At the appeal from the Upper Tribunal, HMRC claimed that Euromoney Institutional Investor plc had set up a scheme to avoid corporation tax when it sold a stake in a company.

During the transaction, Euromoney, which was a listed company at the time, but now operates as Delinian, agreed in principle to transfer its shares in Capital Data Limited to Diamond Topco Limited for $80.4m. Of that total, $21m (£16.9m) consisted of cash and the remainder of ordinary shares in Diamond.

The company later realised that it would be more tax efficient if it received the $21m in redeemable preference shares in Diamond instead of cash.

In a email trail, then head of tax at Euromoney’s majority owner, Daily Mail, suggested that the share approach would be better than cash, as it would be ‘tax free as the rolled over gain is washed away’.

In response, Christopher Fordham, Euromoney’s group managing director, emailed as follows: ‘The preference shares are the mechanism to avoid paying tax on the capital gain for the cash element of the transaction. In 18 months we convert the preference shares into cash and avoid paying 20% tax on the gain.’

On that basis, Euromoney would pay no tax when it redeemed the preference shares more than 12 months later so it renegotiated the commercial deal with Diamond so that it exchanged its shares in Capital Data for a combination of ordinary and preference shares in Diamond.

Euromoney filed its tax return on the basis that s135 applied to the exchange of Capital Data shares for ordinary and preference shares in Diamond as they were exempt from corporation tax under the substantial shareholdings exemption.

But HMRC rejected this position and amended the return to include a liability to corporation tax on a chargeable gain (on the entire exchange) of some £10,483,731 and issued a closure notice.

This case concerned the ‘proper scope’ of the capital gains tax and corporation tax provisions to exchanges of shares and schemes of reconstruction set out in sections 135 to 137 of the Taxation of Chargeable Gains Act 1992 (the TCGA).

HMRC argued that the First Tier Tribunal and the Upper Tribunal ought to have looked separately at the element of the scheme that led to the preference shares replacing the cash. Had it done so, it would have had to conclude that the main purpose or one of the main purposes of that part of the scheme was tax avoidance.

Euromoney argued that even if the earlier tribunals were wrong about the proper construction of s137(1), they ought to have held that the word ‘avoidance’ in that subsection was to be construed objectively as a course of conduct designed to defeat the evident intention of Parliament, as distinct from the acceptance of an offer of freedom from tax as was found in the Willoughby cases.

On that basis, Euromoney contended that taking advantage of the substantial shareholdings exemption could not, in any event, be tax avoidance. HMRC argued that the emails ‘show that that step was for tax avoidance purposes’.

In the ruling, the judges noted the emails, stating: ‘The issue in this case is solely a matter of statutory construction. The words in section 137(1) to be construed are: “unless the exchange … in question is effected for bona fide commercial reasons and does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is [tax] avoidance”.

‘They are not complicated words. We reach the same answer whether we consider a literal or a purposive construction.’

Referencing the First Tier Tribunal hearing, the Court of Appeal judges added that it ‘cannot be controversial to comment that one can enter into a share exchange transaction for bona fide commercial reasons even if that transaction is wholly or partly tax driven.

Rounding up the case, the ruling noted that s137(1) was ‘clearly providing for the situations in which taxpayers will not be permitted to defer their tax when they effect a share exchange. They are allowed to do so if the exchange is for bona fide commercial purposes and if the exchange does not form part of a scheme or arrangements of which the, or a, main purpose is tax avoidance’.

The Court of Appeal ruling stated: ‘Put shortly, taxpayers can delay paying tax when they exchange shares, but not if the exchange forms part of an entire scheme which has a main purpose of tax avoidance.

‘Put another way, s137(1) envisages that there may be tax avoidance so long as that is not the sole or a main purpose of the scheme or arrangements. Parliament’s purpose is clear from the language it used.’