Omega Group Pension Scheme Trustees v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 22 June 2001 |
| Date | 22 June 2001 |
| Court | Special Commissioners (UK) |
special commissioners decision
Dr Nuala Brice, M Cornwell-Kelly.
1. The trustees of the OMEGA group pension scheme ("the appellants") appeal against a notice and an assessment.
2. The notice was dated 18 November 1999 and was given by the Board of Inland 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"). The notice stated thatIncome and Corporation Taxes Act 1988 section 703s. 703 applied to the appellants in respect of two transactions, namely two sales of shares in Powergen plc ("Powergen") to Powergen. The first sale was on 16 May 1996 and the second on 5 June 1996. The notice also stated that an assessment to income tax under Sch. F for the year 1996-97 for receipts of £484,563 was requisite for counteracting the tax advantages obtained by the two transactions.
3. The assessment was notified to the appellants on 15 December 1999 and assessed tax of £96,912.60 in respect of the assessable receipts of £484,563.
4. The relevant parts of s. 703 of the 1988 Act provide:
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703(1) Where-
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(a) in any such circumstances as are mentioned in section 704, and
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(b) in consequence of a transaction in securities or of the combined effect of two or more such transactions,
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a person is in a position to obtain, or has obtained, a tax advantage, then unless he shows that the 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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…
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703(3) Where this section applies to any 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.
5. Section 703(1)(a) refers to "such circumstances as are mentioned in section 704". The parts of s. 704 which are relevant in this appeal are:
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A. That 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 a purchase or sale of the same or other securities, 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:
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(a) any exemption from tax…
6. The relevant parts of s. 709(2) provide:
In this Chapter-
…
references to dividends include references to other qualifying distributions and to interest.
7. The relevant parts of s. 709(4) provide:
For the purposes of section 704 an amount received by way of dividend shall be treated as abnormal if the Board, the Special Commissioners or the tribunal, as the case may be, are satisfied-
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(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…
8. The relevant parts of s. 709(6) provide:
For the purposes of subs. (4)(b) above-
…
(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 or other distributions made in respect of them during that time.
9. Section 703(1) also refers to the obtaining of "a tax advantage". Section 709 defines the meaning of tax advantage and other expressions. Section 709(1) provides:
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 bear tax on them, or by a deduction in computing profits or gains.
10. The appellants purchased shares in Powergen. On two occasions they sold the shares back to Powergen and claimed tax credits. The Inland Revenue were of the view that the circumstances of the sales were as mentioned in Income and Corporation Taxes Act 1988 section 704As. 704A because the appellants had received an abnormal amount by way of dividend and were also of the view that the appellants had obtained a tax advantage. The appellants argued that the circumstances were not as mentioned in Income and Corporation Taxes Act 1988 section 704As. 704A as they had not received an abnormal amount. They also argued that they had not obtained a tax advantage. Finally, they argued that the two sales were carried out for bona fide commercial reasons and in the ordinary course of making or managing investments and that neither of them had as their main object, or one of their main objects, to enable tax advantages to be obtained.
11. Thus the issues in the appeal were:
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(2) whether Income and Corporation Taxes Act 1988 section 703 subsec-or-para (1)s. 703(l)(a) applied and whether the circumstances were as mentioned in Income and Corporation Taxes Act 1988 section 704s. 704 and, in particular, whether the appellants received an abnormal amount within the meaning ofIncome and Corporation Taxes Act 1988 section 704As. 704A as clarified by Income and Corporation Taxes Act 1988 section 709 subsec-or-para (2) section 709 subsec-or-para (4) section 709 subsec-or-para (6)ss. 709(2), 709(4)(b) and 709(6)(b);
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(3) whether Income and Corporation Taxes Act 1988 section 703s. 703 applied and, in particular, whether the appellants obtained a tax advantage as defined in Income and Corporation Taxes Act 1988 section 709 subsec-or-para (1)s. 709(1);
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(4) whether the sales were carried out for bona fide commercial reasons or in the ordinary course of making or managing investments within the meaning of Income and Corporation Taxes Act 1988 section 703 subsec-or-para (1)s. 703(1); and
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(5) whether the sales had as their main object, or one of their main objects, to enable tax advantages to be obtained within the meaning ofIncome and Corporation Taxes Act 1988 section 703 subsec-or-para (1)s. 703(1).
12. A statement of agreed facts and accompanying documents were produced. Three bundles of documents were produced on behalf of the appellants being:
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(2) documents;
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(3) procedural documents; and
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(4) a witness statement and exhibits of Mr Keith Richard Mullins.
Oral evidence was given on behalf of the appellants by Mr Mullins. Mr Mullins is the fund manager of the OMEGA group pension scheme at Merrill Lynch Investment Managers Ltd (formerly Mercury Asset Management ("MAM")). Mr Mullins joined the Mercury group in 1978 and has been a fund manager for 20 years. Throughout that time he was involved in the UK pension business of MAM. He became the UK equity fund manager of the appellant's portfolio in 1994. A witness statement dated 9 March 2001, and made by the secretary of the appellants, was not objected to by the Inland Revenue and was put in evidence at the hearing of the appeal without the attendance of the secretary.
13. From the evidence before us we find the following facts.
14. The OMEGA group ("OMEGA") is a publicly quoted company which appears in the FTSE 100. It trades in computer software. In about 1949 Yarrow Ltd, which later became OMEGA, established a pension scheme ("the scheme") for its employees and the appellants are the trustees of the scheme. In 1996 the value of the assets of the scheme varied between £60m and £66m. The scheme is an exempt approved scheme within the meaning of s. 592 of the 1988 Act which provides:
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592(2) Exemption from income tax shall, on a claim being made in that behalf, be allowed in respect of income derived from investments or deposits if, or to such extent as the Board are satisfied that, it is income from investments or deposits held for the purposes of the scheme.
15. Schemes such as that of which the appellants are trustees, whose income is exempt from income tax, were referred to at the hearing as "gross funds".
16. The appellants receive contributions from both OMEGA and its employees and pay pensions to those entitled to them. The appellants also have responsibility for the investment of the funds of the scheme. On 6 August 1982 the appellants first appointed MAM as the discretionary fund manager of the scheme and delegated to MAM their responsibility for the investment of the funds of the scheme.
17. The MAM group currently employs over 260 investment professionals who provide investment management services for institutional and private clients. It was acquired by Merrill Lynch & Co Inc in December 1997 and is now a major global asset management company with over US$460 billion of assets under management. Clients include pension funds, companies, private clients and charities. As at March 1997 MAM's clients included five of the ten largest pension funds in the world and the pension funds of over 50 of the UK's 100 largest quoted companies or their subsidiaries.
18. The appointment of MAM by the appellants, which was in force at the date of the two sales the subject of this appeal, was dated 6 July 1991 and gave MAM sole responsibility for the management of the assets of the scheme. MAM was authorised to carry out...
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