to the position taken in Allam, which was appealed from the FTT and heard by the Upper Tribunal at the end of last year. In that case, Dr Allam had sold a company that he wholly owned (Allam Developments Ltd, “ADL”) to a company that he and his wife owned (Allam Marine Ltd, “AML”) for £4.95m in capital proceeds.

As with Mr Timms, Dr Allam argued that the income tax advantage was not the main purpose of his being a party to the transaction: rather, it was merely an incidental benefit obtained as a result of the transaction. Dr Allam had given a number of reasons for the transaction in witness evidence including creating a cash fund for his retirement along with the need to unite ADL and AML under common corporate ownership to support the bank financing of a real estate development. The reasons he gave were both commercial and personal – but importantly were not tax-related.

The key difference between the two cases, however, is that FTT was swayed by the evidence of Dr Allam but not by the evidence of Mr Timms.

Crucially, in Wroe, Rimmer and Timms, the only contemporaneous documentary evidence of the taxpayers’ purposes was a letter from CLB containing their advice in relation to the reorganisation. This letter was crucial to HMRC’s case and, ultimately, to the conclusions reached by the FTT. In this letter, a central theme was the avoidance of being charged income tax on the extraction of £1.8m from Jenbest/Proline.

Mr Timms maintained that, from his perspective, the tax was an incidental benefit and while CLB may have noted the tax position (given their role as accountants), that was not his motivation. 

The FTT found the contemporary document to be more reliable evidence of the taxpayers’ purposes in relation to the reorganisation than Mr Timms’ witness evidence.  Judge Brannan referred to the guidance on witness evidence given in the case of Gestmin SGPS, which emphasises the fallibility of human memory and the need to assess witness evidence in its proper place alongside contemporaneous documentary evidence.

Therefore, whilst Mr Timms denied that the main purpose of the preference shares was to extract a cash receipt from the company that was capital in nature, the FTT did not find this to be convincing in light of the documentary evidence and concluded that a main purpose of the reorganisation was to obtain an income tax advantage. 

At one point in the decision of Wroe, Rimmer and Timms, Mr Timms was asked why Proline did not issue or transfer additional shares to Mr Jones and pay a dividend to the taxpayers. Mr Timms stated that this option had not been put to him, albeit that the contemporaneous document did show that alternative transactions to the reorganisation were considered. That alternative was rejected in favour of a structure that would enable funds to be extracted as capital receipts rather than via the payment of dividends. It is clear that the FTT was not convinced by Mr Timms’ recollection.

Again, this can be compared and contrasted with Allam, in which HMRC also argued that the existence of an alternative transaction with a greater income tax liability demonstrated that obtaining an income tax advantage was a main reason for choosing another transaction. However the Upper Tribunal, referring to the decision in Brebner, held that the mere fact that the result of the transaction might have been achieved by a different transaction (with a greater income tax liability) does not automatically give rise to the inference that the main purpose of the chosen transaction was to obtain an income tax advantage.

Whilst the consideration and ultimate rejection of such an alternative transaction may be a factor in deciding whether or not an inference can be drawn, HMRC cannot solely rely on the existence of an alternative transaction with a greater income tax liability to prove that obtaining an income tax advantage was a main reason for choosing another transaction.

In Wroe, Rimmer and Timms, this conclusion was endorsed by the FTT but, clearly, the existence of an alternative route, which the document at the time considered but Mr Timms could not recall, was significant.


In such cases, taxpayers have the burden of giving an honest explanation of their motives, many years after the event and in the face of arguments that they are remembering events with rose-tinted glasses.

However, in circumstances where the Tribunal is persuaded that the witness is credible and convincing, their evidence will be difficult to resist: it is their motive that is relevant and HMRC obviously do not have access to other individuals who might provide a contrary view.

What HMRC has is the documents from the time and some judicial scepticism. For that reason, inevitably, it will be important for the witness to be able to explain the contemporaneous record. If the witness is in the position simply of not recalling that documentation, that will rarely be a convincing answer for the Tribunal.

In fact, as Allam made clear the mere existence of an alternative transaction with a higher income tax liability is not determinative in itself. If there are non-tax motives that mean that tax was not a main purpose, then the taxpayer can succeed. It will, however, be difficult for a taxpayer to persuade a Tribunal of their motives, however genuine they may be, in the face of conflicting documentation that is neither accepted nor explained.