Farnborough Airport Properties Company v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Henderson,Baker LJ,Floyd LJ |
| Judgment Date | 08 February 2019 |
| Neutral Citation | [2019] EWCA Civ 118 |
| Docket Number | Case No: A3/2017/3284 |
| Court | Court of Appeal (Civil Division) |
| Date | 08 February 2019 |
[2019] EWCA Civ 118
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Floyd
Lord Justice Henderson
and
Lord Justice Baker
Case No: A3/2017/3284
Mr Philip Ridgway (instructed by KPMG LLP) for the Appellants
Mr Jonathan Bremner QC (instructed by the General Counsel and Solicitor to HMRC) for the Respondents
Hearing date: 20 November 2018
Approved Judgment
Introduction
In the normal way, group relief from UK corporation tax may be claimed and surrendered between sister companies in a group if they are both “75% subsidiaries” (as defined) of a third company, and if the numerous other requirements for the grant of such relief are satisfied. Group relief is also available between two companies if one is the 75% subsidiary of the other, but in this case we are concerned only with “horizontal” claims between two fellow subsidiaries. The relevant legislation was most recently restated with minor changes, pursuant to the Tax Rewrite Project, in Part 5 of the Corporation Tax Act 2010 (“ CTA 2010”), which extends from sections 97 to 188.
According to the basic definition of “75% subsidiary” in section 1154 of CTA 2010, which is applied for the purposes of group relief by section 151(1), a body corporate (“B”) is a 75% subsidiary of another body corporate (“A”) “if at least 75% of B's ordinary share capital is owned directly or indirectly by A”: see section 1154(3). By virtue of subsections (5) and (6), such ownership must be “beneficial ownership”, and the requirement for the ordinary share capital to be owned “directly or indirectly” may be satisfied if it is owned “partly directly and partly indirectly”, as well as when all of it is owned either directly or indirectly.
Section 151(4) contains further provisions which, for the purposes of group relief, reinforce the requirement of beneficial ownership by A of B's ordinary share capital. In short, the parent company (A) must also be beneficially entitled to receive at least 75% of any profits available for distribution to equity holders of the subsidiary (B), and at least 75% of any assets of B available for distribution to such equity holders on a winding up, in each case in accordance with detailed provisions contained in Chapter 6 of CTA 2010 (sections 157 to 182). In other words, the beneficial interest must reflect a corresponding economic interest in the subsidiary, both when its profits are distributed and when it is wound up.
In addition to the requirements of section 151(4), companies A and B are also disqualified from membership of the same group if arrangements of a specified type are in place during the accounting period for which one of them has amounts available for surrender: see section 154. For present purposes, the relevant parts of section 154 read as follows:
“154. Arrangements for transfer of member of group of companies etc
(1) This section applies if, apart from this section, one company (“the first company”) and another company (“the second company”) would be members of the same group of companies.
(2) For the purposes of this Part the companies are not members of the same group of companies if –
(a) one of the companies has surrenderable amounts for an accounting period (“the current period”), and
(b) arrangements within subsection (3) are in place.
(3) Arrangements are within this subsection if they have any of the following effects…
…
Effect 2
At some time during or after the current period a person (other than the first or second company) has or could obtain, or persons together (other than those companies) have or could obtain, control of the first company but not of the second company.
…”
It can be seen, therefore, that “arrangements” will disqualify companies A and B from being members of the same group if (a) the arrangements are “in place” during the surrendering company's accounting period (“the current period”), and (b) the arrangements have the “effect” that, at some time during or after the current period, a person other than A or B has or could obtain control of one, but not of both, of those companies (or, alternatively, persons together other than A or B have or could obtain such control). Thus, for example, this condition would clearly be satisfied if the effect of the arrangements is to transfer control of either A or B to a third party, but it would also be satisfied if their effect is merely to leave the 75% parent company of A and B with control of one, but not the other, of them.
To discover the meaning of “control” in this context, it is necessary to turn to section 1124(2) of CTA 2010, which contains a general definition applicable to any provisions of the Corporation Tax Acts which apply it, or to which it is applied: see subsection (1). In the case of section 154, the definition is applied by virtue of sections 1118(2), (5) and 1119. The definition in subsection (2) states that:
“In relation to a body corporate (“company A”), “control” means the power of a person (“P”) to secure –
(a) by means of the holding of shares or the possession of voting power in relation to that or any other body corporate, or
(b) as a result of any powers conferred by the articles of association or other document regulating that or any other body corporate,
that the affairs of company A are conducted in accordance with P's wishes.”
The definition is thus concerned with the power of a person to secure that the affairs of the subject company are conducted in accordance with that person's wishes. Such power must be exercisable in one or other of the specified ways, the first of which depends on the holding of shares or the possession of voting power, and the second of which depends on the exercise of any powers conferred by the articles of association or by any “other document” which regulates that or any other company. In very broad terms, it would seem that the former limb of the definition is looking at the ability to exert control at shareholder level, for example by taking steps to appoint or remove directors, while the second limb focuses on the exercise of powers conferred by the articles or any other document which regulates the company's affairs, typically at board level. In either case, however, the person exerting the control must thereby be able to achieve the result that the company's affairs are conducted in accordance with his wishes.
As to the meaning of “arrangements”, section 156(2) provides that:
““Arrangements” –
(a) means arrangements of any kind (whether or not in writing), but
(b) does not include a power of a Minister of the Crown, the Scottish Ministers or a Northern Ireland department to give directions to a statutory body as to the disposal of assets belonging to the body or to a subsidiary of the body.”
In the light of this legislative background, I can now identify the key issue which arises on this second appeal by the taxpayer companies, Farnborough Airport Properties Company and Farnborough Properties Company (which I will call “FA” and “FP” respectively, and together “Farnborough”) against the refusal by HMRC (in closure notices issued on 24 December 2014, and upheld on review on 6 March 2015) of their claims to group relief surrendered by their fellow 75% subsidiary, Piccadilly Hotels 2 Limited (“ PH2L”), in respect of PH2L's accounting periods ending on 31 January 2012 and 2013. The relevant losses of PH2L for which relief was claimed amounted to £7,114,177 in its accounting period to 31 January 2012, and £3,513,532 in the following period, totalling £10,627,709. Both amounts were claimed by FA and FP in relation to their accounting periods ended 31 May 2012.
It is common ground that, at all material times before 27 June 2011, FA, FP and PH2L were each 75% subsidiaries (as defined) of a company called Kelucia Limited (“Kelucia”). An agreed statement of facts before the First-tier Tribunal (“FTT”) recorded that FA and FP were both 100% subsidiaries of a company called Gatevalley Limited (“Gatevalley”), which was in turn (partly directly and partly indirectly) an 80.5% subsidiary of Kelucia, while PH2L was a 100% subsidiary of Piccadilly Hotels 1 Limited, which was in turn (partly directly and partly indirectly) a 92.3% subsidiary of Kelucia. It is also common ground that, apart from the receivership which I am about to mention, all the other requirements for making valid claims to group relief were satisfied in relation to the claims in issue.
The problem arises because, on 27 June 2011, PH2L was placed into receivership by Bank of Scotland PLC, in exercise of its rights as Security Trustee under a Deed of Debenture date 10 October 2006 (“the Debenture”). Under the terms of the Debenture, the receivership extended to the entire property and undertaking of PH2L and the receivers were granted very extensive (but standard) powers, including power to carry on the business of the company as they thought fit. The basic question which therefore arises is whether, following the appointment of the receivers, PH2L ceased to be a member of the same group of companies as FA and FP respectively, on the footing that arrangements were then in place within the meaning of section 154(2) of CTA 2010 which had the effect, within the meaning of Effect 2, that Kelucia ceased to have control of PH2L.
HMRC's argument, reduced to its simplest terms, is that the appointment of the receivers, and the conduct of the receivership in accordance with the terms of the Debenture, constituted arrangements within the broad definition in section 156(2), that those arrangements...
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