Limitgood Ltd v R & C Commissioners and HM Revenue and Customs v Prizedome Ltd CA
| Jurisdiction | England & Wales |
| Judge | Lord Justice Mummery,Lord Justice Dyson,Lord Justice Jacob |
| Judgment Date | 12 March 2009 |
| Neutral Citation | [2009] EWCA Civ 177 |
| Date | 12 March 2009 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2008/0414 |
[2009] EWCA Civ 177
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR JUSTICE BLACKBURNE
Before : Lord Justice Mummery
Lord Justice Dyson
and
Lord Justice Jacob
Case No: A3/2008/0414
CH/2007/APP/0412
MR GRAHAM AARONSON QC MR KEVIN PROSSER QC & MR JAMES HENDERSON (instructed by Price Waterhouse Coopers Legal LLP) for the Appellants
MR MALCOLM GAMMIE QC and MR DAVID EWART QC (instructed by the Solicitor to HM Revenue & Customs) for the Respondents
Hearing dates: 9 th & 10 th December 2008
Lord Justice Mummery :
Background and issues
This case is about the taxation of capital gains of groups of companies under the Taxation of Chargeable Gains Act 1992 (the 1992 Act). The appeal turns on the construction of section 177A of and Schedule 7A to the 1992 Act. Those provisions place restrictions on the set-off of “pre-entry losses.” They were inserted in the 1992 Act by section 88 of the Finance Act 1993. There were transitional provisions.
Schedule 7A makes provision in relation to losses accruing to a company before it becomes a member of a group of companies. The aim of the inserted provisions is to restrict the tax benefits which can be obtained by a group of companies buying a company which has capital losses. Even though the losses do not arise from its own activities, a group of companies would seek to obtain tax relief by setting off the pre-entry losses of the company against the capital gains made by companies in the group.
The 1992 Act, as amended, restricts the tax benefits of set off by ring fencing pre-entry capital losses brought into a group of companies. Specific rules cover the take-over of one group by another group, the reconstruction of companies and anti-avoidance measures.
The particular point in this case arises where a company joins a group of companies (the first group), which is later taken over by another group (the second group). It then becomes necessary to determine which is “the relevant group” in relation to the pre-entry losses. It is common ground that the appellants are entitled to set off the losses against the gains to the extent claimed in this case if, but only if, paragraph 1(6) of Schedule 7A applies to the facts of this case. The construction of paragraph 1(6) is at the heart of the dispute.
The relevant principles of statutory construction are not disputed. They are concisely stated in Barclays Finance Ltd v. Mawson [2005] 1 AC 684 at paragraph 32 of the single opinion of the committee delivered by Lord Nicholls—
“The essence of the new approach was to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. Of course this does not mean that the courts have to put their reasoning in the straitjacket of first construing the statute in the abstract and then looking at the facts. It might be more convenient to analyse the facts and then ask whether they satisfy the requirements of the statute. But however one approaches the matter, the question always is whether the relevant provision of the statute, upon its true construction, applies to the facts as found. As Lord Nicholls said in MacNiven v. Westmoreland Investments Ltd [2003] 1 AC 311,320, para 8: “The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case.” ”
Only one other authority was cited at the hearing, Inco Europe v. First Choice Distribution [2000] 1 WLR 586 at 592. It is not a tax case. The dispute was about the effect of the Arbitration Act 1996 on the jurisdiction of the Court of Appeal to entertain an appeal in relation to the refusal by the judge at first instance to grant a stay of an action in a case in which the parties had agreed to refer disputes to arbitration. The judge held that the arbitration agreement was null and void or inoperative, refused to grant a stay and refused leave to appeal. The only point of possible relevance to this case is that the House of Lords held that the courts have power to correct obvious drafting errors in legislation by adding, omitting or substituting words. Although the courts can improve legislative drafting in this way, apparently in the exercise of their constitutional function as interpreters of the law, the power is confined to plain cases and must be exercised with “considerable caution.”
While asserting that the clear words of the 1992 Act, in particular in paragraph 1(6) of Schedule 7A, allow the set off of the pre-entry capital losses to the extent claimed in this case and that their interpretation was included in a 1993 Inland Revenue Press Release and in HMRC's own published manuals, the appellant taxpayers accept that it was not the intention of the legislation that they should be allowed to do this. Their case is that the draftsman has slipped up (possibly, it was suggested, the victim of his own detailed and prescriptive drafting technique), but it is beyond the power of the courts to correct his slip by a process of judicial interpretation. As was said in Inco at page 592E the courts “must abstain from any course which might have the appearance of judicial legislation.”
The respondent Commissioners (HMRC) do not accept that there has been any drafting slip or mistake requiring correction by the courts or anyone else. Their case is that, properly construed, paragraph 1(6) and the other relevant provisions of the 1992 Act and Schedule 7A accord with the legislative intention and do not allow the taxpayers to set off losses to the extent claimed by them. No large question looms on the drafting of taxing statutes, the principles of statutory interpretation or on the constitutional role of the courts, upon which Mr Aaronson QC, for the appellants, made some interesting generalised comments, which were supplemented by more specific submissions and illustrative examples from Mr Prosser QC. In my opinion, the question for the court is a very narrow one: do the particular provisions in paragraph 1(6)(b) of Schedule 7A to the 1992 Act apply to this case?
I turn to the short facts of the case, quote the relevant statutory provisions and summarise their application in the proceedings so far.
Facts and law
The appellant companies, Limitgood Limited (L) and Prizedome Limited (P), realised capital losses. On 27 September 2000 they became subsidiaries of Grantchester Limited (GL), the principal company in the GL group. Other subsidiary companies in the GL Group owned certain assets. On 19 December 2000 GL was taken over by Grantchester Holdings plc (GH). During the accounting periods of L and P ended 30 September 2001 and 2002 subsidiaries in the GH Group made capital gains on the disposal of assets. Elections were made to set off L and P's losses against the gains in the GH group by deeming the gains as made by L and P.
The right to set off L and P's losses was claimed principally under paragraphs 1 and 9 of Schedule 7A. Paragraph 1 deals with the application and scope of the Schedule. Paragraph 9 deals with the identification of “the relevant group” where there is more than one group of companies which would be “the relevant group” in relation to any company and the application of the Schedule to every connected group. The paragraphs in the Schedule have to be read with section 170(10) in Chapter I (COMPANIES, Groups of companies) of Part VI of the 1992 Act. The section applies to the interpretation of section 177A, which introduced Schedule 7A.
The provisions cited in argument can be conveniently gathered in one place. They read as follows-
SCHEDULE 7A
RESTRICTION ON SET-OFF OF PRE-ENTRY LOSSES
Application and construction of Schedule
“1 (1) This Schedule shall have effect, in the case of a company which is or has been a member of a group of companies (“the relevant group”), in relation to any pre-entry losses of that company.
(2) In this Schedule “pre-entry loss”, in relation to any company, means-
(a) any allowable loss that accrued to that company at a time before it became a member of the relevant group; or
(b) the pre-entry proportion of any allowable loss accruing to that company on the disposal of any pre-entry asset.
……..
[(3), (4) and (5) relate to “pre-entry assets”]
(6) Subject to so much of sub-paragraph (6) of paragraph 9 below as requires groups of companies to be treated as separate groups for the purposes of that paragraph, if-
(a) the principal company of a group of companies (“the first group”) has at any time become a member of another group (“the second group”) so that the two groups are treated as the same by virtue of subsection (10) of section 170, and
(b) the second group, together in pursuance of that subsection with the first group, is the relevant group,
then, except where subparagraph (7) below applies, the members of the first group shall be treated for the purposes of this Schedule as having become members of the relevant group at that time and not by virtue of that subsection at the times when they became members of the first group”.
Identification of “the relevant group” and application of Schedule to every connected group
9. (1) This paragraph shall...
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