Commissioners of Inland Revenue v Sema Group Pension Scheme Trustees
| Jurisdiction | England & Wales |
| Judge | Lord Justice Jonathan Parker,Mr Justice Aikens,Lord Justice Aldous |
| Judgment Date | 19 December 2002 |
| Neutral Citation | [2002] EWCA Civ 1857 |
| Docket Number | Case No: A3 2002 0484 |
| Court | Court of Appeal (Civil Division) |
| Date | 19 December 2002 |
[2002] EWCA Civ 1857
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT
CHANCERY DIVISION (Mr Justice Lightman)
Royal Courts of Justice
Strand,
London, WC2A 2LL
Lord Justice Aldous
Lord Justice Jonathan Parker and
Mr Justice Aikens
Case No: A3 2002 0484
Mr John Gardiner QC and Mr Jolyon Maugham (instructed by Messrs Lovells) for the Appellants
Mr Launcelot Henderson QC and Mr Christopher Tidmarsh QC (instructed by The Solicitor of Inland Revenue) for the Respondents
INTRODUCTION
This is an appeal by the trustees of The SEMA Group Pension Scheme ("the Scheme") from an order made by Lightman J on 7 February 2002 allowing an appeal by the Revenue from a decision of the Special Commissioners dated 22 June 2001. By their decision, the Special Commissioners cancelled a notice dated 18 November 1999 given by the Revenue to the appellants under s.703(3) of the Income and Corporation Taxes Act 1988 ("the 1988 Act") and a subsequent assessment to income tax under Schedule F for the fiscal year 1996/7 in the sum of £484, 563. Permission for a second appeal was granted by Chadwick LJ on 15 March 2002, limited to two of the three grounds of appeal set out in the Appellant's Notice. The application for permission to appeal on the third ground is renewed at this hearing.
The Scheme is an occupational pension scheme. It is an approved scheme for the purposes of section 592 of the 1988 Act, and as such it is exempt from income tax on income derived from its investments (see s.592(2)). The appeal raises questions as to the true meaning and effect of the anti-avoidance provisions contained in ss.703(1), 704A and 709 in Part XVII of the 1988 Act, as they apply to sums received by an approved scheme under a "buyback" by a quoted company of its own shares.
It is common ground that, by virtue of ss.209 and 254 of the 1988 Act, where a UK resident company buys back its own shares that part of the purchase price which exceeds the nominal value of the shares the subject of the buyback is treated as a 'qualifying distribution' for the purposes of s.231 of the 1988 Act. As a consequence, the recipient of the purchase price, being a UK resident and not being a company, was (prior to the removal of such entitlement by the Finance Act 1997 with effect from 8 October 1996) entitled to a tax credit equal to such proportion of the amount or value of the distribution as corresponded to the rate of advance corporation tax in force for the financial year in which the distribution was made (see s.231(1)). Hence buybacks were particularly attractive to approved schemes and other persons or bodies exempt from income tax, since a substantial part (usually the greater part) of the purchase price would represent income for tax purposes, in respect of which the recipient could claim a payment of an amount equal to the tax credit.
The two buybacks with which this appeal is concerned took place in May and June 1996; prior, that is to say, to the removal of the entitlement to payment of an amount equal to the tax credits. Following the buybacks, the Scheme claimed tax credits in respect of them. The claim was accepted by the Revenue, and (since the Scheme had no liability to income tax against which the credits could be set off) the amount of the tax credits was duly paid to the trustees. Subsequently, the Revenue has sought, in effect, to reverse this payment by recourse to the anti-avoidance provisions in Part XVII of the 1988 Act.
The Special Commissioners' Decision ("the Decision") and the judgment of Lightman J ("the Judgment") are both reported in full in [2002] STC 276. For the purposes of this judgment I shall take them as read, referring to them only so far as is necessary to render this judgment intelligible.
THE RELEVANT ANTI-AVOIDANCE PROVISIONS
Before turning to the detailed facts, it is convenient at this point to set out the relevant anti-avoidance provisions, and to identify the issues which arise in relation to them.
The relevant provisions are all to be found in Chapter I of Part XVII of the 1988 Act. Part XVII is headed 'Tax Avoidance', and Chapter I is headed 'Cancellation of tax advantages from certain transactions in securities'. The provisions in question are set out in full in the Decision and in the Judgment but for convenience of reference I set them out again below, with the critical words in italics.
"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 or transactions 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 of 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 transactions.
(2) ….
(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.
[(4) to (12) ….]
704 The prescribed circumstances
The circumstances mentioned in section 703(1) are –
A. That in connection with the distribution of profits of a company …. 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) any exemption from tax, …
[(b) to (f) ….]
….
[705 – 708]
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) In this Chapter –
….
"transaction in securities" includes transactions, of whatever description, relating to securities ….
and references to dividends include references to other qualifying distributions….
(3) In section 704 –
(a) references to profits include references to income, reserves or other assets;
(b) references to distribution include references to transfer …
(c) ….
(4) For the purposes of section 704 an amount received by way of dividend shall be treated as abnormal if the Board …. are satisfied –
(a) ….; 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 ….
(5) ….
(6) For the purposes of subsection (4)(b) above –
(a) ….; and
(b) in determining whether an amount received by way of dividend exceeds a normal return, regard shall be had to the length of time previous to the receipt of that amount that the recipient first acquired any of the relevant securities and to any dividends and other distributions made in respect of them during that time."
Thus in the instant case a counteracting adjustment may be made under s.703(3) if the following three conditions are fulfilled, that is to say:
1. In relation to the two buybacks in question the circumstances prescribed in s.704A were present, viz: (1) that in connection with the distribution of profits of a company the Scheme 'receive[d] an abnormal amount by way of dividend', and (2) that 'the amount so received [was] taken into account [for the purposes of] any exemption from tax'. It is common ground that circumstance (2) was present. There is, however, an issue ( Issue 1) as to whether circumstance (1) was present. The trustees contend on the facts that it was not; the Revenue contend that it was, on the footing that in each case the amount 'received [by the Scheme] by way of dividend' (see s. 704A) 'substantially exceed[ed] a normal return on the consideration provided by the [Scheme] for the relevant securities' (see s.709(4)(b)), and having regard to the matters set out in s.709(6)(b).
2. In consequence of the buybacks the Scheme obtained 'a tax advantage' (see s.703(1)). There is an issue ( Issue 2) as to whether this requirement was met. The Revenue contend that the advantage which undoubtedly accrued to the Scheme in consequence of the buybacks by reason of its exemption from income tax falls within the definition of 'tax advantage' in s.709(1); the trustees contend that it does not. And
3. The "escape route" provided by s.703(1) is not available to the trustees; that is to say, the trustees do not succeed in showing (1) that they participated in the two buybacks 'either for bona fide commercial reasons or in the ordinary course of making or managing investments' and (2) that '[neither] of [the buybacks] had as their main object, or one of their main objects, to enable tax advantages to be obtained'. There is no longer an issue as to the first element of the escape route. The Special Commissioners held that in participating in the buybacks the trustees were acting in the ordinary course...
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