HMRC's appeal dismissed: interest payment not caught by anti-abuse provision in UK-Ireland double tax treaty

In HMRC v Burlington Loan Management DAC [2026] EWCA Civ 461, the Court of Appeal (CoA) upheld the decisions of the First-tier Tribunal (FTT) and Upper Tribunal (UT) and confirmed that Article 12(1) of the UK-Ireland double taxation treaty (the Treaty) applied to exempt interest from withholding tax on the relevant debt claim and Article 12(5) did not disapply that treatment.

Background

Burlington Loan Management DAC (BLM) is resident in the Republic of Ireland. It purchased the rights to a debt claim in the administration of Lehman Brothers International (Europe) (LBIE) in England (the Debt Claim). 

The Debt Claim was bought in February 2018, by way of a back-to-back assignment via a broker from SAAD Investments Company Ltd (SICL), a company resident in the Cayman Islands.

The issue in dispute was whether BLM's entitlement to receive approximately £90.8 million of post-administration interest in respect of the Debt Claim, was exempt from UK withholding tax by virtue of Article 12(1) of the Treaty, under which interest beneficially owned by an Irish resident is exempt from UK withholding tax and taxable only in Ireland.

HMRC argued that Article 12(1) was disapplied by Article 12(5), because the main purpose, or one of the main purposes, of BLM was to take advantage of Article 12 by means of the assignment of the Debt Claim. Accordingly, BLM was liable to UK withholding tax and not entitled to seek any reclaim by way of credits.

HMRC issued a closure notice to BLM refusing the UK withholding tax reclaim in the amount of £18,147,304.27, in relation to the Debt Claim.

BLM appealed the closure notice.

FTT and UT decisions 

The FTT and UT held that the payment of interest to BLM from the LBIE administration was taxable only in Ireland, by reason of Article 12(1) of the Treaty. 

HMRC appealed to the CoA. 

CoA judgment

HMRC's appeal was unanimously dismissed.

In the CoA, HMRC's main grounds of appeal, which focused on BLM's purposes, were that:

(1) the UT wrongly superimposed an additional and undefined requirement that it could only apply Article 12(5) of the Treaty where the arrangement in question amounted to an abuse; and

(2) the FTT and UT wrongly failed to take account of the fact that, without being able to reclaim the UK withholding tax, the transaction would not have been profitable for BLM; HMRC argued that this should have led the FTT and UT to conclude that BLM's main purpose, or at least a main purpose, in entering into the assignment was to obtain the benefit of Article 12(1) of the Treaty.  

BLM's position was that there was nothing artificial about the assignment of the Debt Claim and that it was a genuine commercial transaction entered into at arm's length between SICL and BLM. 

The CoA considered that there was nothing to indicate that the concept of improper use of a double tax treaty should be limited to arrangements involving some artificiality and that Article 12(5) was capable of applying even if the parties have genuine commercial reasons to buy and sell a debt-claim, although this was not determinative of the issues in the present case.

When considering the main purpose, the CoA avoided reaching a conclusion on what BLM's main purpose, or one of its main purposes, was, by deciding the case on the basis of the meaning of the words 'to take advantage of' in Article 12(5). The CoA adopted the meaning given by Popplewell LJ in Vietjet Aviation JSC v FW Aviation (Holdings) Ltd [2025] EWCA Civ 783, that 'taking advantage of' does not simply mean taking the benefit, it means doing so contrary to the object and purpose of the treaty. Applying this definition, the CoA confirmed, agreeing with the UT, that the correct starting point for the analysis was that, under Article 12(1), the UK agreed that BLM, as a resident of Ireland and beneficial owner of the Debt Claim, should only be taxed on the interest payable in Ireland. Therefore, BLM's reliance on Article 12(1) was entirely in accordance with the objects and purposes of the Treaty. The CoA commented that it was no part of the object and purpose of Article 12 to maximise tax revenue for HMRC and Article 12(5) does not prohibit assignments simply on the basis that they would lead to less tax being recovered by HMRC. 

Lady Justice Falk also observed that where a tax advantage is specifically conferred by legislation or a treaty, it cannot have been intended that it should inevitably be denied by a 'main purpose' rule if it forms part of the economics of a transaction. She said that she (along with Lord Justices Snowden and Zacaroli), was unconvinced by the parties' agreed position that Article 3(2) of the Treaty applied when determining the meaning of 'main purpose or one of the main purposes', so that regard should be had to English domestic case law without any consideration of wider principles of interpretation of international treaties.

Comment

Whilst this decision provides some helpful guidance on the correct interpretation of treaty anti-abuse articles, by side-stepping the substantive analysis of the main purpose test, the CoA has missed an opportunity to provide taxpayers with greater guidance and clarity on how the main purpose test applies.

The judgment also provides some reassurance for those participating in the UK secondary debt markets who factor in available treaty reliefs.

Given the sums at stake in this case, it will be interesting to see if HMRC seek to appeal to the Supreme Court. 

The judgment can be viewed here.