Travel Document Service & Ladbroke Group International v Revenue & Customs (Rev 1), [2018] EWCA Civ 549

A British taxpayer (TDS) used a total return swap to cause its share investment in a subsidiary (LGI) to be deemed to be a loan. However, its hoped-for tax benefit was denied by an anti-avoidance provision that applied if “one of the main purposes” for being a party to a loan relationship was to secure relief from tax. In rejecting TDS’s submission that the anti-avoidance provision should only be applied to actual loans and not deemed loans, Lord Justice Newey referred to the dictum in Marshall v. Kerr (repeated in many subsequent cases) that “because one must treat as real that which is only deemed to be so, one must treat as real the consequences and incidents inevitably flowing from or accompanying that deemed state of affairs, unless prohibited from doing so.” This then meant that what was to be evaluated under the anti-avoidance rules was the purposes for which TDS held its shares of LGI.

In this regard, TDS emphasized that it had held its TDS shares long before entering into the swap and a related novation contract. In rejecting this contention, Lord Justice Newey stated (at para. 46):

While, therefore, there is no question of TDS having had the tax advantage in mind when it acquired the shares, it was evidently intending to use them in the tax avoidance scheme during the currency of the Swap. Had the tax advantage in view been small, there might have been scope for argument as to whether an intention to use the shares to achieve it implied that obtaining the advantage was now a main purpose of holding the shares. In fact, however, the hoped-for gain was large both in absolute terms (more than £70 million) and relative to the apparent value of TDS (some £280 million). That being so, I agree with Mr Ghosh [for HMRC] that the inescapable inference was that securing the advantage had become a main purpose of holding the shares. …

He also rejected HMRC’s submission that "’main’ … means ‘more than trivial’," stating (at para. 48):

A purpose can be "more than trivial" without being a "main" purpose. "Main" has a connotation of importance.

A British taxpayer (TDS) used a total return swap to cause its share investment in a subsidiary (LGI) to be deemed to be a loan. However, its hoped-for tax benefit was denied by an anti-avoidance provision that applied if “one of the main purposes” for being a party to a loan relationship was to secure relief from tax. In this regard, TDS emphasized that it had held its TDS shares long before entering into the swap and a related novation contract. In rejecting this contention, Lord Justice Newey stated (at para. 46):

Had the tax advantage in view been small, there might have been scope for argument as to whether an intention to use the shares to achieve it implied that obtaining the advantage was now a main purpose of holding the shares. In fact, however, the hoped-for gain was large both in absolute terms (more than £70 million) and relative to the apparent value of TDS (some £280 million).

After so concluding against TDL, Lord Justice Newey stated (at para. 48):

I would add, however, that I do not accept that, as was submitted by Mr Ghosh [for HMRC], "main" … means "more than trivial". A "main" purpose will always be a "more than trivial" one, but the converse is not the case. A purpose can be "more than trivial" without being a "main" purpose. "Main" has a connotation of importance.