R v Commissioners of Inland Revenue, ex parte Newfields Developments Ltd
| Jurisdiction | England & Wales |
| Judge | LORD BINGHAM OF CORNHILL,LORD STEYN,LORD HOFFMANN,LORD COOKE OF THORNDON,LORD SCOTT OF FOSCOTE |
| Judgment Date | 23 May 2001 |
| Neutral Citation | [2001] UKHL 27 |
| Date | 23 May 2001 |
| Court | House of Lords |
[2001] UKHL 27
HOUSE OF LORDS
Lord Bingham of Cornhill
Lord Steyn
Lord Hoffmann
Lord Cooke of Thorndon
Lord Scott of Foscote
My Lords,
For reasons given by my noble and learned friends, Lord Hoffmann and Lord Scott of Foscote, which I have had the benefit of reading in draft, I would allow this appeal and restore the order of the judge.
My Lords,
I have had the advantage of reading in draft the speeches of my noble and learned friends, Lord Hoffmann and Lord Scott of Foscote. For the reasons which they have given I would also allow the appeal.
My Lords,
The Finance Act 1972 introduced a relief for small companies in the form of a reduced rate of corporation tax. The full relief can be claimed if the company's profits in the relevant accounting year do not exceed one specified amount and partial relief can be claimed if they do not exceed another specified amount. The conditions for obtaining the relief and the specified amounts are now contained in section 13 of the Income and Corporation Taxes Act 1988 as amended. The reduced rate is 20%, as against the full rate of 30%.
The relief would be open to obvious abuse if a business could be divided among two or more companies so that each earned profits below the specified amount. Section 13(3) therefore provides that if a company has one or more associated companies, the relevant specified amount shall be divided by the number of associated companies plus one. Thus a company with one associated company can claim the relief in full or in part only if its profits in the relevant accounting period do not exceed half the relevant specified amount.
The question in the present appeal is whether the taxpayer company (Newfields Developments Ltd, which I shall call "Newfields") has an associated company or not. The revenue contend that it has an associated company as defined in the Act, namely a company called Lawrek Properties Ltd ("Lawrek"). I shall in due course describe what the revenue say is the relevant relationship between the two companies but, in order to explain why the revenue say that their relationship is relevant, I must first go into the details of the rather complicated definition of an associated company.
Associated companies are defined in section 13(4) as companies of which one controls or is controlled by the other or which are both under the control of the same person or persons. Crucial to this definition is therefore the concept of control, which the subsection says "shall be construed in accordance with section 416".
The primary purpose of section 416 is to define the expressions "associated company" and "control" for the purposes of Part XI of the Act, which deals with close companies. The term "close company" appeared for the first time in the Finance Act 1965, which introduced the corporation tax, but had its roots in earlier concepts: the company "under the control of not more than five persons" in respect of which income could be apportioned to its members for surtax purposes under section 21 of the Finance Act 1922 and the "company whereof the directors have a controlling interest therein" which was limited in the deductions it could make in respect of directors' salaries for the purposes of profits tax by para 11 of Schedule 4 to the Finance Act 1937. The close company is defined by section 414(1), subject to exceptions, as "one which is under the control of five or fewer participators, or of participators who are directors". Part XI provides that in certain respects close companies are to be subject to a special fiscal regime. Thus the definition of control in section 416, which originally appeared in para 3 of Schedule 18 to the Finance Act 1965, was for a purpose quite different from its use in section 13(4), which made its first appearance in the Finance Act 1972.
The definition of a close company made it necessary to provide definitions of "participator" and "control". Participator is defined by section 417(1):
"For the purposes of this Part, a 'participator' is, in relation to any company, a person having a share or interest in the capital or income of the company, and, without prejudice to the generality of the preceding words, includes—
(a) any person who possesses, or is entitled to acquire, share capital or voting rights in the company;
(b) any loan creditor of the company;
(c) any person who possesses, or is entitled to acquire, a right to receive or participate in distributions of the company (construing 'distributions' without regard to section 418) or any amounts payable by the company (in cash or in kind) to loan creditors by way of premium on redemption; and
(d) any person who is entitled to secure that income or assets (whether present or future) of the company will be applied directly or indirectly for his benefit.
In this subsection references to being entitled to do anything apply where a person is presently entitled to do it at a future date, or will at a future date be entitled to do it."
Control is defined in section 416, of which the relevant subsections are (2) to (6):
"(2) For the purposes of this Part, a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, direct or indirect control over the company's affairs, and in particular, but without prejudice to the generality of the preceding words, if he possesses or is entitled to acquire—
(a) the greater part of the share capital or issued share capital of the company or of the voting power in the company; or
(b) such part of the issued share capital of the company as would, if the whole of the income of the company were in fact distributed among the participators (without regard to any rights which he or any other person has as a loan creditor), entitle him to receive the greater part of the amount so distributed; or
(c) such rights as would, in the event of the winding-up of the company or in any other circumstances, entitle him to receive the greater part of the assets of the company which would then be available for distribution among the participators.
(3) Where two or more persons together satisfy any of the conditions of subsection (2) above, they shall be taken to have control of the company.
(4) For the purposes of subsection (2) above a person shall be treated as entitled to acquire anything which he is entitled to acquire at a future date, or will at a future date be entitled to acquire.
(5) For the purposes of subsections (2) and (3) above, there shall be attributed to any person any rights or powers of a nominee for him, that is to say, any rights or powers which another person possesses on his behalf or may be required to exercise on his direction or behalf.
(6) For the purposes of subsections (2) and (3) above, there may also be attributed to any person all the rights and powers of any company of which he has, or he and associates of his have, control or any two or more such companies, or of any associate of his or of any two or more associates of his, including those attributed to a company or associate under subsection (5) above, but not those attributed to an associate under this subsection; and such attributions shall be made under this subsection as will result in the company being treated as under the control of five or fewer participators if it can be so treated."
It will be seen that although this definition starts in subsection (2) with a concept of control which reflects its meaning in ordinary speech ("a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, direct or indirect control over the company's affairs"), that fairly simple notion is enormously widened by subsequent subsections. Subsection (4) deems the person in question to already have interests which have not yet vested and subsection (5) attributes to him the rights or powers of his nominees. Subsection (6) goes much further in providing that for the purposes of deciding whether a person falls within the definition in (2) (or the definition of joint control in (3)) any person may have attributed to him the rights or powers of any associate or of any company which he or his associates or both have control. The full breadth of this extension can be seen from the definition of "associate" in section 417(3):
"For the purposes of this Part 'associate' means, in relation to a participator—
(a) any relative or partner of the participator;
(b) the trustee or trustees of any settlement in relation to which the participator is, or any relative of his (living or dead) is or was, a settlor ('settlement' and 'settlor' having here the same meaning as in section 681(4)); and
(c) where the participator is interested in any shares or obligations of the company which are subject to any trust, or are part of the estate of a deceased person—
(i) the trustee or trustees of the settlement concerned or, as the case may be, the personal representatives of the deceased; and
(ii) if the participator is a company, any other company interested in those shares or obligations;
and has a corresponding meaning in relation to a person other than a participator."
"Relative" is defined in section 417(4) to mean "husband or wife, parent or remoter forebear, child or remoter issue, or "brother or sister". The effect of these cumulative definitions is that for the purpose of deciding whether a person "shall be taken to have control of a company" under section 416(2), it may be necessary to attribute to him the rights and powers of persons over whom he may in real life have little or no power of control. Plainly the intention of the legislature was to...
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