Tax

The Court of Appeal’s decision in The Commissioners for HMRC v Burlington Loan Management DAC [2026] EWCA Civ 461 marks the latest stage in a significant treaty tax dispute that has now been decided in favour of the taxpayer at three successive levels. It provides important reassurance for secondary debt market participants and other taxpayers pricing arm’s-length transactions by reference to expected treaty relief. The Court’s reasoning – and in particular its recognition of the importance of legislative context and parliamentary intent in distinguishing use from abuse – will be welcomed by taxpayers, confirming that merely availing of tax advantages specifically conferred by a treaty or legislation should not, in and of itself, constitute abuse.

In summary, the Court of Appeal held that the fact a debt claim is sold to an unconnected third party at a price which reflects the purchaser’s expected entitlement to treaty relief on subsequent interest payments will not, without “something more”, mean that such treaty relief is unavailable under the treaty’s anti-abuse provisions. The Court rejected HMRC’s argument that “to take advantage of” a treaty provision simply means to obtain the benefit of that provision, and concluded that this instead means obtaining the relevant treaty benefit in a manner contrary to the provision’s object and purpose.

Background

We covered the Upper Tribunal (“UT”) decision in Burlington in an earlier post on this blog. By way of brief recap: Burlington Loan Management DAC (“BLM”), an investment company tax resident in Ireland, acquired a debt claim (the “SAAD Claim”) in February 2018 from SAAD Investments Company Limited (“SICL”), a Cayman Islands resident entity, via a third-party broker. The claim was outstanding against Lehman Brothers International (Europe) (“LBIE”), which had been in administration in England and Wales since September 2008. BLM acquired the SAAD Claim after SICL had already received the outstanding principal amount, meaning that BLM was purchasing the right to future payments of post-administration interest. The interest had a UK source and, absent relief or exemption, was subject to UK withholding tax (“WHT”) at 20%. No relevant treaty relief was available while SICL, as a Cayman Islands resident, owned the claim. Following the assignment, however, BLM claimed that Article 12(1) of the UK-Ireland double tax treaty (the “Treaty”) applied, with the result that the interest was taxable only in Ireland. BLM’s expected ability to reclaim UK WHT was reflected in its pricing of the SAAD Claim, and BLM subsequently claimed a refund of UK WHT withheld from the interest payments.

HMRC refused the WHT refund, relying on Article 12(5) of the Treaty, which disapplies the interest exemption where a main purpose, or one of the main purposes, of any person concerned with the creation or assignment of the debt claim was “to take advantage of” Article 12(1). HMRC argued that because the transaction would only have been profitable by virtue of BLM’s expected ability to obtain a UK WHT refund, and because that expectation was reflected in the pricing, each of BLM and SICL necessarily had a main purpose of taking advantage of Article 12(1) of the Treaty.

As set out in our earlier post, both the First-tier Tribunal (“FTT”) and the UT rejected that argument, and HMRC appealed to the Court of Appeal.

The Appeal

Before the FTT and the UT, HMRC relied on both SICL’s and BLM’s purposes in arguing that the assignment engaged Article 12(5). Before the Court of Appeal, however, HMRC’s appeal focused only on whether BLM had a main purpose of “taking advantage of” Article 12(1).

HMRC argued that the UT had wrongly treated Article 12(5) as requiring “abuse”, and that, because the transaction would not have been profitable for BLM without the expected WHT refund, obtaining the benefit of Article 12(1) must have been a main purpose of BLM. HMRC’s position was that “to take advantage of” Article 12(1) meant no more than “to obtain the benefit of” that provision.

The Court of Appeal’s Decision

The Court of Appeal dismissed HMRC’s appeal unanimously. Three key principles emerge from the decision:

1. The meaning of “to take advantage of”

In his leading judgment, Snowden LJ agreed with the reasoning of the recent Court of Appeal decision in  Vietjet Aviation JSC v FW Aviation (Holdings) 1 Limited [2025] EWCA Civ 783 and stated that to “take advantage” of a provision such as Article 12(1) within the meaning of an anti-abuse provision such as Article 12(5), cannot “simply be synonymous with to ‘obtain the benefit’ of that provision”. To do so would have the result that the relevant provision would be self-defeating.

In her concurring judgment, Falk LJ emphasised that, where a treaty specifically confers a benefit on a category of taxpayer, the fact that the taxpayer obtains that benefit, even where economically significant, cannot of itself justify denying the benefit under a purpose-based anti-abuse rule. Something more is required before the inference can properly be drawn that the treaty is being misused.

2. The object and purpose of the Treaty

The Court considered whether BLM’s reliance on Article 12(1) was contrary to the Treaty’s object and purpose. In analysing this question, the Court cited the 2014 OECD Commentary on the Model Tax Convention, which provides that the “principal purpose of double tax conventions is to promote, by eliminating international double taxation, exchanges of goods and services and the movement of capital and persons. It is also a purpose of tax conventions to prevent tax avoidance and evasion.” The Court held that, without more, it cannot be an abuse for a taxpayer resident in one of the contracting states to a double tax treaty to acquire a debt claim in the expectation that it will enjoy the very exemption from tax which the treaty expressly provides for someone in its position.

Accordingly, the Court agreed with the UT that the correct starting point for the analysis is that BLM, as a resident of Ireland and beneficial owner of the SAAD Claim, was entitled under Article 12(1) to be taxed only in Ireland. The Court was also clear that Article 12 is not concerned with preserving HMRC’s taxing rights where the Treaty allocates those rights to Ireland. The fact that HMRC would collect less UK WHT following the assignment than it would have done had SICL retained the claim was therefore not, without something more, a basis for invoking Article 12(5).

Enabling BLM, as an Irish resident, to bid a higher price to acquire the SAAD Claim on the assumption that it would only be taxed in Ireland was, in the Court’s view, in line with the objects and purposes of the Treaty. BLM’s reliance on Article 12(1) was in accordance with those purposes.

3. Abuse does not require artificiality

Burlington is not, however, authority for the proposition that all genuine commercial transactions fall outside Article 12(5). The Court rejected BLM’s respondent’s notice, which argued that Article 12(5) applies only to artificial transactions or arrangements. Artificiality is not a precondition, and the presence of genuine commercial substance is not necessarily conclusive. The question in every case is whether, viewed in light of the treaty’s object and purpose, the taxpayer is using the treaty in an intended way or abusing its provisions.

Significance and Practical Implications

The Burlington decision is of direct relevance for secondary debt market participants, lenders and entities structuring cross-border financing arrangements involving UK-source interest.

Deal pricing: Pricing for, and obtaining, an intended treaty benefit is not inherently abusive. A taxpayer who prices a transaction on the assumption of treaty relief, and whose reliance on that relief is consistent with the treaty’s own objectives, does not engage an anti-abuse provision automatically. The relevant question is whether the arrangement amounts to a misuse or abuse of the treaty, not solely whether it produces a favourable UK tax outcome.

Risk profile: The risk profile shifts where the facts look closer to conduit or treaty-shopping arrangements, for example, where the original holder retains an interest in the income stream, where there are circular or back-to-back income flows or where a treaty-resident vehicle is interposed specifically to channel income that economically accrues to a non-treaty resident. Arrangements involving related parties, newly incorporated special purpose vehicles or structures where treaty relief is the dominant or sole commercial driver carry higher risk of challenge.

Arm’s-length dealing; outright disposal of the claim; absence of retained economics; and a commercial investment rationale were the factors that distinguished Burlington from circumstances where Article 12(5) might be engaged. But that does not mean that the presence of genuine commercial substance is conclusive. The test is not limited to artificiality; it captures abuse more broadly.

Potential relevance to other transactions: Looking beyond the treaty relief context, the principles underpinning the Court’s decision – in particular, that “something more” is required to establish abuse rather than merely obtaining the benefit expressly intended to be conferred by a treaty (or legislation) – are potentially of wider application for UK taxpayers. Analogies can be drawn with the recent line of cases concerning the unallowable purpose rules, referenced in the Court of Appeal’s decision, and the newly amended purpose test under section 137 of the Taxation of Chargeable Gains Act 1992 relevant to share-for-share exchanges and reorganisations.

Each case will ultimately turn on its own facts, with legislative context and parliamentary intent central to distinguishing use from abuse. Burlington is nevertheless a welcome decision for taxpayers, confirming that simply availing of tax advantages specifically conferred by a treaty or legislation should not, without something more, be characterised as abuse.