Piggott (Inspector of Taxes) v Staines Investments Ltd

JurisdictionEngland & Wales
CourtChancery Division
Judgment Date31 January 1995
Date31 January 1995

Chancery Division.

Knox J.

Pigott (HM Inspector of Taxes)
Staines Investments Ltd

Alan Moses QC and Michael Furness (instructed by the Solicitor of Inland Revenue) for the Crown.

Andrew Park QC and Hugh McKay (instructed by Herbert Smith) for the taxpayer.

The following cases were referred to in the judgment:

Craven (HMIT) v White & Ors ELRTAX[1989] AC 398; [1988] BTC 268 (HL)

Edwards (HMIT) v Bairstow & Anor ELR[1956] AC 14

Fitzwilliam (Countess) & Ors v IR Commrs TAX[1993] BTC 8003

Furniss (HMIT) v Dawson & Ors ELRTAX[1984] AC 474; [1984] BTC 71

IR Commrs v Burmah Oil Co Ltd TAXTAX(1981) 54 TC 200; [1982] BTC 56

Ramsay (WT) Ltd v IR Commrs ELR[1982] AC 300

Corporation tax - Surplus ACT - Acquisition by holding company - Transfer of existing subsidiary to acquired company - Dividend paid by existing subsidiary to acquired company under group dividend election - Dividend paid by acquired company to holding company outside group dividend election - Holding company used franked investment income on acquired company's dividend to offset liability to ACT - Whether acquired company could carry back surplus ACT to earlier years and obtain repayment of tax paid - Whether Ramsay principle precluded claim - Income and Corporation Taxes Act 1988 section 239 subsec-or-para (3)Income and Corporation Taxes Act 1988, s. 239(3).

This was an appeal by the Revenue from a decision of a special commissioner that a scheme intended to bring the taxpayer company within the provisions for repayment of surplus advance corporation tax in theIncome and Corporation Taxes Act 1988 section 239 subsec-or-para (3)Income and Corporation Taxes Act 1988, s. 239(3) did not constitute a "composite transaction" within the principles set out in WT Ramsay Ltd v IR Commrs ELR[1982] AC 300 and Furniss (HMIT) v Dawson & Ors TAX[1984] BTC 71 ("the Ramsay/Furniss principle").

BAT Industries plc ("BAT"), the parent of a group of companies, had received dividends over the years from a subsidiary, BATCo. A large proportion of the profits of BATCo comprised non-UK income. Advance corporation tax ("ACT") became payable either when BATCo paid dividends to BAT (outside the scope of a group election under Income and Corporation Taxes Act 1988 section 247s. 247 of the Income and Corporation Taxes Act 1988) or when BAT paid onward dividends to its public shareholders. Repayments of surplus ACT were not available because the tax paid by BATCo had been reduced or eliminated by double taxation relief claims in respect of the overseas taxes borne on that income, such overseas taxes being credited against liabilities to corporation tax on the overseas source income. It was therefore decided to acquire a company which in the past had paid corporation tax and carry back the ACT on dividends paid out of post-acquisition profits and to set it off against the tax paid by the acquired company.

The following steps were taken to that end: in February 1991, BAT purchased the whole of the share capital of Staines Investments Ltd ("Staines") from Tesco plc at a price determined by a formula based on tax savings made by the BAT group and BAT transferred its 100 per cent holding in BATCo to Staines in exchange for an issue of 84.6 million £1 shares (valued at £31.78 per share) (steps 1 and 2); on 18 and 19 December 1991 respectively, BATCo paid a dividend of £176.6m to Staines under a group income election and Staines paid a dividend of some £176.6m, not under group election to BAT (steps 3 and 4).

There were five events which might have occurred to prevent steps 3 and 4 taking place: the possibility of a fall in available profits in BATCo to enable the necessary dividend to be paid to Staines; the possibility of a change in the tax law nullifying the anticipated tax advantages; a purchase by an outside organisation of BATCo or of BAT; and an acquisition by BATCo which would have rendered its funds not available by way of distribution by way of dividend.

A special commissioner held that the four steps in question were a series of pre-ordained steps effected solely for tax mitigation purposes but that there was no rational basis by which those four steps could be re-characterised as one composite whole in a way which excluded a claim for repayment under Income and Corporation Taxes Act 1988 section 239 subsec-or-para (3)s. 239(3).

On the Revenue's appeal against the second part of the decision, Staines challenged the first part of the decision contending that the special commissioner had erred in law in that he applied the wrong test as to the degree of certainty required at the time when the first step was taken that all four steps would be completed. If he had applied the right test, the only true and reasonable conclusion possible in view of the possible events which might have prevented steps 3 and 4 from taking place was that there was not a sufficient degree of certainty to satisfy the Ramsay/Furniss principles. Moreover, there was in any event such a long interval of time between the two pairs of steps that there had been a genuine interruption of what otherwise might have been a pre-ordained series of transactions.

The Revenue contended that the four steps were to be re-characterised by postulating a quadripartite contract between BAT, BATCo, Staines and Tesco under which Staines accepted a contractual obligation to hand over to BAT the dividend which BATCo was to declare and pay to Staines. That would have the effect of making the payment received by Staines from BATCo not part of Staines' free property available for distribution as a dividend since it would be subject to a contractual obligation to pay it over to BATCo. The Revenue concentrated not on the dividend paid by BATCo to Staines, which could not be said to be other than a dividend, but on the dividend paid by Staines to BAT, which it was said should be treated as made pursuant to the contractual obligation created by the quadripartite contract hypothesised by the Revenue.

Held, allowing Staines' appeal:

1. The court could only reverse the commissioner's decision if the only true and reasonable inference from the primary facts was that there was no pre-ordained series of transactions covering all four steps. The commissioner's conclusion was not an impossible one to be inferred from primary facts and he had applied the correct "double negative test" in deciding that the four steps amounted to a pre-ordained series of transactions: that is whether there was "no practical likelihood" that the later steps would not follow: Craven (HMIT) v White & OrsTAX[1988] BTC 268 per Lord Oliver at p. 298 applied.

The existence of a ten-month interval between steps 1 and 2 and 3 and 4, was relevant to the factual question whether there was a pre-ordained series of transactions. However, a long interval between steps did not inevitably prevent a series of steps from being pre-ordained although there should be no sensible and genuine interruption between the steps. In the present case the existence of an interval between steps 1 and 2 and 3 and 4 was an integral part of the overall scheme in that steps 3 and 4 were to take effect in relation to profits earned after steps 1 and 2 and were thus a predictable consequence of taking those steps. On that basis the lapse of ten months as a matter of law was not fatal to the existence of a pre-ordained series of transactions. It followed that in relation to his conclusion regarding a pre-ordained series of transactions, the commissioner made no error of law: Craven v White at pp. 300-301 per Lord Oliver and at p. 313 per Lord Jauncey explained.

2. Although there were four pre-ordained steps, there was no defensible way of treating the series of transactions as a composite whole. If a company in a middle tier in a corporate structure received a dividend from below which on the group policy should be paid on to the holding company at the top of the structure, the natural thing would be for it to be paid up the line by way of dividend. To invent a contract removing the power of the company in the middle tier to do the normal and natural thing to achieve the desired result, the receipt by BAT of the money, would be not so much to re-characterise as to denature the transaction. The application of the Ramsay/Furniss principles to the normal operation of the three tier structure of BATCo, Staines and BAT, which the Revenue accepted as one of the enduring consequences forming part of the end result of the scheme, went further than any decided case. It would involve re-characterising a perfectly normal and straightforward commercial transaction into a thoroughly abnormal and unusual transaction whose only merit would be that it attracted a tax disadvantage. That would go far beyond disregarding steps only taken for a tax advantage and not for any commercial purpose.


1. His Honour Judge Stephen Oliver QC heard the appeal by Staines Investments Ltd ("Staines") on 15-19 November 1993. The appeal was against the refusal by the inspector of taxes against Staines' claim under the Income and Corporation Taxes Act 1988 section 239 subsec-or-para (3)Income and Corporation Taxes Act 1988, s. 239(3) for repayment of £58,609,778.

2. The question for determination was whether Staines were entitled to "carry back" the advance corporation tax ("ACT") of £58,609,778 on an interim dividend amounting to £176,682,678 (paid on 19 December 1991) and have it set off against corporation tax paid by it:

  1. (i) as to £36,382,473 in the year ended 25 February 1987; and

  2. (ii) as to £22,227,304.50 in the year ended 25 February 1986.

3. I gave a written decision allowing the appeal on 8 December 1993. The decision, revised to take account of certain amendments and additions suggested by both sides, is annexed and forms part of this case.

4. The facts and contentions of the parties are set out in my decision.

5. After the receipt of my decision the inspector, through the Solicitor of Inland...

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