Commissioners of Inland Revenue v Laird Group Plc
| Jurisdiction | England & Wales |
| Judgment Date | 28 February 2001 |
| Date | 28 February 2001 |
| Court | Chancery Division |
Chancery Division.
Lightman J.
Michael Furness QC (instructed by the Solicitor for Commissioners of the Inland Revenue) for the Crown.
Andrew Thornhill QC (instructed by Ashurst Morris Crisp) for the respondant.
The following cases were referred to in the judgment:
Barron v Littman ELR[1953] AC 96
Farrell v Alexander ELR[1977] AC 59
Greenberg v IR Commrs ELRTAX[1972] AC 109; (1971) 47 TC 240
IR Commrs v Joiner TAX(1975) 50 TC 449
IR Commrs v Parker TAXELR(1966) 43 TC 396;[1966] AC 141
IR Commrs v Pollock and Peel Ltd WLR[1957] 1 WLR 822
NAP Holdings (UK) Ltd v Whittles TAX[1994] BTC 450
Pepper v Hart TAXELR[1992] BTC 591; [1993] AC 593
R v Secretary of State, ex parte Spath Holme Ltd WLR[2000] 2 WLR 15
Sheppard v IR Commrs (No. 2) TAX[1993] BTC 113
Corporation tax - Transactions in securities - Tax advantage - Company purchasing entire issued share capital of second company - Second company paying abnormally large dividend subject to advance corporation tax - First company using that dividend and the associated tax credit to frank dividend payments to its own shareholders - Whether declaration and payment of dividend constitutes a transaction in securities -Income and Corporation Taxes Act 1988 section 703 subsec-or-para (1)Income and Corporation Taxes Act 1988, s. 703(1)(b).
In June 1990, Laird acquired the entire issued share capital of Stanton. In December 1990, Laird declared a dividend on its own shares of £3.484m ("the Laird Dividend") and Stanton paid a dividend to Laird of £3m ("the Stanton Dividend"). No group income election was in place, so Stanton accounted to the Inland Revenue for £1m of Advanced Corporation Tax ("ACT"). By setting it against its own corporation tax for the current and past years, Stanton obtained repayment of £1m of "mainstream" corporation tax. The Stanton Dividend was received by Laird as franked investment income, enabling Laird to set off the ACT accounted for by Stanton against its own ACT liability. Thus Laird paid less ACT on the Laird Dividend that it would have done but for the Stanton Dividend. The tribunal constituted under Income and Corporation Taxes Act 1988 section 706s. 706 of the Income and Corporation Taxes Act 1988 held that Income and Corporation Taxes Act 1988 section 703s. 703 did not apply to the transaction. The Revenue appealed.
(1) Whether the declaration and payment of a dividend is a "transaction in securities" for the purposes of Income and Corporation Taxes Act 1988 section 703 subsec-or-para (1)s. 703(1)(b) of the Income and Corporation Taxes Act 1988.
(2) Whether the rule in Pepper v Hart TAX[1992] BTC 591 could be invoked to resolve any ambiguity.
Held, dismissing the appeal:
1. Neither the declaration nor the payment of a final dividend nor the payment of an interim dividend alone constituted a transaction in securities. The declaration and payment involved no dealing with securities and no alteration of rights attaching to the securities. They merely gave effect to the pre-existing rights attaching to the securities.
2. If the decision on the first point were wrong, and there was an ambiguity in the term "transaction in securities", it would not be permissible to look at Hansard in relation to the Finance Act 1960 when construing the Income and Corporation Taxes Act 1988, which was consolidated legislation. The relevant provisions had been the subjects of authoritative judicial pronouncements prior to consolidation. Otherwise, and if this decision were wrong on the first point, the court could take into account the unequivocal assurance given by the Attorney-General that the term did not cover a declaration and payment of a dividend.
Lightman J: Introduction
1. This appeal concerns the validity of a notice given by the appellants ("the Revenue") under Income and Corporation Taxes Act 1988 section 703 subsec-or-para (3)s. 703(3) of the Income and Corporation Taxes Act 1988 ("the 1988 Act") and an assessment to tax in the sum of £1m made consequent on that notice. (All statutory references unless otherwise indicated are to the 1988 Act). The validity of the notice and the assessment were challenged by an appeal on the part of Laird Group plc ("Laird") to the special commissioners underIncome and Corporation Taxes Act 1988 section 705 subsec-or-para (1)s. 705(1). By a decision dated the 8 February 1999, the special commissioners affirmed the validity of the notice and dismissed the appeal. Laird then exercised its right to a rehearing before the tribunal constituted under Income and Corporation Taxes Act 1988 section 706s. 706 ("the tribunal") pursuant toIncome and Corporation Taxes Act 1988 section 705 subsec-or-para (2)s. 705(2). The tribunal allowed Laird's appeal and discharged the assessment. The Revenue now appeals by way of case stated under Income and Corporation Taxes Act 1988 section 705As. 705A. An appeal lies on a point of law only (Income and Corporation Taxes Act 1988 section 705A subsec-or-para (6)s. 705A(6)). The issue is whether a declaration and payment of a dividend constitutes "a transaction in securities" within the meaning of Income and Corporation Taxes Act 1988 section 703 subsec-or-para (1)s. 703(1)(b). This question of construction requires detailed consideration of three decisions of the House of Lords on the predecessors sections of s. 703(1)(b) in the Finance Act 1960 ("the 1960 Act") and theIncome and Corporation Taxes Act 1970 ("the 1970 Act"). These decisions are IR Commrs v Parker TAXELR(1966) 43 TC 396; [1966] AC 141 ("Parker"), Greenberg v IR Commrs ELRTAX[1972] AC 109; (1971) 47 TC 240 ("Greenberg"), and IR Commrs v JoinerTAX(1975) 50 TC 449 ("Joiner"). The extraction of the grounds for those decisions and the guidance which they lay down is the difficult exercise which is required before the answer to the question of construction can be given. Since this is a suitable case for a leap-frog appeal to the House of Lords, this judgment attempts to provide a full and detailed consideration of all the issues raised.
2. In 1960 the government decided to introduce legislation designed to cancel tax advantages obtained from certain transactions in securities and most particularly (but not exclusively) dividend stripping and bond washing. The legislation took the form of the 1960 Act. The transactions at which the legislation was directed were set out in s. 28. The provisions of this section, which survived largely unchanged in the 1970 and 1988 Acts, (so far as material) provided as follows:
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28(1) Where-
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(a) in any such circumstances as are mentioned in the next following subsection, and
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(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:
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Provided that this section shall not apply to him if-
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(i) the transaction or transactions in securities were carried out, and
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(ii) any change in the nature of any activities carried on by a person, being a change necessary in order that the tax advantages should be obtainable, was effected,
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before the fifth day of April, nineteen hundred and sixty.
28(2) The circumstances mentioned in the foregoing subsection are that-
(a) 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, being entitled (by reason of any exemption from tax or by the setting off of losses against profits or income) to recover tax in respect of dividends received by him, receives an abnormal amount by way of dividend; or
(b) in connection with the distribution of profits of a company or any such sale or purchase as aforesaid the person in question becomes entitled, in respect of securities held or sold by him, to a deduction in computing profits or gains by reason of a fall in the value of the securities resulting from the payment of a dividend thereon or from any other dealing with any assets of a company; or
(c) the person in question receives, in consequence of a transaction whereby any other person-
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(i) subsequently receives, or has received, an abnormal amount by way of dividend; or
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(ii) subsequently becomes entitled, or has become entitled, to a deduction as mentioned in para. (b) of this subsection, a consideration which either is, or represents the value of, assets which are (or apart from anything done by the company in question would have been) available for distribution by way of dividend, or is received in respect of future receipts of the company or is, or represents the value of, trading stock of the company, and the said person so receives the consideration that he does not pay or bear tax on it as income; or
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(iii) in connection with the distribution of profits of a company to which this paragraph applies, the person in question so receives as is mentioned in para. (c) of this subsection such a consideration as is therein mentioned…
The "exceptions" or defences made available to the taxpayer by the clause in s. 28(1) commencing with the word "unless" are referred to by Lord Reid in Greenberg and are carried through inIncome and Corporation Taxes Act 1988 section 703 subsec-or-para (1)s. 703(1) of the 1988 Act. The proviso to s. 28(1) ("the Proviso") was a transitional provision which figured large in the decisions of the House of Lords but...
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