The Upper Tribunal (“UT”) decision in The Commissioners for HMRC v Burlington Loan Management DAC (UT/2022/000144) provides welcome reassurance for participants in the UK secondary debt markets, and reaffirms the conclusions previously drawn by the First-tier Tribunal (“FTT”).  In summary, the fact that the sale of a debt claim to an unconnected third party is priced to reflect the purchaser’s entitlement to tax treaty relief on subsequent interest payments it receives will not necessarily mean that such treaty relief should be rendered unavailable pursuant to the treaty’s anti-abuse provisions.  Some commentators have suggested that to find otherwise would have had a material impact on the pricing of secondary debt market deals involving UK borrowers.


The case concerned the assignment by a Cayman Islands tax resident company, SAAD Investments Company Limited (“SICL”), to an Irish tax resident company, Burlington Loan Management DAC (“BLM”), of a debt claim (the “SAAD Claim”) outstanding against a UK tax resident company, Lehman Brothers International (Europe) (“LBIE”).  BLM purchased the SAAD Claim after SICL had received the outstanding principal amount, which meant that it was purchasing the right to future payments of interest only.

As the interest payable by LBIE had a UK source, in the absence of any relief or exemption, it would have been subject to UK withholding tax (“WHT”) at a rate of 20%. No such relief or exemption was available while SICL owned the SAAD Claim but, following the assignment, BLM claimed that Article 12(1) of the UK-Ireland double tax treaty applied such that the interest became taxable only in Ireland (and therefore the UK’s domestic taxing provisions were not engaged). As a result, BLM was effectively entitled to receive 25% more interest than SICL, as interest payments to it were not liable to UK WHT. 

However, Article 12(5) of the treaty provides an exception to the applicability of Article 12(1) in circumstances where the main purpose, or one of the main purposes, of any person concerned in the assignment or creation of the relevant debt claim is to take advantage of Article 12(1). Although the parties did not produce detailed evidence of the applicable effective tax rate, it was clear that, were Article 12(5) to apply, BLM would be subject to tax on receipt of the interest at a rate of at least 20%, putting it in a similar position to SICL.

BLM acquired the SAAD Claim from SICL in the secondary market at a price reflecting the availability of Article 12(1).  HMRC argued that relief from UK WHT should not apply to interest paid to BLM on the basis that Article 12(5) applied because it was a main purpose of the assignment to take advantage of Article 12(1).  In other words, Article 12(1) was being taken advantage of through the sale of the SAAD Claim to BLM for a sum that reflected a higher amount of interest receipts than was possible in the absence of a sale.


The FTT rejected HMRC’s arguments and concluded that the assignment of the SAAD Claim from SICL to BLM did not engage Article 12(5). In reaching its decision, the FTT drew an important distinction between a person’s “purpose” of doing something on the one hand, and the person’s understanding of the “inevitable and inextricable consequences” of doing it on the other.

BLM was aware both that Article 12(1) would apply to interest it received, and that SICL would have received the interest net of UK WHT.  BLM also knew that other potential buyers would also be able to mitigate any UK WHT.  The FTT therefore reasoned that BLM knew that it needed to offer a price that was more than 80% of the interest.  However, the FTT considered that this knowledge was part of the “setting” in which BLM made its offer rather than an independent “purpose” of the acquisition.  For its part, SICL also knew that it would receive the interest net of UK WHT and that there would be buyers for whom the UK WHT would not be an absolute cost.  Notably, however, SICL did not know the identity of the buyer at the time the terms were agreed, although it would have been able to infer from the price that the buyer was somehow able to mitigate the UK WHT cost.  It was not until four days later that SICL discovered the identity of the purchaser and its use of Article 12(1).  

The FTT noted that SICL’s only purpose in entering into the assignment was to sell the SAAD Claim for the best available price, and that considering “taking advantage” of Article 12(1) to be one of SICL’s main purposes in entering into the transaction would be a “somewhat surprising conclusion”. According to the FTT, the transferor of a debt could only have a main purpose of “taking advantage” of Article 12(1) if it knew that the purchaser is entitled to the benefit of Article 12(1) specifically.  It would not be enough for the transferor just to know that the purchaser is entitled to some exemption from UK tax even if that exemption does in fact stem from Article 12(1).

The FTT concluded that something more would be required to engage Article 12(5) than simply selling a debt claim for a market price which happens to reflect the fact that certain potential purchasers of the claim have tax attributes which the seller does not have by virtue of being entitled to relief under a tax treaty.  The FTT noted the potential “enormous impact on the secondary debt market” were it to hold in HMRC’s favour. 

HMRC appealed the FTT’s findings, essentially arguing that the FTT had misconstrued Article 12(5) and had made certain errors in its evaluative factual conclusions.


The UT upheld the FTT’s decision and rejected HMRC’s appeal.

The UT considered that the FTT had gone “too far” in suggesting that SICL’s knowledge that BLM would be relying on Article 12(1) when it agreed the terms of the assignment was a “necessary condition” for Article 12(5) to apply.  That being said, the UT could not accept HMRC’s submission either.  In the UT’s view, it would not be correct for Article 12(5) to apply in all cases in which a person assigning the interest on a debt claim knew that the purchaser would not suffer UK WHT and sought to share the resulting saving with it through the pricing.  HMRC was seeking to treat the “arbitrage” as decisive in its own right rather than as an element to “weigh in the balance”. 

The UT found that to allow HMRC’s appeal would turn Article 12(5) into a provision directed at the avoidance of UK WHT by the seller and not the abuse of Article 12(1). This was not consistent with the purpose and object of Article 12(5), which is directed at whether a person concerned in the creation or assignment of a debt claim has a main purpose of improperly taking advantage of Article 12(1). 

The UT rejected HMRC’s appeal against the manner in which the FTT reached its evaluative conclusion of the facts. It was open to the FTT to decide that the availability of Article 12(1) was “merely part of the scenery” included in the relevant factual matrix, and its determination as to the parties’ subjective intentions was not reached on a flawed basis. Although the FTT had erred in interpreting Article 12(5) to mean that SICL needed to be aware that BLM would be relying on Article 12(1) specifically, the UT did not consider this impacted the FTT’s evaluative judgment to a material extent.

The UT also considered BLM’s submission in its Respondent’s Notice that Article 12(5) should be limited to transactions that involved artificial steps or arrangements.  The UT agreed with the FTT that the authors of the wording contained in Article 12(5) had in mind transactions involving conduit companies, but nevertheless concluded that its application should not be limited solely to transactions involving artificial or conduit arrangements. Had the UK and Ireland intended Article 12(5) to capture only artificial steps or arrangements, they could have made express provision in those terms.