Commissioners of Inland Revenue v Laird Group Plc
| Jurisdiction | England & Wales |
| Judge | LORD NICHOLLS OF BIRKENHEAD,LORD WALKER OF GESTINGTHORPE,LORD RODGER OF EARLSFERRY,LORD HOFFMANN |
| Judgment Date | 16 October 2003 |
| Neutral Citation | [2003] UKHL 54 |
| Date | 16 October 2003 |
| Court | House of Lords |
[2003] UKHL 54
HOUSE OF LORDS
The Appellate Committee comprised:
Lord Nicholls of Birkenhead
Lord Hoffmann
Lord Millett
Lord Rodger of Earlsferry
Lord Walker of Gestingthorpe
My Lords,
I have had the advantage of reading in draft the speech of my noble and learned friend Lord Millett. For the reasons he gives, with which I agree, I would allow this appeal and make the order he proposes.
LORD HOFFMANN My Lords,
I have had the advantage of reading in draft the speech of my noble and learned friend Lord Millett. For the reasons he has given, I too would allow this appeal.
My Lords,
The question for decision in this appeal is whether the payment of a dividend in respect of shares is "a transaction in securities" or "a transaction relating to securities" within the meaning of section 703 of the Income and Corporation Taxes Act 1988 ("the 1988 Act"). The Tribunal established under section 706 of the 1988 Act ("the Tribunal") and Lightman J held that it is not. The Special Commissioners and the Court of Appeal held that it is.
The facts.
The facts are remarkably simple for a case concerned with tax avoidance. In June 1990 the taxpayer The Laird Group plc ("Laird") acquired the entire share capital of Stanton Rubber and Plastics Ltd ("Stanton"). Six months later Laird declared and paid a dividend of £3,848,000 to its shareholders ("the Laird dividend"). Shortly afterwards Stanton paid an interim dividend of £3,000,000 to Laird ("the Stanton dividend").
The tax consequences.
Companies pay mainstream corporation tax on their profits. In turn their shareholders are generally liable to income tax under Schedule F on dividends and other distributions which they receive in respect of their shares. At all material times the United Kingdom operated a partial imputation system under which shareholders could use part of the corporation tax for which the company was liable to offset their own liability to income tax on dividends and other distributions which they received from the company. In order to ensure that the credit taken by the shareholders represented tax which the company had actually paid, a company resident in the United Kingdom and paying a dividend to its shareholders was required to pay advance corporation tax in respect of the dividend. The company could set off the amount of advance corporation tax which it paid against its liability to mainstream corporation tax on its profits in the current year or past years. It could also carry any unused balance of advance corporation tax forward and set it off against its liability to mainstream corporation tax in future years.
This system penalised companies such as Laird which paid substantial dividends to their shareholders but which earned most of their profits overseas through subsidiaries resident and taxable abroad. They had to pay advance corporation tax in respect of the dividends but were liable to relatively little mainstream corporation tax on their overseas profits because these would already have borne tax abroad. This gave rise to unusable advance corporation tax which fell to be written off against profits.
Stanton had accumulated substantial profits on which mainstream corporation had been paid. On its acquisition by Laird, Laird and Stanton became members of the same group of companies. Stanton could have elected to pay dividends to Laird under a group election. Had it done so, it would not have been required to account to the Revenue for advance corporation tax in respect of the Stanton dividend. Laird, on the other hand, would have had to pay advance corporation tax on the Laird dividend, but would have insufficient mainstream corporation tax against which the payment could be set off.
Stanton therefore did not make a group election. Instead it paid advance corporation tax of £1m on the Stanton dividend and set this sum off against mainstream corporation tax on its profits for the current and past years. Payment of the Stanton dividend thus gave rise to a reduction or repayment of £1m of Stanton's mainstream corporation tax. Laird, for its part, received the Stanton dividend as franked investment income, that is to say a dividend on which advance corporation tax had been paid, and this could be set against Laird's liability to pay advance corporation tax on the Laird dividend. As a result Laird paid £1m less by way of advance corporation tax in respect of the Laird dividend than it would have done if it had not received the Stanton dividend.
The proceedings.
In 1993 the Board of Inland Revenue issued a notice under section 703(3) of the 1988 Act to counteract the tax advantage which Laird had obtained by arranging to receive payment of the Stanton dividend. Section 703 enables the Board to take action to counteract a tax advantage which has been obtained in prescribed circumstances in consequence of a transaction in securities or of the combined effect of two or more such transactions. The taxpayer can repel the Board's attack by showing that the transaction or transactions in question were carried out 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 the obtaining of a tax advantage.
The Board alleged that the payments of the Stanton and Laird dividends were transactions in securities which were not carried out for bona fide commercial reasons or in the course of making or managing investments and had as one of their main objects the obtaining of a tax advantage within the meaning of section 703(1) of the 1988 Act. Following service of the section 703 notice Laird was assessed to advance corporation tax in a sum of £1m.
The Special Commissioners dismissed Laird's appeal against the section 703 notice and upheld the assessment. They held that each of the dividends was a transaction in securities. Laird asked for the case to be reheard by the Tribunal, which held that the declaration and payment of a dividend do not constitute transactions in securities within the meaning of section 703 of the 1988 Act and discharged the assessment. The Revenue appealed by way of case stated to the High Court, where Lightman J upheld the Tribunal's decision and dismissed the Revenue's appeal. The Court of Appeal allowed the Revenue's further appeal and reinstated the assessment. Laird now appeals to your Lordships' House.
The legislation.
The narrow issue arising on the appeal is whether the Stanton dividend (which was the dividend which gave rise to the tax advantage which Laird obtained) was "a transaction in securities" within the meaning of section 703 of the 1988 Act. This section forms part of a group of sections (sections 703 to 710) which were first enacted by section 28 of the Finance Act 1960. These provisions have been amended from time to time in a number of respects which, with one exception, are not material, and were consolidated by the Income and Corporation Taxes Act 1970 and again by the 1988 Act. The critical definition of "transaction in securities" which is now to be found in section 709(2) of the 1988 Act, however, has not changed over the years. For ease of exposition, I shall refer to the predecessor sections by reference to their counterparts in the 1988 Act.
It is not necessary to set out the lengthy and complicated statutory provisions at length. They can be found in the reports of the decisions below. Shortly stated, they enable the Revenue to counteract a tax advantage where
(i) there is a transaction in securities (or two or more such transactions);
(ii) the transaction or transactions have occurred in one or more of the five sets of circumstances mentioned in section 704; and
(iii) in consequence of the transaction or the combined effect of two or more such transactions the taxpayer has obtained or is in a position to obtain a tax advantage.
These are three separate and independent requirements. The Revenue do not suggest that it is sufficient that the taxpayer has obtained a tax advantage in one of the circumstances described in section 704; he must also be shown to have obtained the tax advantage in question in consequence of one or more transactions in securities. This appears plainly from the structure of the section, from the fact that it is a defence for the taxpayer to show that the transaction or transactions were entered into for bona fide commercial reasons even if the circumstances described in section 704 are present, and from the way in which the courts have stated the issues: see, for example, Inland Revenue Commissioners v Joiner [1975] 1 WLR 1701, 1705E per Lord Wilberforce.
It is common ground that conditions (ii) and (iii) above are satisfied. The circumstances described in paragraph A of section 704 occurred because "in connection with the distribution of profits of a company" (Stanton) "the person in question" (Laird) received an abnormal amount by way of dividend and the amount so received was taken into account for the purpose of the application of franked investment income in calculating Laird's liability to pay advanced corporation tax.
It is also common ground (i) that the Stanton dividend was of an abnormal amount; (ii) that Laird gained a tax advantage in consequence of the receipt of the Stanton dividend in that the receipt reduced or discharged its liability to pay advance corporation tax; and (iii) that the payment of the Stanton dividend had as one of its main objects the obtaining of a tax advantage. The remaining requirement, on which issue is joined, is whether the payment of the Stanton dividend constituted a transaction in...
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