The Court of Appeal has rejected HMRC’s attempt to bring a £20m share buyback within the transactions in securities rules, clarifying that an intention to preserve capital gains tax relief does not necessarily amount to a main purpose of obtaining an income tax advantage.
What did the Court of Appeal decide?
In The Commissioners for HMRC v Hugh Edward Mark Osmond & Anor [2026] EWCA Civ 1440, handed down on 12 November 2026, the Court of Appeal dismissed HMRC’s appeal. Lady Justice Falk gave the leading judgment, with Lady Justice Elisabeth Laing and Lord Justice Newey agreeing.
The appeal concerned the transactions in securities (TIS) rules in Chapter 1 of Part 13 of the Income Tax Act 2007. The central question was whether a main purpose of securing a capital gains tax (CGT) benefit could, as a matter of law, be treated as a main purpose of obtaining an “income tax advantage” under section 687 of the Act.
The court agreed with the Upper Tribunal that it could not. The statutory definition of an income tax advantage may establish that an advantage was obtained, but it does not automatically establish that obtaining that advantage was one of the taxpayer’s main purposes in entering into the transaction.
How did the tax dispute develop?
The First-tier Tribunal found that preserving EIS disposal relief was a main purpose of the 2015 buybacks. It also found that obtaining an income tax advantage was not a main purpose. The taxpayers did not want to extract funds from the company; they wanted to crystallise the CGT relief before it might be withdrawn.
Nevertheless, the First-tier Tribunal accepted HMRC’s primary argument that the statutory definition of “income tax advantage” meant that the taxpayers’ purpose of securing EIS disposal relief necessarily counted as a purpose of obtaining an income tax advantage. The tribunal considered that conclusion followed from the statutory comparison between the income tax that would be payable on a qualifying distribution and the CGT payable.
The Upper Tribunal allowed the taxpayers’ appeal. It concluded that section 687 did not deem a main purpose to exist where that purpose did not in fact exist. It distinguished the purpose of a transaction from its effect and treated the First-tier Tribunal’s factual finding on the taxpayers’ actual purpose as important.
HMRC then appealed to the Court of Appeal on the single issue of whether the taxpayers’ purpose of obtaining EIS disposal relief was, as a matter of law, a main purpose of obtaining an income tax advantage for the purposes of section 684(1)(c) of the Income Tax Act 2007.
Why did HMRC lose the appeal?
The Court of Appeal focused on the language and purpose of the statutory scheme. Section 682 describes the chapter as making provision for counteracting income tax advantages from transactions in securities. Section 687 defines the relevant advantage by comparing the income tax that would be payable if the relevant consideration were a qualifying distribution with the CGT payable in respect of it.
Lady Justice Falk emphasised that the legislation contains two distinct requirements. A taxpayer must obtain an income tax advantage, and a main purpose of entering into the transaction must be to obtain such an advantage. The fact that the first requirement is satisfied does not, by itself, establish the second.
“Effects or consequences, even if inevitable, are not necessarily the same as objects or purposes.”
Lady Justice Falk, applying the principles discussed in Blackrock
The court rejected HMRC’s argument that EIS disposal relief was effectively the same thing as the defined “income tax advantage”. An intention to achieve a reduced or nil CGT liability did not equate to an intention to secure a state of affairs in which income tax otherwise payable exceeded CGT. In the former situation, income tax was irrelevant to the taxpayers’ objective; under the statutory definition, it was central.
The court also considered the legislative history. The 2009 consultation, “Simplifying Transactions in Securities Legislation”, proposed a more targeted regime, a clearer method of calculating the advantage and a narrower scope. It expressly indicated that the revised rules were not intended to apply where the advantage related to a reduction in CGT. The 2010 reforms therefore did not signal an intention to widen the TIS rules to cover CGT avoidance.
On the facts, the First-tier Tribunal had found that the taxpayers’ main purpose was to bank EIS disposal relief, not to obtain an income tax advantage. That finding could not be ignored simply because it had been made when the tribunal considered HMRC’s alternative argument. HMRC’s approach would effectively have treated the taxpayers as having a main purpose they did not in fact have.
What does the judgment mean for taxpayers?
The decision confirms that the TIS rules require a genuine examination of the taxpayer’s purpose, rather than an assumption drawn solely from the tax outcome of a transaction. A tax advantage may arise as a consequence of a transaction without having been one of the main purposes for entering into it.
For taxpayers and advisers, the distinction between income tax planning and the preservation of a CGT relief is significant. The statutory comparison in section 687 identifies whether an income tax advantage has been obtained and its amount; it does not replace the separate purpose test in section 684(1)(c).
The judgment also underlines the importance of the legislative context when interpreting tax provisions. The Court of Appeal considered the 2010 reforms to have narrowed and clarified the regime, rather than fundamentally expanding it. The appeal was therefore dismissed, leaving the Upper Tribunal’s decision undisturbed.
Frequently asked questions
What was the main issue in the HMRC appeal?
Whether a main purpose of securing EIS capital gains tax disposal relief automatically amounted to a main purpose of obtaining an income tax advantage under section 684(1)(c) of the Income Tax Act 2007.
How much did the 2015 share buybacks involve?
The total consideration was £20m. Hugh Osmond received £11m and Matthew Allen received £9m.
Did the Court of Appeal find that no income tax advantage had arisen?
No. It was common ground that an income tax advantage, as defined in section 687(1), had in fact been obtained. The dispute concerned whether obtaining that advantage was a main purpose of the buybacks.
What did the Court of Appeal decide?
It dismissed HMRC’s appeal and held that a purpose of securing EIS disposal relief was not, on the facts and statutory wording in issue, a main purpose of obtaining an income tax advantage.
Which judges heard the appeal?
Lord Justice Newey, Lady Justice Elisabeth Laing and Lady Justice Falk. Lady Justice Falk gave the leading judgment, with the other two judges agreeing.