The Bampton Property Group Ltd and Others v King (an Officer Appointed by HM Revenue and Customs) and another
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE BLAIR |
| Judgment Date | 24 February 2012 |
| Neutral Citation | [2012] EWHC 361 (Admin) |
| Docket Number | Case No: CO/7959/2010 |
| Court | Queen's Bench Division (Administrative Court) |
| Date | 24 February 2012 |
[2012] EWHC 361 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Blair
Case No: CO/7959/2010
and
Mr Philip Coppel QC, Mr Keith Gordon and Ms Ximena Montes Manzano (instructed by Winston & Strawn LLP) for the Claimants
Mr David Yates (instructed by HMRC Solicitor's Office) for the Defendant
Hearing dates: 8 and 9 February 2012
This is an application for judicial review of the decision of the defendant, an officer of Her Majesty's Revenue & Customs, refusing to allow the claimants' late claims to group tax relief. There are four grounds of challenge based on a lack of sufficient reasons in the decision letter, legitimate expectation, criticisms of the decision making methodology in the form of irrelevant considerations, and irrationality.
The facts
Background
The facts are set out in witness statements of Mr David Yu, who is an accountant with Cohen Arnold, for the claimants, and Mr Paul Jefferies and Mr Alan King, who are or were officers (Mr King is now retired) with Her Majesty's Revenue & Customs ("HMRC"). Mr King was the officer responsible for the challenged decision, and is the defendant in this case. Further evidence was filed on behalf of the defendant prior to the hearing, which I shall mention again in due course.
The claimants are each wholly-owned subsidiaries of Daejan Holdings plc (which is one of the interested parties in this case). Daejan Holdings plc is a company incorporated in England and Wales and listed on the London Stock Exchange. Together with approximately sixty other active subsidiaries, it constitutes a substantial and well known property group, engaging in commercial and residential property investment in the UK (and also the USA). For tax purposes, the claimants are members of a group of companies within the meaning of s. 413(3)(a) Income and Corporation Taxes Act 1988. Daejan Holdings plc is the "holding company" within the meaning of s. 413(3)(b).
The relevant tax rules are not in dispute in this application. A company is taxed as an independent entity (even if it is part of a larger group). At the material time, provision for group relief was made under ss 402–413 ICTA 1988 (the provisions have since been rewritten in ss 97–188 Corporation Tax Act 2010). Group relief enables companies in either a group or consortium relationship (as defined) to transfer trading losses between companies. A company which wishes to use the losses to offset against its profits for the same period may claim the losses, whilst the company which suffered the losses, rather than carrying them forward against future profits, may surrender them. Group relief may be claimed within a consortium, in which case it is apportioned according to levels of ownership. The rule is that group relief can only be claimed and surrendered between companies for periods in which they were members of the same group.
In about 2004, the Daejan group was introduced by KPMG to a tax saving scheme which has been called a "Lloyd's loss buying scheme". It consisted in the purchase of the losses of Lloyd's underwriters. The background (as Mr Yu explains) is that Lloyd's of London have (or had) an accounting procedure whereby losses from an underwriting year can be shown over a period of up to three years for accounting purposes. As explained in the defendant's skeleton argument, there were special rules contained in s. 107(4) Finance Act 2000 for companies carrying on general insurance business. These allowed an insurer which had occurred a commercial loss in year one, to shift this to year two for tax purposes. It was possible, therefore to acquire a shareholding in an insurer which had suffered a commercial loss, on the basis that the loss would be deemed to have been suffered for tax purposes after acquisition, so as to utilise group relief for that loss. This provision was in force between 1 January 2000 and 19 July 2007. It was ultimately accepted by HMRC that it could not challenge the effectiveness of such schemes for tax purposes.
However, although the principle is straightforward, its application in particular instances was not necessarily straightforward. Explanations of the general operation of the group relief regime ("consortium relief" being a variant of group relief) so far as relevant to this claim are contained in the witness statements of Mr Yu and Mr King. Where a company surrendering losses is not a member of the consortium at the beginning of the relevant accounting period of the claiming company, the overlapping period must be established, and an apportionment carried out, similarly where there are differences between the accounting periods of the various companies in the group and those of the companies whose shares were being acquired. The surrendered losses have to be applied against the profits of a company with sufficient profits to absorb them, otherwise there is a risk of some of the losses becoming, as it is described, "stranded". The final step therefore is to compare the losses available for surrender with the profits of the claimant company for the relevant overlapping period. There are statutory time limits for the claiming of group relief. This is the background against which the present claim arises.
The acquisition of the shareholdings
On 2 September 2004, Daejan Holdings plc acquired a 74.99% shareholding in Arch Holdings Ltd. Because the remaining share capital was held by a single other company, Arch Holdings Ltd thereby became a "consortium company" (within the meaning of s. 406(1)(b) ICTA), and Daejan Holdings plc thereby became the "link company" (within the meaning of s. 406(1)(a) ICTA), being both a member of that consortium and a member of the Daejan Group. On 14 October 2004, Arch Holdings Ltd acquired a 100% shareholding in a trading company called Arch (2004) Ltd. Arch (2004) Ltd realised trading losses of £41,696,201 and £24,463,738 for the years ended 31 December 2004 and 2005 respectively. These transactions made available a group relief claim under the provisions of s. 402(3)(b) ICTA ("a consortium claim") by Daejan Holdings plc in relation to losses surrendered by Arch (2004) Limited. Similarly, as the claimants were all members of the Daejan Group, although not members of the consortium, they could make a consortium claim and offset losses incurred by Arch (2004) Ltd in a relevant period against their profits.
The next transaction was as follows. On 17 January 2005, Daejan Holdings plc acquired a 16.7% shareholding in Triteam Ltd which on the same day acquired 100% shareholdings in trading companies called Crowe Corporate Capital Ltd and Crowe Dedicated Ltd, which are the other interested parties in this case. Both of these companies suffered £30,000,000 trading losses for the year ended 31 December 2005, and £30,000,000 and £20,000,000 respectively for the year ended 31 December 2006. Again, the effect of this transaction was to enable Daejan Holdings plc and the claimants to make a claim in respect of losses surrendered by these two companies.
At the hearing, there was a dispute between the parties as to whether these transactions should properly be described as "tax avoidance". Mr Philip Coppel QC, counsel for the claimants, submitted that the term "tax avoidance" was inappropriate because there is nothing in the applicable statute that labels as "tax avoidance" claims for group relief such as those made by the claimants. Until 2007, statute permitted these sorts of consortium claim for group relief. In 2007 Parliament, which had previously allowed the claims, changed the legislation so as to make the relief thereafter unavailable. Both when it was available and when it became unavailable, Parliament was not concerned with the intention of the taxpayer entering into the arrangement (the normal statutory touchstone of "avoidance"). The provisions, it was submitted, were intention-blind.
Mr David Yates, counsel for the defendant, on the other hand, submitted that Daejan Holdings plc had no commercial interest in acquiring the various shareholdings other than to obtain group relief and to consequently avoid paying significant amounts of corporation tax. Such arrangements constituted avoidance in the view of HMRC.
In my view, any doubt on this point is dispelled by the fact that Daejan Holdings plc itself completed supplementary pages of its 2005 return expressly entitled "Disclosure of tax avoidance schemes" under scheme number 166393940, which was the present scheme. (This was done pursuant to arrangements introduced under ss 306–319 Finance Act 2004 which required tax avoidance schemes to be disclosed to HMRC.) That said, I agree with Mr Coppel that what the claimants were doing was perfectly lawful, and that whatever their intention in entering into the transactions may have been, they were entitled to claim group relief—provided of course they were in compliance with the various statutory provisions including time limits. As already indicated, HMRC itself ultimately accepted this view, albeit the loophole was closed in 2007. Equally, it was up to the...
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