Commissioners of Inland Revenue v Laird Group Plc
| Jurisdiction | England & Wales |
| Judge | The Vice-Chancellor |
| Judgment Date | 30 April 2002 |
| Neutral Citation | [2002] EWCA Civ 576 |
| Docket Number | Case No: A3/2001/1514 |
| Court | Court of Appeal (Civil Division) |
| Date | 30 April 2002 |
[2002] EWCA Civ 576
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MR. JUSTICE LIGHTMAN
CHANCERY DIVISION
Royal Courts of Justice
Strand,
London, WC2A 2LL
The Vice-Chancellor
Lord Justice Mummery and
Lord Justice Longmore
Case No: A3/2001/1514
Mr. Michael Furness QC (instructed by The Solicitor of Inland Revenue) for the Appellants
Mr. Andrew Thornhill QC and Mr. James Henderson (instructed by Messrs Ashurst Morris Crisp) for the Respondent
By s.28 Finance Act 1960 provision was made for the counteraction of tax advantages obtained in prescribed circumstances in consequence of one or more transactions in securities. The legislation by which this was achieved has been amended from time to time and consolidated with such amendments, most recently, in Part XVII Chapter I Income and Corporation Taxes Act 1988 (" ICTA"). Whilst changes have been made to the definition of tax advantage and to the prescribed circumstances there has been no amendment to the definition of transaction in securities. That definition, now contained in s.709(2) ICTA, provides that
"transaction in securities" includes transactions, of whatever description, relating to securities, and in particular —
(i) the purchase, sale or exchange of securities;
(ii) the issuing or securing the issue of, or applying or subscribing for, new securities;
(iii) the altering, or securing the alteration of, the rights attached to securities;"
"Securities" is defined to include shares, stock and the interest of a member in a company not limited by shares.
The relevant legislation has been considered by the House of Lords on three occasions, namely Commissioners of Inland Revenue v Parker [1966] AC 141 and 43 TC 396 (the redemption of a debenture representing previously capitalised profits), Greenberg v Commissioners of Inland Revenue [1972] AC 109 and 47 TC 240 (the creation and sale of preference shares for a price payable by instalments measured by reference to the dividends paid on such shares) and Commissioners of Inland Revenue v Joiner [1975] 1 WLR 1701 and 50 TC 449 (the distribution of assets in a liquidation so that the business of the company was continued by a transferee but assets representing accumulated profits were returned to shareholders).
The issue on this appeal, which did not arise directly in any of those cases, is whether the payment of an interim dividend constitutes a transaction in securities; it is common ground both that one of the prescribed circumstances existed and that the taxpayer, Laird Group plc ("Laird") thereby obtained a tax advantage.
If the law to be applied is complicated the facts of the case are unusually simple. On 12th June 1990 Laird acquired the issued share capital of Stanton Rubber and Plastics Ltd ("Stanton") for £8,267,500m. Both were in a substantial way of business but they differed in their liability for mainstream corporation tax ("MCT") or advance corporation tax ("ACT"). Laird derived much of its profits from overseas operations not liable to MCT but pursued a progressive dividend policy. The consequence was that its liability for ACT on dividends and other distributions was increasingly unrelieved by set off against its liability to MCT. By contrast, Stanton had substantial liability for MCT but, as the profits had not been fully distributed, little or none for ACT.
On 5th December 1990 Laird declared, and subsequently paid to its members, a final dividend of £3,484,000 on its own shares. On 17th December 1990 Stanton paid to Laird an interim dividend of £3m. There was no group election in force under s.247 ICTA so that the interim dividend paid by Stanton gave rise to a liability to ACT of £1m but in the hands of Laird constituted franked investment income with a corresponding tax credit. Accordingly the ACT payable by Stanton was set off against its own liability for MCT and against Laird's liability for ACT on its own dividend. By this means Laird benefited to the extent of £1m.
The Revenue contended that Part XVII Chapter I of ICTA applied. They gave notice as required by s.703(3) and raised an assessment under Schedule 13 para 13(2). Laird appealed to the Special Commissioners. On 8th February 1999 they (Messrs Everett and de Voil) dismissed the appeal and confirmed the notice and assessment. Laird appealed to the Tribunal constituted under s.706. The Tribunal (Stephen Oliver QC and Messrs Ring and White) allowed the appeal and discharged the notice and the assessment. The appeal of the Revenue from the decision of the Tribunal came before Lightman J who, for the reasons given in his judgment reported at [2001] STC 689, dismissed it. This is the appeal of the Revenue from the order of Lightman J.
As I have indicated the only question for our decision is whether the interim dividend paid by Stanton to Laird on 17th December 1990 was a transaction in securities as defined in s.709(2). That definition, which I have set out in paragraph 1 above, is to be applied in the context of ss.703(1)-(3), 704 A (d) and 709(1) and (4) which so far as relevant provide as follows:
"703. Cancellation of tax advantage
(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.
(2) For the purposes of this Chapter a tax advantage obtained or obtainable by a person shall be deemed to be obtained or obtainable by him in consequence of a transaction in securities or of the combined effect of two or more such transactions, if it is obtained or obtainable in consequence of the combined effect of the transaction or transactions and the liquidation of a company.
(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, the nullifying of a right to repayment or the requiring of the return of a repayment already made (the amount to be returned being chargeable under Case VI of Schedule D and recoverable accordingly), or the computation or recomputation of profits or gains, or liability to tax, 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.
[(4)-(12) contain administrative or consequential provisions]
704. The prescribed circumstances
The circumstances mentioned in section 703(1) are—
A. 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 followed by the purchase or sale of the same or other securities, the person in question receives an abnormal amount by way of dividend, and the amount so received is taken into account for any of the following purposes—
[(a)-(c)] or
(d) the application of franked investment income in calculating a company's liability to pay advance corporation tax, or …
[(e)-(g)]
[B—E specify, in detail, other prescribed circumstances]
709. Meaning of 'tax advantage' and other expressions
(1) In this Chapter "tax advantage" means a relief or increased relief from, or repayment or increased repayment of, tax, or the avoidance or reduction of a charge to tax or an assessment to tax or the avoidance of a possible assessment thereto, whether the avoidance or reduction is effected by receipts accruing in such a way that the recipient does not pay or bear tax on them or by a deduction in computing profits or gains.
[(2)-(3)]
(4) For the purposes of section 704 an amount received by way of dividend shall be treated as abnormal if the Board, the Special Commissioners or the tribunal, as the case may be, are satisfied—
(a) in the case of a dividend at a fixed rate, that it substantially exceeds the amount which the recipient would have received if the dividend had accrued from day to day and he had been entitled only to so much of the dividend as accrued while he held the securities, so however that an amount shall not be treated as abnormal by virtue only of this paragraph if during the six months beginning with the purchase of the securities the recipient does not sell or otherwise dispose of, or acquire an option to sell, any of those securities or any securities similar to those securities; or
(b) in any case, that it substantially exceeds a normal return on the consideration provided by the recipient for the relevant securities, that is to say, the securities in respect of which the dividend was received and, if those securities are derived from securities previously acquired by the recipient, the securities which were previously acquired."
Laird has contended throughout that the payment of the Stanton interim dividend was not a transaction in securities but that if there is a doubt about the matter then the court could and should have regard to the statement made by the Attorney-General in the House of Commons on 25th May 1960 at the Committee Stage of the Finance Bill for that year. By contrast the Revenue has consistently contended that the...
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