“Taking Advantage” in Treaty Anti‑Abuse Clauses Means Abusive Use Contrary to Treaty Purpose (Not Mere Enjoyment of Relief)

1. Introduction

Revenue And Customs v Burlington Loan Management DAC concerned whether post-administration interest paid out of the English administration of Lehman Brothers International (Europe) (“LBIE”) to an Irish-resident investor, Burlington Loan Management DAC (“BLM”), was exempt from UK withholding tax (“UK WHT”) under Article 12 of the UK-Ireland double taxation treaty.

BLM bought (via a back-to-back broker assignment) the residual rights to post-administration interest on a debt claim (the “SAAD Claim”) from SAAD Investments Company Ltd (“SICL”), a Cayman Islands company in liquidation. UK WHT at 20% had become a live risk on such interest following HMRC v Lomas [2017] EWCA Civ 2124 (ultimately upheld in [2019] UKSC 12).

The decisive issue was whether the exemption in Article 12(1) (“taxable only” in the state of residence of the beneficial owner) was disapplied by Article 12(5), which denies treaty protection where “the main purpose or one of the main purposes” of a person concerned with the creation or assignment of the debt-claim was “to take advantage” of the Article by that assignment.

2. Summary of the Judgment

The Court of Appeal (Snowden LJ, with whom Falk LJ and Zacaroli LJ agreed) dismissed HMRC’s appeal. The Court upheld the conclusions of the FTT and UT that Article 12(5) did not disapply Article 12(1) on these facts.

  • The Court rejected the Respondent’s Notice argument that Article 12(5) is limited to “artificial” transactions or those lacking “bona fide commercial reasons”, noting the 1998 Protocol removed the “not for bona fide commercial reasons” wording.
  • The Court held that, properly interpreted, “to take advantage of” in Article 12(5) means obtaining treaty benefit in a way contrary to the object and purpose of the treaty (i.e. an anti-abuse concept), not merely “obtaining the benefit” of Article 12(1).
  • On that construction, BLM’s arm’s-length market purchase of a UK claim (as an Irish resident and beneficial owner) and reliance on the treaty exemption was not abusive; it was consistent with the treaty’s purpose of eliminating double taxation and facilitating cross-border capital movement.

3. Analysis

3.1 Precedents Cited

A. Treaty interpretation framework

  • Royal Bank of Canada v HMRC [2023] EWCA Civ 695: The Court adopted the Vienna Convention method (ordinary meaning, context, object and purpose; supplemented where appropriate). This was the interpretive gateway for construing Article 12(5).
  • Anson v HMRC [2015] UKSC 44: Cited for the objective attribution of “common intention” in treaty interpretation and the need for an “international” rather than technical domestic approach.
  • Fothergill v Monarch Airlines [1981] AC 251: Used to emphasise that conventions are not drafted in domestic legislative idiom and must be construed on broad principles of general acceptation.
  • Fowler v HMRC [2020] UKSC 22 (and Smallwood v HMRC [2010] EWCA Civ 778): Authorities for the persuasive role of OECD Commentaries on the Model Tax Convention (even if post-dating the treaty), insofar as reasoning is cogent.

B. “Main purpose” / purpose identification in tax contexts

  • BlackRock Holdco 5 v HMRC [2024] EWCA Civ 330 and Kwik-Fit Group v HMRC [2024] EWCA Civ 434: Cited for the structured domestic approach to purpose: subjective intention, distinction between purpose and effect, and the “inextricably involved” concept. Both cases framed how far an appellate court can intervene in evaluative purpose findings.
  • Mallalieu v Drummond [1983] 2 AC 861 and MacKinley v Arthur Young McClelland Moores [1990] 2 AC 239: Key authorities on when an “inevitable and inextricable” consequence must be treated as a purpose even if not a conscious motive. HMRC relied on these to argue BLM necessarily had a purpose of obtaining Article 12(1) relief.
  • Re Brebner [1967] AC 18, Re Sprintroom Limited [2019] EWCA Civ 932, and Lifestyle Equities CV v Amazon UK Services Limited [2024] UKSC 8: Used to mark the limited scope for appellate interference with evaluative fact findings (logic gaps, inconsistencies, failure to consider material factors).
  • Edwards v Bairstow [1956] AC 14: Cited for the boundary between fact and law in tribunal appeals: an error must amount to an error of law.

C. Competing analogies: “tax avoidance purpose” vs “tax consequences as part of the setting”

  • Fisher v HMRC [2021] EWCA Civ 1438 (reversed on other grounds [2023] UKSC 44): HMRC invoked Fisher to argue that “profit” or “business survival” cannot displace an inseparable tax-avoidance purpose; the Court treated the analogy as fact-sensitive and ultimately unnecessary to resolve because the key was the meaning of “take advantage of” in Article 12(5).
  • IRC v Kleinwort Benson [1969] 2 Ch 221: BLM relied on Cross J’s obiter remarks that it can be an “abuse of language” to describe reliance on a tax attribute that the law deliberately confers as an “object” of the transaction. The Court acknowledged tension between Kleinwort Benson and Fisher, but did not reconcile them because it was not necessary.
  • IRC v Sema Group Pension Scheme Trustees [2002] EWCA Civ 1857: Discussed in Falk LJ’s additional observations (via Kwik-Fit) as emphasising the care needed when characterising the significance of a tax advantage.

D. The decisive modern authority on “take advantage” in treaty anti-abuse clauses

  • Vietjet Aviation JSC v FW Aviation (Holdings) Limited [2025] EWCA Civ 783: Central to the Court’s construction. Popplewell LJ held that “taking advantage” in an anti-abuse clause is not synonymous with “obtaining the benefit”, but refers to obtaining benefits in a way contrary to the object and purpose of the treaty. The Court applied that reasoning to Article 12(5).

E. LBIE post-administration interest/WHT backdrop

  • Lomas v Burlington Loan Management Ltd [2017] EWCA Civ 1462: Relevant context on the “late termination” risk affecting the interest period.
  • HMRC v Lomas [2017] EWCA Civ 2124 and [2019] UKSC 12: Established that payments of post-administration interest were subject to UK WHT under section 874 of the Income Tax Act 2007, which drove SICL’s incentive to sell and the market pricing dynamic.

3.2 Legal Reasoning

A. Article 12(5) is anti-abuse, but not confined to “artificial” transactions

The Court accepted that Article 12(5) is an anti-abuse provision, informed by OECD materials. It rejected BLM’s attempt to confine Article 12(5) to “artificial” arrangements or to exclude “genuine commercial transactions”. Two points were pivotal:

  1. The text of Article 12(5) contains no “artificiality” condition.
  2. The 1998 Protocol deliberately removed the prior requirement that the assignment be “not for bona fide commercial reasons”, signalling that commercially genuine assignments may still be caught if the requisite treaty-abusive purpose exists.

B. The meaning of “to take advantage of”

The Court treated HMRC’s core submission—“take advantage of” = “obtain the benefit”—as incompatible with treaty function. Drawing on Vietjet Aviation JSC v FW Aviation (Holdings) Limited [2025] EWCA Civ 783 and OECD Commentary (notably the “Improper use of the Convention” discussion and the guiding principle that benefits should not be available where a main purpose is to secure a more favourable tax position contrary to the object and purpose of the relevant provisions), the Court held:

“To take advantage of” in Article 12(5) means to obtain the benefit of Article 12(1) in a way that is contrary to the object and purpose of the treaty.

Without that limitation, Article 12(5) would be self-defeating: any Irish resident who structures their affairs expecting the Article 12(1) exemption would be denied it precisely because they relied on it.

C. Proper “starting point” for the analysis

The Court rejected HMRC’s approach of starting from the pre-assignment tax position (SICL in Cayman, no equivalent exemption), and treating the transaction as “UK WHT arbitrage” against HMRC.

The Court instead held that, absent treaty abuse, the correct baseline is the post-assignment legal reality: BLM, as an Irish resident and beneficial owner, falls within Article 12(1). Article 12(5) is then a carve-out only where the assignment is used abusively.

D. Application to BLM: arm’s-length market purchase consistent with treaty purpose

Even assuming (for argument) that reclaiming UK WHT under Article 12(1) was among BLM’s main purposes, the Court found no abuse:

  • BLM was a long-established Irish-resident investor in LBIE claims, buying at arm’s length for profit in a secondary market.
  • The treaty’s purpose includes eliminating double taxation and encouraging movement of capital between the UK and Ireland. Allowing an Irish buyer to value a UK claim on the basis of treaty relief is aligned with that purpose.
  • Reduced UK WHT relative to a counterfactual where a Cayman seller retained the claim is not itself “abuse”; Article 12 is not designed to maximise HMRC receipts.

E. Why “conduit”/“treaty shopping” analogies failed

The Court used OECD “conduit company” paradigms to illustrate what Article 12(5) is aimed at: a non-treaty resident acting through an entity in a treaty state to obtain treaty benefits “improperly”, typically retaining an economic interest and using intra-group routing (dividends/loans) so that the non-qualifying person obtains the economic benefit.

The present facts were materially different: there was an outright sale at market price, no retained interest by SICL, no control relationship, and no channeling of the interest back to SICL. That absence of conduit features reinforced the conclusion that BLM was not “taking advantage” in the treaty-abusive sense.

3.3 Impact

  • Clarifies the content of treaty “main purpose” anti-abuse clauses: “take advantage of” is purposive and treaty-contextual, requiring abuse contrary to object and purpose, not mere reliance on treaty relief.
  • Protects secondary debt markets from overbroad treaty denial: arm’s-length acquisitions by treaty residents (who become beneficial owners) are less likely to be treated as abusive solely because price reflects differing tax attributes.
  • Aligns UK treaty jurisprudence with OECD materials and Vietjet: the Court squarely integrates OECD Commentary/Conduit Report logic into the construction of UK treaty anti-abuse provisions.
  • Practical litigation significance: HMRC will need to show “something more” indicative of misuse (e.g. conduit/channeling, non-arm’s-length structuring, retained economic interests, or arrangements inconsistent with treaty objectives), not just that treaty relief was economically important to the transaction.

4. Complex Concepts Simplified

UK withholding tax (UK WHT)
A tax deducted at source (here, 20%) from certain UK-source interest payments, paid to HMRC. The recipient may sometimes reclaim it under a treaty.
Post-administration interest
Interest payable to creditors in an administration where the company’s assets exceed admitted claims, under insolvency rules.
Double tax treaty exemption for interest (Article 12(1))
A rule allocating taxing rights so that interest “derived and beneficially owned” by an Irish resident is taxable only in Ireland, meaning the UK should not impose WHT (or it must be refunded if withheld).
Beneficial ownership
The treaty benefit applies to the person who truly owns and enjoys the income economically, not merely a nominee or agent.
“Main purpose” tests
Fact-sensitive inquiries into why someone entered a transaction. A consequence can count as a purpose if it is “inevitably and inextricably involved” in the activity (from Mallalieu v Drummond [1983] 2 AC 861).
Conduit company / treaty shopping
Arrangements where a person who cannot claim treaty benefits routes income through an entity in a treaty country so the non-qualifying person gets the economic benefit of the treaty indirectly (as discussed in OECD “conduit” materials).
Key interpretive move in this case: “take advantage” ≠ “obtain the benefit”
The anti-abuse clause only bites where the treaty benefit is obtained in a way that contradicts the treaty’s purpose—otherwise the treaty would negate itself.

5. Conclusion

The Court of Appeal confirmed that Article 12(5) is a purposive, anti-abuse carve-out that does not deny treaty relief merely because a taxpayer’s transaction is priced and executed on the basis that the taxpayer qualifies for treaty exemption. “Taking advantage” in Article 12(5) requires an abusive use of the treaty—typically of the kind illustrated by conduit/treaty-shopping scenarios—contrary to the treaty’s object and purpose.

On the facts, BLM’s arm’s-length acquisition of the SAAD Claim and reliance on Article 12(1) was exactly the kind of cross-border capital movement the UK-Ireland Treaty is meant to facilitate; HMRC’s appeal was therefore dismissed.