INTM602960 - Transfer of assets abroad: Exemptions from charge: Avoidance purpose exemption - purpose

At the heart of the conditions to be met to gain exemption under the avoidance purpose exemption is, naturally enough, a test of purpose. However, the legislation does not refer to the purpose of any particular individual, although the individual who would otherwise be liable to tax should be in a position to supply the information needed to come to a decision.

The individual should be asked to provide particulars in relation to each and every relevant transfer and associated operation, which may include:

  • what was done
  • why the transaction took place
  • what was the expected outcome
  • what was the actual outcome.

In considering those purposes, the legislation makes clear that HMRC have regard to the actions of not only the individual but also those of other persons. For example, the purpose of a transaction might include the avoidance of Corporation Tax by a UK company, or avoidance of tax by beneficiaries or trustees of an offshore trust. This can be illustrated in relation to the income charge where, for example, the purposes of the parents in instigating a transfer by their children can have a significant bearing on whether the avoidance exemption purpose is met.

The case of Mrs Sally Ann Burns and Mrs Lisa Neil v Commissioners of HMRC [SPC 00728] involved the transfer of UK properties into two Jersey companies by the two appellants upon them reaching their eighteenth birthdays. In this case the Special Commissioner commented:

I am convinced that neither appellant had actually any personal purpose in effecting the transaction. It was very clear to me, not only that it was fair to presume that at the age of 18 each of the appellants would have been unconcerned with taxation or indeed any other conceivable purposes for implementing the transactions, other than to do what their parents suggested. The transactions were however clearly implemented very deliberately, and the purpose or purposes underlying the transactions were those influencing the appellants’ parents. The purpose for which the two girls effected the transactions was simply to do what their parents suggested, and it seems appropriate to me to proceed on the basis that the two girls effectively sought to achieve those purposes that influenced their parents.

Based on the evidence of the appellants’ mother, the Special Commissioner determined that their parents did have a tax avoidance purpose in instigating the transfer.

In relation to the benefits charge, it is the beneficiary who must discharge the requirement to satisfy HMRC about the purpose of the transactions resulting in income becoming payable to a person abroad, even though the beneficiary may not have even met the person. In the case of Philippi v CIR (47 TC 75), where the original transfer was made by the taxpayer’s father who could not attend the hearing, the Special Commissioners refused to allow a claim to exemption from charge on the grounds that the onus of establishing such a claim lay with the appellant; and he had not satisfied them that the purpose of avoiding liability to taxation was not a purpose for which any of the transactions entered into by his father was effected.

HMRC consider that the role of advisers should be taken into account in assessing the purpose of the transaction when considering the exemption provisions. This is now made clear in the legislation at ITA07/S737(5). The intentions of any person who (whether or not for consideration) designs or effects the relevant transactions or any of them are to be taken into account in determining the purpose for which those transactions or any of them were effected.

If any professional advice obtained in a particular case is treated as a relevant factor and the individual states that they had no intention to avoid tax, it is reasonable to see whether the advice they acted on is consistent with that contention.

If the individual proceeds in accordance with advice obtained (or simply instructs the agent to proceed), the purpose of the adviser would on normal principles be attributed to the individual, whether they understood the implications of the advice or not. For example, if evidence emerged that an individual’s adviser or agent had

  • devised a particular structure, or
  • recommended or arranged the creation (or use) of a particular non-resident entity

for the purpose of saving UK tax, that purpose should be taken into account in determining, from all the circumstances of the case, the purposes for which the transactions were effected. That is the case whether or not the adviser had expressly informed the client of the purposes behind the transactions. For example, it would be sufficient if evidence emerged from third parties or from the agent’s working papers.

Over the years there has been long debate about exactly how a test of purpose should be construed, in particular whether the test is an objective or a subjective one. Purpose is that which an individual is seeking to achieve or the end the individual intends to reach. It must be distinguished from motive, which focuses on why an individual does something: see Lord Denning in Newton v Commissioners of Taxation of the Commonwealth of Australia (AC 450).

HMRC take the view that the proper way to apply a purpose test is to consider all the facts in an objective manner, but that is not the same as saying the test is ‘objective’. It is clearly wrong to assert that it is only necessary to look at the purpose individuals ascribe to their actions in deciding whether exemption is due; but it is equally wrong to say that only the outcome is relevant. It is essential to consider both. Thus, purpose or intention is essentially a subjective concept, but in practice the objective facts must be examined to draw an inference: see Pennycuick J in Lloyd’s Bank v Marcan (2 All ER 359) at 367-8:

The word ‘intent’ denotes a state of mind. A person’s intention is a question of fact. Intent may be proved by direct evidence or may be inferred from surrounding circumstances. Intent may also be imputed on the basis that a person must be presumed to intend the natural consequences of his or her act: see Hatherley LC and Giffard LJ in Freeman v Pope.

This approach is borne out by the construction of the exemption test, referring as it does to ‘all the circumstances of the case’ in considering purposes including the intentions and purposes of any person who designs, effects, or provides advice in relation to the relevant transactions or any of them.

There was a helpful discussion around ‘purpose’ by the First-tier Tribunal in the case of Anne Fisher, Stephen Fisher & Peter Fisher v Commissioners for HM Revenue & Customs ([2014] UKFTT 804 (TC)) at paragraphs [241] - [289]. At [287], the court summarised that discussion in these terms:

From the above, we summarise the following propositions in relation to the motive defence:

(1) The test is subjective. (Carvill)

(2) Evidence of a person’s reactions to what is said to them and circumstances as well what they say their purpose is may be relevant. (Philippi)

(3) It is not enough to show a tax avoidance effect.

(4) Knowledge that less tax is paid does not equate to a tax avoidance purpose (but knowledge is a pre-requisite to having a purpose.)

(5) Awareness of tax aspects does not equate to having a tax avoidance motive. (Willoughby)

(6) The mere fact of taking tax advice does not mean there is a tax avoidance motive. (Beneficiary v IRC)

(7) Picking a lower tax route over a higher tax route does not equate to tax avoidance (but equally does not preclude tax avoidance). (Brebner / Willoughby)