Commissioners of Inland Revenue v Sema Group Pension Scheme Trustees
| Jurisdiction | England & Wales |
| Judge | Mr Justice Lightman |
| Judgment Date | 07 February 2002 |
| Neutral Citation | [2002] EWHC 94 (Ch) |
| Docket Number | Case No: CH/200I /APP/0608 |
| Court | Chancery Division |
| Date | 07 February 2002 |
[2002] EWHC 94 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(REVENUE)
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Lightman
Case No: CH/200I /APP/0608
Mr Launcelot Henderson QC and Mr Christopher Tidmarsh (instructed by Solicitor of Inland Revenue, Somerset House, Strand, London WC2R 1 LB) for the Revenue
Mr John Gardiner QC (instructed by Lovells, 65 Holborn Viaduct, London ECIA 2DY) for the Trustees
Hearing dates : 22nd - 24th January 2002
JUDGMENT: APPROVED BY THE COURT
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this
Judgment and that copies of this version as handed down may be treated as authentic.
THE HOUNRABLE MR JUSTICE LIGHTMAN
Mr Justice Lightman
INTRODUCTION
This is an appeal by the Commissioners of Inland Revenue ("the Revenue") made to the High Court under section 56A of the Taxes Management Act 1970 against a decision dated the 22nd June 2001 ("the Decision") of the Special Commissioners, Dr Brice and Mr Cornwell-Kelly, ("the Commissioners"). By the Decision the Commissioners cancelled a notice dated the 18th November 1999 ("the Notice") given by the Revenue to the Respondents the Trustees ("the Trustees") of the SEMA Group Pension Scheme ("the Scheme") under section 703(3) of the Income and Corporation Taxes Act 1988 ("the 1988 Act") and a subsequent assessment to income tax under Schedule F for 1996/7 in the sum of £484,563 issued on the 15th December 1999 ("the Assessment"). The Revenue made the Assessment to counteract what the Revenue claimed was the tax advantage obtained by the Trustees from the sale by them of two parcels of shares ("the Holding") of ordinary 50p shares in Powergen plc ("Powergen") back to Powergen in two buy-backs which took place on the 16th May 1996 and the 5th June 1996 respectively.
This appeal raises important questions of construction of the anti-avoidance provisions contained in sections 703(1), 704A and 709 (forming part of Part XVII) of the 1988 Act and in particular how they operate in respect of "share buy-back schemes" entered into by exempt schemes approved under section 592 of the 1988 Act.
The conjoint effect of sections 209 and 254 of the 1988 Act is that, where a company "buys back" its own shares, the purchase price is treated as giving rise to a "qualifying" distribution for tax purposes in so far as the price exceeds the amount originally subscribed and any amount of premium paid on such shares. Accordingly the fiscal consequence of such a transaction is that the receipt by the vendor is the sum of two constituents, namely a return of the original capital and a distribution. Section 592 of the 1988 Act confers on income derived from investments held for the purpose of the scheme by an exempt approved scheme "exemption from income tax". Prior to the removal with effect from the 8th October 1996 of the availability of the tax credit by the Finance Act 1997, by reason of this exemption from income tax the sale of shares held by exempt approved schemes (and other bodies exempt from income tax) back to the company was particularly attractive to them because they gave rise to an entitlement to payment of a tax credit on the part of the purchase price (ordinarily the greater portion of the purchase price) representing the distribution element.
The critical issue in this case is whether and if so in what circumstances such sales may fall foul of Part XVII of the 1988 Act which contains anti-avoidance provisions for cancellation of the tax advantages from certain transactions in securities where the conditions there specified are satisfied. The same or similar issues arise in some 100 other cases awaiting determination in the light of the outcome of this case. The tax credits in issue in all these cases total some £83.3 million.
FACTS
The Scheme was at all material times an exempt approved occupational pension scheme entitled to exemption from income tax under section 592(2) of the 1988 Act in respect of money derived from investments held for the purposes of the Scheme.
At all material times the Trustees delegated to Mercury Asset Management Limited ("MAM") responsibility for the investment of the funds of the Scheme. A Mr Mullins of MAM was the fund manager at MAM who was responsible on behalf of the Trustees for the discretion management of the Scheme's United Kingdom equity portfolio.
On the 18th September 1995 Powergen made a £1.8 billion offer to acquire Midlands Electricity Plc ("Midlands") This bid (if it went ahead) afforded the prospect of real growth in the value of Powergen and that a holding of its shares would outperform the Index. For this reason on the 26th February 1996 MAM (acting by Mr Mullins) bought for the Trustees 100,000 50p ordinary shares in Powergen for £5.39 per share, and on the 7th March 1996 ought for the Trustees a further 20,000 ordinary shares in Powergen for £5.35 per shar. These were all normal purchases in the open market of quoted shares at the prevailing prices.
On the 14th May 1996 Powergen announced that it was not proceeding with the bid for Midlands, and this led Mr Mullins to conclude that Powergen was a less attractive proposition. On the 15th May 1996 Powergen announced its intention to make a buy— back of 10% of its fully pad issued capital and on the 16th May 1996 offered to repurchase on the Stock Exchange 4.8% of its fully paid issued capital. The offer contained the "health warning" of the possible application of the anti-avoidance provisions in Part XVII of the 1988 Act and that Powergen had not applied for clearance from the Revenue under section 703 of the 1988 Act since such clearance depended on the individual circumstances of the shareholder participating in the buy—-back scheme. The Trustees tendered to Powergen all their shares in Powergen, but Powergen's offer was over-subscribed. MAM on behalf of the Trustees was only able to sell 45,000 shares back to Powergen for £5.25 per share. On the 5th June 1996 Powergen made the offer to buy-back the balance of the 10% of its fully paid up share capital. The Trustees tendered all their remaining shares in Powergen, but again the offer was over-subscribed an MAM on behalf of the Trustees only managed to sell a further 40,162 shares back to Powergen for £4.83 per share. The sale of the Holding to Powergen left remaining in the hands of the Trustees 34,838 shares which they sold in the market in July 1998 wen the market price was about £7.70 per share.
By virtue of section 209(2)(b of the 1988 Act, the whole of the purchase price for the Holding received from Powergen by the Trustees in excess of the paid-up capital of 50p per share constituted a distribution in respect of which the Trustees were entitled to a tax credit under section 231(1) of the 1988 Act. The tax credit in respect of the first buy-back amounted to £53,437 and the tax credit in respect of the second buy— back amounted to £43,475.
Because the Scheme was exempt from income tax under section 592(2) of the 1988 Act, the Trustees were entitled to claim payment of the tax credits under section 231(3) of the 1988 Act. The Trustees submitted a claim to such tax credits (totalling £96,912) on the 3rd July 1996 and these were duly paid on the 12th August 1996. To counteract the perceived tax advantages obtained by the Trustees from the sale by them of the Holding back to Powergen, the Revenue decided to invoke its powers under Part XVII of the 1998 Act. Accordingly on the 18th November 1999 the Revenue gave to the Trustees the Notice and on the 15th December 1999 the Revenue made the Assessment.
By the Decision the Commissioners cancelled the Notice and the Assessment.
The Revenue decided not to exercise its right under section 705(2) of the 1988 Act to require a re-hearing of the Trustees' appeal to the Commissioners before a special tribunal constituted under section 706 of the 1988 Act, but instead to appeal to the High Court. Such appeal lies only on questions of law: sections 56A(1) and (4) of the TMA 1970.
THE STATUTORY PROVISIONS
The relevant statutory provisions are conveniently set out in paragraphs 4-9 of the Decision. The critical statutory words are there italicised as they are in this judgment
Section 703 of the 1988 Act (so far as material) provides as follows:
"703 (1) Where
(a) in any such circumstances as are mentioned in section 704,
and
(b) in consequence of a transaction in securities or of the combined effect of two or more such transactions, a person is in a position to obtain, or has obtained, a tax advantage, then unless he shows that the transaction or transactions were carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments, and that none of them had as their main object, or one of their main objects, to enable tax advantages to be obtained, this section shall apply to him in respect of that transaction or those transactions ….
(3) Where this section applies to a person in respect of any transaction or transactions, the tax advantage obtained or obtainable by him in consequence thereof shall be counteracted
by such of the following adjustments, that is to say an assessment … on such basis as the Board may specify by notice served on him as being requisite for counteracting the tax advantage so obtained or obtainable."
Section 703(1)(a) refers to "such circumstances as are mentioned in section 704". The parts of section 704 which are relevant in this appeal are:
"704A. That in connection with the distribution of profits of a company or in connection with the sale or purchase of securities being a sale or purchase...
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