Court of Appeal Delivers Clarity: Burlington Ruling Sets the Bar for Purpose Tests and Treaty Benefits in International Tax

The much-anticipated Court of Appeal judgment in HMRC v. Burlington Loan Management DAC [2026] provides some welcome clarity and reassurance to taxpayers (and their advisers) grappling with the application of purpose tests in an international tax context. As the leading case in an evolving area previously hampered by a general absence of guidance, Burlington will be an essential point of reference in applying the purpose tests (including the BEPS PPT) in the UK’s tax treaty network, while the approach being taken by the UK courts and tribunals may come to inform the “international fiscal” interpretation of the PPT.

Purpose tests and the BEPS PPT

The approach of conditioning entitlement to tax reliefs on taxpayers’ purposes (generally meaning the absence of bad ones) has a long pedigree, both in the UK’s domestic tax law and in its international double tax treaties. Burlington concerns the interest article in the UK-Ireland convention, which has featured a form of main purpose test since 1976. As shown by the extensive recent litigation on the “unallowable purpose” test in the UK’s debt-deductibility rules, which were first enacted in 1996, taxpayer and HMRC practice in applying purpose tests may develop in diametrically opposed directions over time and, as a result, generate real uncertainty in tax outcomes. Clear authorities on specific fact patterns are therefore extremely valuable.

Purpose tests increased in prominence at the international level with the conclusion of BEPS Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) in 2015 and its implementation from 2018 onwards via the OECD’s Multilateral Instrument. This reform introduced, for the majority of participating jurisdictions, a standardised principal purpose test (the “PPT”) which now applies to much of the global tax treaty network and supersedes equivalent tests agreed unilaterally (and probably worded differently). The PPT provides that:

… a benefit under this Convention shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention.

Published guidance on the PPT in the decade since it first emerged is largely limited to the (fulsome and helpful) OECD Model Tax Convention Commentary. Otherwise, with certain exceptions, tax authorities globally have been reluctant to pre-empt the PPT’s potential application by publishing specific guidance while its application in practice rather resembles a Mexican standoff. As with purpose-based tests in other areas, the sense that treaty PPT challenges are likely to be complex and consequential may explain why tax authorities have to-date been slow to use their newest tool.

Burlington: background

Burlington concerned a claim by an Irish DAC entity, BLM, for a refund of approximately £18 million of UK income tax withheld from interest on a specific debt claim (the “SAAD Claim”) in the administration of Lehman Brothers International (Europe) (LBIE). BLM was an entity with significant substance and a diversified asset base and had been a very active participant in the secondary market for LBIE debt.

BLM purchased the coupon payment right via an intermediary broker engaged by the Cayman-resident seller SAAD Investments Company Ltd (or, rather, its liquidators as SICL was also involved in drawn-out insolvency proceedings) to market the asset to prospective purchasers. If SICL had retained the SAAD Claim, UK withholding tax would have represented an absolute cost at 20% of the gross interest payable, with no right for SICL to reclaim or otherwise set off the tax. It was clear from the evidence before the First-Tier Tribunal both that the parties understood this (“withholding tax reasons” were a factor in the decision to sell and SICL’s “withholding tax issue” drove the pricing) and that BLM’s investment manager was sensitive to disclosure of the end-purchaser’s identity to SICL.

The trade date for the deal was 12 February 2018 – with BLM agreeing to purchase the claim for an amount which equated to 92% of the gross interest payable – and completion occurred on 9 March 2018 by assignments from SICL to the broker and from the broker to BLM. BLM made an application for relief at source from UK interest withholding tax in April 2018 but no gross-payment direction was issued by HMRC. The interest was duly paid by the LBIE administrators on 25 July 2018 net of UK income tax at 20% and the tax relief claim migrated (as originally envisaged in financial modelling by BLM’s manager) to reclaiming the withheld tax from HMRC. 

Following a lengthy enquiry process HMRC made payment of material refunds on other LBIE debt claims held by BLM but refused to refund the tax withheld on the SAAD Claim on the grounds that Article 12(5) of the UK-Ireland treaty was met. At the relevant time, Article 12(5) provided that:

The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment.

Exactly what it was about the SAAD Claim that originally triggered the HMRC challenge, and distinguished it from the very considerable volume of interest claims on which HMRC did pay refunds, remains slightly obscure because the reasoning in HMRC’s closure notice was not provided by the Tribunals. The significant quantum of the single reclaim (at over £18 million this was likely a major outlier) and the broader context of trading in the LBIE secondary market at the time are the most likely explanations.

Approach to purpose in Burlington

The First-Tier and Upper Tribunals in Burlington had applied Article 12(5) analogously to UK domestic statutory purpose tests in a systematic and quite intricate assessment of whether either party to the deal (BLM and SICL) had a main purpose either for themselves or for their counterparty (SICL or BLM) to take advantage of the interest article of the UK-Ireland treaty. Four potential purposes therefore fell to be considered and the exercise extended beyond the relevant treaty state residents. By the Court of Appeal stage, the focus was on the purposes of BLM (the treaty state resident) although SICL’s purposes, and in particular its ignorance of the basis on which BLM was able to offer the price it did, were considered “relevant backdrop”.

HMRC appealed against the Upper Tribunal judgment on two grounds:

1. Treaty interpretation: (a) the Tribunal had incorrectly read a requirement of, variously, “abuse” or “artificiality” into Article 12(5) when there was no such requirement and (b) the starting-point for applying the purpose test was the pre-transaction not the post-transaction position.
2. Economic reality: the fact that the transaction would only have been profitable because of BLM’s entitlement to a WHT refund necessarily means that BLM had a main purpose of taking advantage of the interest article in the treaty.

On the treaty interpretation issue, the Court of Appeal agreed with HMRC in principle that Article 12(5) was capable of applying to “genuine commercial” transactions that lacked abusive or artificial elements. This was a pyrrhic victory, however, as such elements will in any event “remain highly relevant” and abuse, in the sense of obtaining a benefit contrary to a treaty’s object and purpose, is anyway implicit in the term “take advantage”. The Court here followed its own approach in the significant recent non-tax case VietJet Aviation JSC v. FW Aviation (Holdings) Ltd [2025]. 

Ultimately the decision on abuse endorsed the approach taken by the First-Tier Tribunal that, although the purpose test can apply to otherwise commercial transactions, in a market transaction between unconnected parties “something more” than factoring in expected tax treaty benefits will be required in order to trip the test. Exactly what that “something more” may be is (inevitably and deliberately) left open. 

In transactions where there is no connection between the parties, factors such as evidence of collusion in achieving the tax outcome, circular flows of income or repurchases of underlying assets, compressed timescales such as transfers short periods before record dates, or mechanisms to adjust pricing based on the tax outcome may be causes for concern. None applied in Burlington and it is now clearer that merely consciously determining and paying a price that reflects the buyer’s tax status is not itself abusive.

Significantly, the Court of Appeal also roundly rejected the suggestion that the analytical starting-point should be the previous position (i.e., SICL owning the SAAD Claim). This would be illogical given that the very purpose being tested relates to the assignment. The correct starting-point was rather that BLM, as a resident of Ireland and the beneficial owner of the interest, benefitted from Article 12(1) such that Ireland had exclusive taxing rights over the interest. Applying the treaty purpose test meant not putting the cart before the horse.

In an important caveat, the Court accepted that this analysis may not apply where the existence of a connection between the companies moved the analysis into conduit company territory. But otherwise, and absent reason to think “something more” is in play, an Irish resident eligible for the treaty and acquiring debt with a view to using that eligibility could expect to be able to do so.

The Court also declined the invitation, offered by HMRC’s second ground of appeal, to link entitlement to treaty benefits on demonstrating some level of pre-tax deal economics. As Lady Justice Falk pointed out, if HMRC were right that the centrality of the tax benefit to the transaction’s profitability necessarily meant that BLM had an impermissible main purpose, “it would be very hard to see how that relief could be relied on in any case where the exemption is of more than incidental economic significance”. 

The treaty should not be self-defeating. It was “entirely in accord” with the objects and purposes of the UK treaty – which included promoting the movement of capital between the treaty states – for BLM to rely on the treaty to bid the price it did for the SAAD Claim in the secondary debt market: at the most basic level, this caused income to flow via Ireland that otherwise would likely have gone elsewhere. Furthermore, and by the same logic maximising revenues for HMRC was no part of those objects and purposes.

Implications for the BEPS PPT?

As is apparent from the above, the UK-Ireland treaty main purpose test at issue in Burlington is not the same as the PPT. The PPT overlays an objective element (“reasonable to conclude, having regard to all relevant facts and circumstances”) to the subjective assessment of purpose, uses a broader concept of causation (“that resulted directly or indirectly in that benefit”), and has a seemingly significantly-lower trigger (“obtaining that benefit” in place of “take advantage”). 

There are other differences too, such as the optional savings provision – permitting taxpayers denied benefits by the PPT a second bite of the cherry on the basis that, in the absence of the offending transaction or arrangement, treaty benefits should nonetheless have been granted – which the UK has sought to include in its revised treaty network.

The question of how much the differences matter will fall to be determined in due course. There are reasons, though, to think that they may be more cosmetic than appears at first blush – particularly the seemingly lower trigger. If, as Burlington and VietJet establish, “take advantage” means obtain a benefit contrary to a treaty’s object and purpose then that is exactly what the PPT polices: it explicitly permits benefits which it is “established … would be in accordance with the object and purpose of the relevant provisions of this Convention”.

The main distinction here may instead be to shift the burden of proof on to the taxpayer (potentially required to establish such accordance). It remains to be seen whether this translates into additional procedural requirements in HMRC’s treaty relief processes, which are already subject to ongoing review.

Even if the different wording were to restrict its direct application to the PPT, Burlington’s conclusions on the object and purposes of double tax treaties (paragraphs 96-104) get to the heart of the matter and should read across fairly uncomplicatedly. The rights afforded by tax treaties can sometimes be obscured by over-attention to the restrictions on those rights, and the Court’s robust conclusions in this section of the judgment will be required reading for anyone considering how the PPT is likely to affect their structures and transactions. As in the Supreme Court judgment in Royal Bank of Canada v. HMRC [2025] (previously considered here), the UK’s higher courts are (thus far) maintaining an orthodox approach in the interests of taxpayer certainty.

The judgment concludes with Falk LJ expressing an expectation that “a consistent interpretation [of main purpose or one of the main purposes] should be adopted internationally”. Although an international fiscal meaning of the various elements comprising the PPT currently appears to be a fairly distant prospect, from a UK perspective Burlington does provide a workable framework with which to apply purpose tests in treaties and avoids taking the serious wrong turn for which HMRC were arguing. Given the issue at stake, a further appeal to the Supreme Court remains a possibility, but following three defeats it is difficult to see a basis for any other outcome.

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