Key points

• Were the counteraction assessments raised in time?
• The relevant legislation is: ITA 2007, s 698(5); TA 2007, s 698(7); and TMA 1970, s 34(1).
• A number of the cases from 2015-16 are probably relying almost exclusively on whether HMRC raised the counteraction assessments on time.

In my first article about Osmond and Allen (TC9163), I explored the decisions of the First-tier Tribunal (FTT) on the motive test and why I feel – along with many others – that the decision was incorrect. Since leave to appeal to the Upper Tribunal on that point has been granted, we have much to look forward to.

That was the first of four elements of the judgment, the others being whether a return of capital is effectively outside the scope of the transactions in securities rules (the relevant consideration argument), whether the counteraction notices were validly issued and whether the counteraction assessments were issued within the statutory time limit. Spoiler alert: the FTT found for HMRC on all three issues.

This second article (out of three) on the case covers the last of these issues – whether the assessments were raised in time. While the legislation has changed since the case arose, the point is still of interest to many of the cases that were stayed behind Osmond and Allen, so it is a pity that the taxpayers have chosen to appeal only on the motive test, as it means that the time limit issue will have to start again with a different taxpayer in front of a differently constituted FTT.

Background
To recap, Mr Osmond and Mr Allen held shares that were subject to EIS relief, so that if the shares were disposed of for capital gains tax purposes, no capital gains tax would arise on the disposal. During 2013, and again in March 2015, both of the appellants entered into share buybacks. The buybacks of March 2015 (£11m to Mr Osmond and £9m to Mr Allen) were challenged by HMRC under the transactions in securities rules. As explained in the previous article, the tribunal found for HMRC that a main purpose of Messrs Osmond and Allen being party to the share buybacks was to obtain an income tax advantage.

Timing of assessments
Put simply, this argument was about whether the time limit for raising assessments in this case was four years or six years. This is important because there are a number of transactions in securities cases where assessments for the tax year 2015-16 were made in the last few weeks or months of tax year 2021-22.

The contention for the taxpayers, that the time limit was four years from the end of the year of assessment in which the income tax advantage arose – as per TMA 1970, s 34 – means that all of those assessments were made out of time, which means that all of those cases would fall away.

Conversely, if HMRC’s contention – that the transactions in securities rules contain a special time limit of six years – then many taxpayers may choose to concede, given the costs of an appeal and the possibility of losing on the motive test. The changes made by FA 2016 mean that this argument is historical but, given the number of counteraction notices issued in relation to income tax advantages in 2015-16, it is a highly significant issue for all of those cases.

The relevant legislation is:

• ITA 2007, s 698(5): ‘Nothing in this section authorises the making of an assessment later than six years after the tax year to which the income tax advantage relates.’ [NB This provision was amended with effect from 6 April 2016.]
• ITA 2007, s 698(7): ‘But no other provision in the Income Tax Acts is to be read as limiting the powers conferred by this section.’
• TMA 1970, s 34(1): ‘Subject to the following provisions of this Act, and to any other provisions of the Taxes Acts allowing a longer period in any particular class of case, an assessment to income tax or capital gains tax may be made at any time not more than four years after the end of the year of assessment to which it relates.’

HMRC’s arguments
HMRC argued that ITA 2007, s 698 provided a self-contained regime for the counteraction of income tax advantages. The legislation requires HMRC to make adjustments to counteract an income tax advantage ‘and these adjustments allow HMRC to specify … an assessment’. There is then a separate provision to allow an assessment to be made within six years of the end of the tax year in which the income tax advantage arose, which HMRC said was to override the 20-year time limit for deliberate non-compliant behaviour. Apparently, HMRC’s view is that a loss of tax under the transactions in securities rules cannot be caused by such deliberate non-compliant behaviour. As an aside, this seems a slightly odd argument to make, since it seems to suggest that a loss of income tax can arise under the transactions in securities rules in cases of careless non-compliance, although it is difficult to see how this could ever arise.

HMRC’s second contention is that ITA 2007, s 698(7) ensures that the four-year time limit in TMA 1970, s 34 does not apply to limit the assessment power under s 698(5). For this argument to be valid, HMRC would have to demonstrate that TMA 1970 is a provision in the Income Tax Acts, because s 698(7) refers to ‘no other provision in the Income Tax Acts’ limiting the assessment power, and the taxpayers’ argument was the TMA 1970, s 34 imposes a four-year time limit. HMRC has frequently referred, in correspondence on similar cases, to CRC v Inverclyde Property Renovation LLP [2020] STC 1348, which it relied upon here, too. This was an Upper Tribunal decision that came to the view that TMA 1970 can be part of the Income Tax Acts. There are other authorities to the contrary, particularly R (Spring Salmon and Seafood) v CIR [2004] STC 444, which was a Court of Session decision. But HMRC argued that the FTT in this case should follow the most recent decision.

HMRC’s final argument was that TMA 1970, s 34 gives priority to the transactions in securities rules, as it is ‘subject … to any other provisions of the Taxes Acts allowing a longer period’, and ITA 2007, s 698(5) was just such an ‘other provision’.

Appellants’ arguments
The argument for the taxpayers was that ITA 2007, s 698 requires HMRC to issue a counteraction notice, which must specify the adjustments to be made and the basis for them, but that the assessments themselves remain subject to the procedural rules of TMA 1970, including s 34. The appellants did not specifically argue against the transactions in securities rules being a self-contained regime, as HMRC’s case was not couched in those terms, although that is the way the tribunal recorded it.

Secondly, the time limit in ITA 2007, s 698(5) is not a power to make assessments up to six years after the end of the tax year. Instead, it is a limitation on HMRC’s ability to raise assessments relating to the transactions in securities rules. In contrast, the permissive rules of TMA expressly state that something can or may be done, as in TMA 1970, itself, which says that ‘an assessment to income tax or capital gains tax may be made at any time not more than four years after the end of the year of assessment’.

The purpose of ITA 2007, s 698(7) is simply to ensure that the transactions in securities regime is not limited by anything else in the Income Tax Act, itself, or in any of the other Income Tax Acts. Furthermore, since TMA 1970 is not, in the taxpayers’ view, part of the Income Tax Acts, ITA 2007, s 698(7) cannot override TMA 1970, s 34. In effect, this was the decision in Spring Salmon, which should be preferred by the tribunal over Inverclyde, on the basis that the latter was wrongly decided.

Decision on timing of assessments
The tribunal decided: ‘The TIS regime is a freestanding anti-avoidance regime which contains the essential elements relating to the criteria for liability, the charging mechanics, and an appeals mechanism.’ The judgment said that it had not seen any legislation or case law to suggest that an assessment ‘is subject to the exclusive domain of the TMA’. The tribunal therefore applied the general rules of statutory interpretation in the context of the charging regime set out in ITA 2007, s 698. Since the transactions in securities rules were not explicitly made subject to the rules of TMA, it considered that the transactions in securities rules should take precedence.

In terms of the different provisions being permissive or restrictive, the tribunal highlighted the fact that the transactions in securities rules require HMRC to do certain things, such as counteracting an income tax advantage, whereas the rules in TMA 1970 simply permit HMRC to raise an assessment. In the words of the judgment, the judges said (paragraphs 132 to 135):

‘But it is clear to us that HMRC not only have power to assess, but have a duty to do so, by dint of the language in section 698(1) and (2). In subsection (1)(b) HMRC are told that where there is a prime facie case “the income tax advantage in question is to be counteracted by adjustments”. (Emphasis added). This is prescriptive.

‘The same is true of the language in section 698(2) “the adjustments ... which … To be made are to be specified in the notice…” (Again, emphasis added).

‘This, too, is prescriptive, and far more so than the provisions in, for example, section 29 TMA, or in section 34 TMA where the language is “may”.

‘So HMRC have not just a power, [but] a duty, to issue a counteraction notice in the circumstances set out in section 698(1).’

Overall, their conclusion was: ‘The issue of the assessment, therefore, is an integral part of the duty and power that HMRC have to counteract an income tax advantage.’ It was therefore not surprising that some limit, ie six-year time limit in ITA 2007, s 698(5), was placed on HMRC’s power, which must be viewed in the context of the statutory requirements in subsections (1) and (2). As a ‘coherent and self-contained regime’, there is no ‘room for the application of the TMA, and in particular the more restrictive time limits in relation to assessment’.

The tribunal considered it significant that the transactions in securities rules contain provisions for an appeal against a counteraction notice and assessment (ITA 2007, s 705). While the taxpayers pointed out that the appeal is formally against the counteraction notice, on dealing with an appeal, the tribunal is entitled to ‘affirm, vary or cancel’ either the counteraction notice or the assessment. This further reinforced the tribunal’s view that the transactions in securities rules are self-contained, with their own assessment and appeal procedures, and they pointed out that it would certainly be odd – and contrary to the likely intention of parliament – if there were two routes to appeal against a counteraction assessment, one under the transactions in securities rules, themselves, and another under the general rules of TMA 1970.

The tribunal also looked at this point in the context of TMA 1970, s 34 being ‘subject … to any other provisions of the Taxes Acts allowing a longer period’ and HMRC’s contention that the time limit in s 34 must therefore be subject to the transactions in securities regime because ITA 2007 is one of the Taxes Acts. The taxpayers’ position was that this was not relevant because ITA 2007, s 698(5) does not ‘allow’ a longer period, it simply restricts HMRC’s ability to raise an assessment. Again, the tribunal sided with HMRC saying that the provision ‘must be seen as part of the TIS charging regime, and in particular the duties and powers imposed on HMRC by s 698(1) and (2). The tribunal noted that those subsections are permissive (I would suggest they are mandatory), so that s 698, read as a whole, does allow a longer period.

In arriving at this conclusion, the tribunal noted the comments of Lord Hodge in RFC 2012 plc (in liquidation) (formerly Rangers Football Club plc) v Advocate General for Scotland [2017] STC 1556 that ‘the legislative code is not a seamless garment but is in certain respects a patchwork of provisions’. The tribunal said that ‘the legislative code governing assessments made under the TIS regime may not be a seamless garment, and there may indeed be loose ends’, but by adopting a purposive approach to the legislation, it concluded that the transactions in securities regime must be supreme in the context of the instant case. It seems to me that the reference to UK tax legislation being something of a patchwork is clearly applicable to all of the arguments on the question of the time limit for assessments under the transactions in securities regime, so these comments could be generally applied to all the arguments on this point.

In terms of the taxpayers’ argument that TMA 1970 is not one of the Tax Acts, as referred to in ITA 2007, s 698(7), the tribunal took the view that, since it had found that the transactions in securities regime was completely self-contained in terms of assessment powers, there was no need for it to opine on this point.

Overall, the decision on this point was also in favour of HMRC.

Comments
This point is absolutely crucial for the other cases involving transactions in securities that took place towards the end of 2015-16. While Osmond and Allen itself is only being appealed in respect of the motive test, a number of the other cases are probably relying almost exclusively on whether HMRC raised the counteraction assessments on time. In terms of the cases I have been involved with, I can certainly think of more than one where the commercial drivers for a reduction of capital were weak and the taxpayers’ only hope would be to demonstrate that the assessments were raised out of time. So, this particular point is of paramount importance to many other cases and it is, perhaps, unfortunate that Messrs Osmond and Allen in this case have not chosen to pursue it.

The argument that the transactions in securities regime is self-contained, and is not dependent on TMA 1970, may seem compelling on a first read through of the tribunal’s decision. However, a more detailed consideration suggests that this is simply the wrong answer. While the regime has some limited rules about adjustment by assessment, time limits for assessing, and appeals and how they are dealt with, there is a lot of other procedural legislation that is applicable to counteraction assessments, all of which is found outside the regime.

For example, there was no formal power to open an enquiry under the transactions in securities regime until 6 April 2016 (it is now in ITA 2007, s 695), and the information powers are all found in FA 2008, Sch 36. Having raised a counteraction assessment, HMRC routinely offers an internal review (TMA 1970, s 49A to s 49I) and the facility to stand over any tax due under a counteraction assessment relies on TMA 1970, again, in s 55. So, looking at the wider requirements of an effective counteraction regime, it is clear that the regime depends on a range of provisions outside its own legislation, so it is difficult to see how one can justify calling it a ‘completely self-contained regime’.

I also feel that the tribunal’s approach to the clear meaning of certain words is somewhat cavalier and that it has ridden roughshod over clear legislation in pursuit of a purposive answer. The example here is that ITA 2007, s 698(5) is very obviously (to me, at least) a restriction imposed on HMRC as it explicitly states that it cannot do something. While s 698 mandates HMRC to issue a counteraction notice and to specify an adjustment, in this case by way of assessment, that is the extent of the powers conferred on HMRC by this provision. Those powers are being constrained by the restriction at subsection (5) and nothing in s 698 permits HMRC to issue an assessment beyond the four-year time limit specified by TMA 1970, s 34.

My understanding of purposive interpretation is that it is a way of deciding what was intended by parliament if there is any ambiguity in the legislation. In this case, I cannot see any ambiguity that would permit the restriction in s 698(5) being read as being a power. I appreciate that some ambiguity does arise due to the legislation being something of a patchwork, but this does not mean that even clear words should be treated as being ambiguous.

Having reached the conclusion that the transactions in securities regime is not completely self-contained, and that a purposive approach to interpretation does not extend to clear words in the legislation, the element that the tribunal decided to ignore becomes much more important. ITA 2007, s 698(7) clearly states that no other provisions in the Taxes Acts can limit the transactions in securities regime. But it seems absolutely clear to me that TMA 1970 cannot be part of the Taxes Acts, based on the taxonomy in the legislation, as follows:

Schedule 1 of the Interpretation Act 1978 states that:

• ‘The Income Tax Acts’ means all enactments relating to income tax, including any provisions of the Corporation Tax Acts which relate to income tax; and that
• ‘The Corporation Tax Acts’ means the enactments relating to the taxation of the income and chargeable gains of companies and of company distributions (including provisions relating to income tax); and that
• ‘The Tax Acts’ means the Income Tax Acts and the Corporation Tax Acts.

TMA 1970, s 118 then tells us that ‘the Taxes Acts’ means TMA 1970, itself, the Tax Acts, TCGA 1992 and the Development Land Tax Act 1976 and any other enactment relating to development land tax.

So, TMA 1970 is one of the Taxes Acts but it is not one of the Tax Acts. As Lady Smith said in Spring Salmon: ‘It seems clear that TMA is separate and distinct from the group of statutes referred to as “the Tax Acts”.’ The decision of the Upper Tribunal in Inverclyde appears to say that TMA can at the same time be part of the Taxes Acts, as clearly stated in TMA 1970, s 118, and also a part of the Income Tax Acts, by virtue of containing provisions that are concerned with the administration of income tax. This conclusion seems plainly incorrect to me.

Once we accept that TMA 1970 is not part of the Income Tax Acts, then its application is not restricted by ITA 2007, s 698(7), so the four-year time limit in s 34 is applicable to assessments arising from the transactions in securities regime.

General conclusions
The issues discussed in this article might appear to be largely administrative and historical and readers could be forgiven for assuming that the important issue in this case relates to the motive test, which is the only point that is being appealed. And that is a hugely important matter, given the ramifications of the FTT’s decision.

However, as already noted, a lot of tax planning went on in the last few months of the 2015-16 tax year. In early December 2015 the changes to be transactions in securities regime were announced and we were told that a reduction of capital by a company would now be added to the list of transactions to which the regime might apply (now ITA 2007, s 684(2)(e) ‘a repayment of share capital or share premium’). Several advisers appear to have decided that meant the transactions in securities regime would not apply to a reduction of share capital before the change of the rules on 6 April 2016, so they encouraged their clients with substantial share capital to reduce that capital and pay it back to the shareholders, on the basis that the gains would be subject to capital gains tax, and possibly subject to entrepreneurs’ relief on up to £10m of gains. It is for this reason that there are so many transactions in securities cases waiting to be heard. (The buy-back in Osmond and Allen was for entirely different reasons, as discussed in the previous article, but the potential application of the transactions in securities rules is the same.)

Realistically, none of the cases that I am aware of are suggesting that a reduction of share capital was not a transaction in securities prior to 6 April 2016. However, many of them are relying on the fact that, in almost every case, HMRC issued the counteraction notices and raised the assessments in the last few weeks of the 2021-22 tax year, right on the six-year time limit. If it is ultimately found that the assessments were raised out of time, every one of those cases will succeed, regardless of the application of the motive test or of any other arguments that might be put. So, while the time limit issue has been superseded by the new legislation, it is of critical importance for a great many cases. Since this point is not being pursued in Osmond and Allen, we will have to wait for the next case for a decision that might impact so many taxpayers.