Barry Clarke Cook (HMIT) v Andrew John Billings & Others
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE MUMMERY,LORD JUSTICE WARD,LORD JUSTICE OTTON |
| Judgment Date | 07 December 2000 |
| Judgment citation (vLex) | [2000] EWCA Civ J1207-7 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: CHRVF99/062531/3 |
| Date | 07 December 2000 |
[2000] EWCA Civ J1207-7
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION) FROM THE HIGH COURT
OF JUSTICE CHANCERY DIVISION (REVENUE)
Lord Justice Otton
Lord Justice Ward and
Lord Justice Mummery
Case No: CHRVF99/062531/3
Mr Michael Furness QC (instructed by the Solicitor of Inland Revenue for the Appellant)
Mr Christopher Sokol (instructed by Cripps Harries Hall for the Respondents)
These are seven appeals from the Judgment of Laddie J on 24 May 1999. He affirmed the determinations of the General Commissioners on 16 January 1997 that the taxpayers were entitled to tax relief under section 289 of the Income and Corporation Taxes Act 1988 (the 1988 Act). He dismissed the Crown's appeals, but granted unconditional permission to appeal to this court. His Judgment is now reported in [1999] STC 661.
The dispute concerns the eligibility of the taxpayers for relief from income tax in respect of their investment in a Business Expansion Scheme (BES). The relevant provisions, which were contained in Chapter III of Part VII of the 1988 Act, have been repealed as respects shares issued after 31 December 1993. They have been replaced by a new form of relief in the provisions in the Finance Act 1994 establishing the Enterprise Investment Scheme.
The Facts
The appeals all involve the same essential facts. In 1993 the seven taxpayers, including Mr Andrew Billings, were partners in the same partnership. They applied for ordinary shares in a property company called Fernhead Homes Limited (the Company). They each held equal numbers of shares amounting in each case to just under 15% of the issued share capital of the Company and the voting rights. Collectively they owned 100% of the shares and voting rights in the company.
When they claimed tax relief under the provisions governing BES it was not in dispute that each taxpayer satisfied certain of the relief requirements in section 291 (1): each had subscribed for the eligible shares in a qualifying company on his own behalf and was resident and ordinarily resident in the UK at the time when the shares were issued. Tax relief was, however, refused on the ground that in the relevant period the taxpayers did not qualify for relief as they were "connected with" the Company and did not therefore satisfy the qualifying condition for relief contained in section 291 (1) (c) of the 1988 Act.
The Statutory Provisions
Subsections (2)-(10) of section 291 set out various circumstances in which a person is or, as the case may be, is to be regarded as, "connected with" the company. In general terms it is possible to describe those who fall within the "connected with" provisions as people who already have, or come to acquire, a stake in the well being of the company, as director or employee, or a significant degree of ownership of the company. The definition of individuals who are "connected with" the company is expanded by the introduction of references to "associates" of those individuals connected with the company. Thus,
"(2) An individual is connected with the company if he, or an associate of his, is-
(a) an employee of the company or of a partner of the company;
(b) a partner of the company; or
(c) subject to subsection (3) below, a director of the company or of another company which is a partner of that company."
Subsection (3) provides that an individual, or an associate of his, who is a director is not connected with the company in the circumstances which are specified. They are not material to this case.
"(4) An individual is connected with the company if he directly or indirectly possesses or is entitled to acquire more than 30% of-
(a) the issued ordinary share capital of the company; or
(b) the loan capital and issued share capital of the company; or
(c) the voting power of the company."
Subsection (5) contains provisions concerning the treatment of certain debts incurred by the company as included in the loan capital. They are not material.
"(6) An individual is connected with the company if he directly or indirectly possesses or is entitled to acquire such rights as would, in the event of the winding up of the company or in any other circumstances, entitle him to receive more than 30 % of the assets of the company which would then be available for distribution to equity holders of the company…"
The remainder of that subsection is concerned with the determination of who are the equity holders of the company and of the percentage of the assets of the company to which the individual would be entitled.
"(7) An individual is connected with a company if he has control of it within the meaning of section 840."
The critical provisions are in subsection (8).
" For the purposes of this section an individual shall be treated as entitled to acquire anything which he is entitled to acquire at a future date or will at a future date be entitled to acquire, and there shall be attributed to any person any rights or powers of any other person who is an associate of his."
The Issue
The General Commissioners and the judge accepted the taxpayers' contention that none of them were "connected with" the Company within the meaning of those provisions, as each of them possessed less than the upper limit of 30 % of the issued share capital of the Company set by section 291 (4) (a).
The Crown appeals on a short (but by no means easy) point of statutory construction. It contends that each of the taxpayers is "connected with" the company. Although each of them only directly possesses under 30% of the issued ordinary share capital of the company, it is accepted that, by reason of the interpretation provisions in section 312 (1) of the 1988 Act, each taxpayer is an "associate" of the other within the wide definition of that term in section 417(3) of the 1988 Act. In those circumstances subsection (8) applies. That has the effect of attributing to each individual shareholder of the Company "any rights or powers of any other person who is an associate of his."
The result is that each individual taxpayer is treated as directly possessing more than 30 % of the issued ordinary share capital of the company and is therefore "connected with" the company. On this view none of the individuals would qualify for relief.
Laddie J rejected this construction. He preferred the taxpayers' contention that the application of the "attribution " provisions in the latter part of the subsection is confined to expanding the ambit of those cases of entitlement specified in the preceding part of the subsection. He held that they do not apply outside the subsection, for example, to the cases of direct or indirect possession of share capital, loan capital or voting power in the company specified in subsection (4).
The Legal Position.
In my judgment this appeal should be allowed as the individual taxpayers have not brought themselves within provisions governing the qualifications for tax relief. Although the excellent arguments of Mr Michael Furness QC, on behalf of the Crown, and Mr Sokol, on behalf of the taxpayers, were developed in detail, I can briefly state my conclusions on the legal position.
(1) The ordinary and natural effect of the opening words of subsection (8) —"For the purposes of this section"—is that they govern the whole of the subsection. They make both parts of it potentially relevant to the operation of other subsections of the section. The effect of the taxpayer's "conjunctive" construction of the two parts is that the latter part of the subsection is to be read as if it were separately governed by words which are not there i.e." and for the purposes of this subsection."
(2) I agree that the first part of subsection (8) does not apply to the facts of this case. The taxpayers directly possess their shares within the meaning of subsection (4). This is not a case of individuals being "entitled to acquire" shares in the company now or becoming entitled to acquire shares in the company at some time in the future. In those circumstances the taxpayers contend that the whole of subsection (8) is irrelevant to their case.
(3) It does not follow, however, from the inapplicability of the first part of subsection (8), that the latter part of subsection (8) is also inapplicable to this case. In the absence of express words confining its operation to the preceding part of the subsection and in the absence of any grounds for the necessary implication of a restriction to that effect, the latter part is to be construed as governed by the plain opening words of (8). It is therefore available for the construction of other parts of section 291, such as section 291 (4), (6) and (7).
(4) If, as I hold, the latter part of subsection (8) is available for the construction of subsection (4), then it follows that there is attributed to each individual in this case the rights of "any other person who is an associate of his."As all the shareholders in the company are conceded to be associates of each other, all of them are treated as possessing more than 30 %(i.e.100%) and fail to qualify for relief.
(5) In this connection I would reject Mr Sokol's further point that section 6 (c) of the Interpretation Act 1978 ("words in the singular include the plural and words in the plural include the singular") is displaced by a contrary intention in the latter part of subsection (8), so that the expression " any other person " is to be read in the singular as if it had said "one other person." On this construction the latter part of...
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