Consortium relief was still available even though a shareholder was contractually obliged to pay on to the seller under an earn-out any amounts it received by way of dividend from Target. The arrangement did not deprive the shareholder of the necessary beneficial ownership in Target.
Bupa Finance acquired approximately 46 percent of the shares in a company (Target) that had significant carried-forward trading losses. The consideration was nominal, but under an earn-out provision, Bupa Finance had to pay the seller by way of deferred consideration an amount equal to any distribution (income or capital) paid to it by Target within 10 business days.
Bupa Insurance (a member of the same group as Bupa Finance) claimed consortium relief in respect of some of the losses made by Target. The UK tax authorities (HMRC) disallowed the claim on the basis that the earn-out clause restricted Bupa Finance's rights over its shareholding in Target to such an extent that it did not satisfy the beneficial entitlement requirements in the legislation for consortium relief.
The Court held that the earn-out clause did not mean that Bupa Finance was not beneficially entitled to the shares and distributions in Target. In reaching this decision, the judgment emphasised the importance of certain rights that Bupa Finance enjoyed (e.g., to benefit from cash distributions for the ten days before the onward payment was due). Bupa Finance, the Court found, had acquired more than a "mere legal shell", and if it was not commercially able to retain the distribution proceeds indefinitely, that did not defeat its beneficial entitlement.
HMRC also raised an argument at the hearing that the claim for consortium relief should be disallowed in any case because the shares in Target had been acquired solely for a tax avoidance purpose. The Court ruled that HMRC was not entitled to introduce such a claim at the hearing stage of proceedings, but considered the issue nonetheless, and rejected HMRC's argument. In its reasoning, the Court distinguished the facts in the current case from a leading case on the meaning of tax avoidance, namely Arrowtown, the facts of which involved a company with mere "shadowy" rights to dividends or assets on a winding-up. The shares in Target, however, carried more significant rights including, for example, rights to assign the distribution. Moreover, a tax avoidance purpose does not necessarily mean that a transaction should be disregarded; this would only be the case where the relevant legislation required it.
The decision means that consortium relief is not necessarily disallowed where a company's rights over shares are subject to restrictions. However, the judgment makes it clear that decisions relating to beneficial entitlement will always turn on a case's specific facts.