Johnston Publishing (North) Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | THE HON. MR JUSTICE LINDSAY,Mr Justice Lindsay |
| Judgment Date | 14 March 2007 |
| Neutral Citation | [2007] EWHC 512 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CH/2006/APP/838 |
| Date | 14 March 2007 |
[2007] EWHC 512 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Hon. Mr Justice Lindsay
Case No: CH/2006/APP/838
Mr John Gardiner QC and Mr Philip Walford (instructed by Nabarro) for the Appellant
Mr Christopher Tidmarsh QC (instructed by HMRC) for the Respondent
Hearing date: 22 nd February 2007
Approved Judgment
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.
Mr Justice Lindsay:
Introduction
I have before me an appeal from the Special Commissioners which raises a short but important point as to the applicability or not of deeming provisions in relation to the taxation of chargeable gains arising out of what may or may not be group transactions. To focus in the finest detail, I shall be concerned with the meaning and effect, in context, of the word “associated” where it appears for the second time in section 179(2) of the TCGA 1992.
The Commissioners for HM Revenue and Customs (“the Commissioners”), who appeared below, as they do before me, by Mr Christopher Tidmarsh QC, succeeded before the Special Commissioner, Mr John Clark, who released his reasoned decision on 9 th October 2006. The taxpayer, Johnston Publishing (North) Limited, which appeared before me, as below, by Mr John Gardiner QC leading Mr Philip Walford, appeals against the Special Commissioner's decision. Because of name changes since the transactions in question, it is convenient to refer to the taxpayer by the acronym UPNH. I shall refer below to the facts in summary form but they are fully set out in the Special Commissioner's judgment and are not in dispute. The contest, essentially one of statutory construction, cannot be understood without a sight of the statute and it is accordingly to that which I shall first turn.
The statutory provisions
It is section 179(2) TCGA 1992 which is at the heart of the issue but all the relevant provisions fall within Part VI of TCGA 1992 which is headed, under the broader heading of 'Companies, Oil, Insurance, etc.', as follows:—
“CHAPTER I
Companies
Groups of companies
170 Interpretation of sections 171 to 181
(1) ….
(2) Except as otherwise provided—
(a) references to a company apply only to a company, as that expression is limited by subsection (9) below, which is resident in the United Kingdom;
(b) subsections (3) to (6) below apply to determine whether companies form a group and, where they do, which is the principal company of the group;
….
(d) “group” and “subsidiary” shall be construed with any necessary modifications where applied to a company incorporated under the law of a country outside the United Kingdom.
….
….
(6) A company cannot be a member of more than one group; …
Transactions within groups
171 Transfers within a group: general provisions
(1) Notwithstanding any provision in this Act fixing the amount of the consideration deemed to be received on a disposal or given on an acquisition, where a member of a group of companies disposes of an asset to another member of the group, both members shall, except as provided by subsections (2) and (3) below, be treated, so far as relates to corporation tax on chargeable gains, as if the asset acquired by the member to whom the disposal is made were acquired for a consideration of such amount as would secure that on the other's disposal neither a gain nor a loss would accrue to that other; …
Companies leaving groups
179 Company ceasing to be member of group: post-appointed day cases
(1) If a company (“the chargeable company”) ceases to be a member of a group of companies, this section shall have effect as respects any asset which the chargeable company acquired from another company which was at the time of acquisition a member of that group of companies, but only if the time of acquisition fell within the period of 6 years ending with the time when the company ceases to be a member of the group; and references in this section to a company ceasing to be a member of a group of companies do not apply to cases where a company ceases to be a member of a group in consequence of another member of the group ceasing to exist.
(2) Where 2 or more associated companies cease to be members of the group at the same time, subsection (1) above shall not have effect as respects an acquisition by one from another of those associated companies.
(3) If, when the chargeable company ceases to be a member of the group, the chargeable company, or an associated company also leaving the group, owns, otherwise than as trading stock—
(a) the asset, or
(b) property to which a chargeable gain has been carried forward from the asset on a replacement of business assets,
then, subject to subsection (4) below, the chargeable company shall be treated for all the purposes of this Act as if immediately after its acquisition of the asset it had sold, and immediately reacquired, the asset at market value at that time.
….
(10) For the purposes of this section—
(a) 2 or more companies are associated companies if, by themselves, they would form a group of companies,
….”
The Facts
The relevant facts have never been in issue; if I may briefly state them, respecting that preference for acronyms of which those engaged in such operations are enamoured, they are these: on 7 th July 1997 UPNH became a member of the UNM Group by way of being a wholly owned subsidiary of UNMG, a member of that Group. On the same day, but after UNMG had been registered as the shareholder of UPNH, UPNH made a rights issue to UNMG in return for £314,700,000. Then another member of the UNM Group, UPN, which owned a number of operating subsidiaries, offered to sell the share capital in those subsidiaries to UPNH. That was stage 1. Then, still on 7 th July 1997, UPNH agreed to buy UPN's shares in those operating subsidiaries for £310,000,000. Still on that busy day, UPNH became registered holder of those shares and paid UPN that price. That was stage 2. At neither stage 1 nor stage 2 were UPN and UPNH such that they were themselves then “associated” (within the meaning of section 179(10)). However, as UPN and UPNH were members of the same UNM Group, that transfer, being an intra-group dealing, was treated, pursuant to section 171 TCGA 1992, as for a consideration that gave rise neither to a gain or a loss to UPN. Yet later on 7 th July 1997, UPN, by now replete with the purchase money paid to it for the sale of its operating subsidiaries to UPNH, paid a dividend of £280,000,000 out of its distributable profits to its parent, URN, another member of the UNM Group. Plainly the value of UPN was thereby diminished. Then, still on 7 th July 1997, UPNH bought URN's holding in UPN for £4,700,000. UPNH was registered as owner of the whole issued share capital in UPN. UPN, by way of being owned by UPNH, was still at this stage in the UNM Group. The disposition of shares in UPN from URN to UPNH – stage 3 – was another intra-group dealing at, for tax purposes, neither gain nor loss to URN.
So much for the 7 th July 1997. The next stage – stage 4 – occurred on 27 th February 1998 when UNMG sold the whole share capital in UPNH for, in all, £365,897,000 to a company in a wholly unrelated group. At that stage, stage 4, UPNH ceased to be a member of the UNM Group. At the same time, UPN, as a subsidiary of UPNH, also ceased to be a member of the UNM Group but, by then, UPNH and UPN (and other subsidiaries of UPNH) were together such as to be “associated” within section 179(10). Later there was correspondence in which the Inspector of Taxes indicated it may be appropriate to assess UPNH at a figure of £280,000,000 in respect of its deemed gain. On 1 st March 2004 an assessment was raised on UPNH. UPNH appealed. The appeal was transferred to the Special Commissioners. The figure for the amount has not been agreed between the parties; that has been left to await the final outcome of UPNH's appeal.
The context and argument
It will be useful, before turning to the parties' argument on the meaning and effect of section 179(2), to have in mind two things: first, the broad approach to intra-group dealings and taxation and, secondly, the “Envelope scheme”. As for the broad approach to intra-group dealings, it is explained, by reference to the then-current legislation, in a judgment of Hoffmann J., as he then was, in Westcott (Inspector of Taxes) v Woolcombers Ltd [1986] STC 182. The appeal from him to the Court of Appeal was dismissed – see [1987] STC 600. In the judgment at first instance Hoffmann J., describing the underlying fiscal policy, at page 190 said:
“The policy of para 2(1) of Schedule 13 [the precursor of section 171] is to recognise that in the case of transactions between members of a group of companies, the legal theory that each company is a separate entity does not accord with economic reality. It gives effect to that policy by, broadly speaking, ignoring transactions within the group, computing the gain as the difference between the consideration given when an asset was acquired by the group and the consideration received when it left the group, and charging the tax on whichever company made the outward disposal…. Thus all the provisions with which we have been concerned are directed to neutralising the tax effects of transactions which are disposals in legal theory but not in real life”.
In the Court of Appeal – [1987] STC 600 at 606 – Fox L.J. agreed with Hoffmann J.'s view of the fiscal policy which the legislation embodied.
As for the “Envelope scheme”, it was explained as long ago as 1992 by Millett J., as he then was; see ...
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