The eye of the needle: Is one of your purposes tax avoidance?

Article by Jonathan Schwarz, first published on

We have all become familiar with the expression in the PPT set out in article 7(1) of the MLI and article 29(9) of the 2017 OECD Model  where “obtaining that benefit was one of the principal purposes of any arrangement or transaction”.  Discerning which is a principal purpose is one of the main challenges in applying the PPT and other anti-abuse rules that turn on purpose.

This kind of language has appeared in UK domestic legislation for a very long time, and in UK double tax treaties for nearly 30 years. A string of recent UK decisions has considered the purpose of arrangements in the context of one of the oldest anti-avoidance rules designed to prevent UK residents structuring their affairs through offshore entities. The “Transfer of Assets Abroad” legislation was first introduced by Finance Act 1936, section 18 and is now in Income Tax Act 2007, Part 13, Chapter 2. The most important provision deems the income of a non-UK person to be the income of anyone who is UK resident and transferred assets directly or indirectly to the non-UK person, if that transferor has a broadly defined, “power to enjoy” the income of the non-UK person resulting from the transfer.

A so-called “motive defence” precludes this attribution of income. In its current form, there are two defences:

“…the purpose of avoiding liability to taxation was not the purpose, or one of the purposes, for which the relevant transactions or any of them were effected.”

“… the transfer and any associated operations(a)were genuine commercial transactions, and (b)were not designed for the purpose of avoiding liability to taxation.”

The scope of the defence has been narrowed over time by legislation. As originally enacted, a main purpose that was not tax avoidance was sufficient to satisfy the defence.

What is a tax avoidance purpose?

To what extent does consideration of tax in deciding on a course of action constitute avoidance? In this context, the UK courts distinguish between “tax avoidance” and “tax mitigation”. The House of Lords decided in Willoughby v IRC [1997] UKHL; 70 TC 57 that tax avoidance is a course of action designed to conflict with or defeat the evident intention of Parliament. Tax mitigation is taking advantage of a fiscally attractive option afforded by the tax legislation, and genuinely suffering the economic consequences that Parliament intended to be suffered by doing so. This approach is consistent with the PPT and statutory GAARs which permit tax benefits that are consistent with the purpose of the relevant tax rule and are thus not abusive. See

The UK tax tribunals have recently considered this issue in a series of cases where UK resident taxpayers have used offshore structures in UK-related activities.

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