DMWSHNZ Ltd v Revenue & Customs [2013] UKFTT 37 (TC)

FTT-Tax
DMWSHNZ Ltd v Revenue & Customs
[2013] UKFTT 37 (TC) · 2012-12-21
[36]“… two steps … are necessary in the application of any statutory provision: first, to decide, on a purposive construction, exactly what transaction will answer to the statutory description and secondly, to decide whether the transaction in question does so. As Ribeiro PJ said in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46 , para 35: "[T]he driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically."38. We are not concerned with an aggressive tax avoidance scheme in the present appeal, but the principle of purposive construction remains the same. Was section 171A intended to apply to the transaction at step (5) in this case? The starting point is that language is taken to bear its ordinary meaning in the general context of the statute – see R v Environment Secretary ex parte Spath Homes Ltd [2001] 2 AC 349 at 397b . Further, it is clear from numerous authorities going back well before W T Ramsay Ltd v IRC [1982] AC 300 that specific provisions in taxing Acts are to be construed in the context of the scheme of the Act as a whole. We were referred to the decision of Sir John Vinelott in Chevron UK Ltd v IRC [1995] STC 712 in which he refrained from adopting a literal interpretation of the Oil Taxation Act 1983. He quoted the well known passage of Lord Wilberforce in Ramsay at p323: “ A subject is only to be taxed upon clear words, not upon "intendment" or upon the "equity" of an Act. Any taxing Act of Parliament is to be construed in accordance with this principle. What are "clear words" is to be ascertained upon normal principles: these do not confine the courts to literal interpretation. There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded… ”39. In Bibby v Prudential Assurance Co Ltd [2000] STC 459 , Sir Richard Scott V-C as he then was similarly rejected a literal interpretation. In doing so he said at 485a: “ The warning against a literal construction that would permit the use of a taxing provision for a purpose never intended or contemplated by Parliament was directed at taxpayers, or their tax advisers, but must, in my judgment, be heeded also by the Revenue. The assessments in the present case have represented, in my view, an attempt to use s 95 for a purpose never intended or contemplated by Parliament. Such an attempt is no more acceptable from the Revenue than it would be from a taxpayer. ”40. We also have in mind a passage from the judgment of the Privy Council in Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10 where Lord Hoffmann stated at [16]:[16]“ The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means. However, that meaning is not necessarily or always what the authors or parties to the document would have intended. It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed: see Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 , 912-913. It is this objective meaning which is conventionally called the intention of the parties, or the intention of Parliament, or the intention of whatever person or body was or is deemed to have been the author of the instrument . ” 41. Finally in this context we were referred to Billingham v Cooper [2001] EWCA Civ 1041 where Walker LJ as he then was said at [35]:
“ Whatever the difficulties the court has to do its best to make sense of the statute, and that means not only making grammatical sense of the text but also finding a rational scheme in the legislation. That is not to say that the court should start off with preconceptions about what it expects to find, or that it should shrink from saying so in the rare case where a tax statute has “plainly missed fire” (the expression used by Lord Macmillan in IRC v Ayrshire Employers Mutual Assurance Association (1946) 27 TC 331, 347). But as Viscount Simon LC said in Nokes v Doncaster Amalgamated Collieries [1940] AC 10 14, 1022 (which was not a tax case, but has often been cited in tax cases): “... if the choice is between two interpretations, the narrower of which would fail to achieve the manifest purpose of the legislation, we should avoid a construction which would reduce the legislation to futility and should rather accept the bolder construction based on the view that Parliament would legislate only for the purpose of bringing about an effective result.” ” 42. Having set the scene we must address the submissions of the parties. Mr Aaronson submitted that HMRC’s interpretation of section 171A gives the words a meaning that Parliament would never have intended or contemplated. He criticised HMRC’s construction as being hyper-literal and giving a result which makes no sense, excludes normal commercial transactions, such as the redemption of loan notes or shares, and serves no conceivable purpose. Mr Gibbon on the other hand disavowed any literal construction and maintained that HMRC was construing the provision purposively. 43. We were referred by both parties to a number of extra-statutory materials from which they sought to derive the intention of Parliament. These comprised the Budget Notes issued prior to the Finance Bill 2000, extracts from Hansard in relation to a Parliamentary Debate on the Finance Bill 2000 and the Explanatory Notes for Finance Bill 2000. Each referred to what was or was to become clause 100 of the Finance Bill 2000. 44. The short extract from Hansard to which we were taken does not address the issue we have to determine on this appeal. Even if it were admissible pursuant to Pepper v Hart [1993] AC 593 it provides no assistance in determining that issue. Nor in our view do the Budget Notes shed any light on the issue of construction. 45. We are entitled to take into account the Explanatory Note to clause 100 (see Westminster City Council v National Asylum Support Service [2002] UKHL 38 at [4] to [6] ). Neither party placed substantial reliance on the Notes, but both Mr Aaronson and Mr Gibbon referred to them and we set out in particular the background referred to in the Notes: “ 8. There is no group relief provision for capital losses by which a company can surrender capital losses to be set against the chargeable gains of another group member. A form of such relief is available by utilising the rules which allow tax neutral transfers of assets between group members. This is achieved by transferring an asset on a tax neutral basis before its eventual disposal outside the group , so that chargeable gains and allowable losses are brought together within a single company. 9. This has necessitated the actual transfer of ownership of an asset between group companies before the disposal outside the group. This new provision, which emerged from consultation with representative bodies, will allow the effect to be achieved by an election by two group members, without the need for the actual transfer of ownership of the asset. 10. The new provision will reduce compliance costs and make it simpler for groups to bring together gains and losses. Groups will be able to make sales of assets without the preliminary transfer between group companies, and will be able to make elections under the new provision up to two years after the accounting period in which the sale took place. ” (Emphasis added)
46. This background was not particularly controversial, and indeed both parties accepted that in broad terms this context could be gleaned from a consideration of section 171 and section 171A . Paragraph 8 of the Note describes the position prior to 2000, where groups of companies could rely on the terms of section 171 . Paragraphs 9 and 10 describe the new clause which became section 171A . Both parties accepted that it was clear that section 171A was a liberalisation of the position established by section 171 . Where the parties differed was the significance of the terms we have highlighted in the Notes. 47. Mr Aaronson relied on the description of a “ disposal outside the group ”. He submitted that this expression was apt to cover what section 171A was aimed at, namely a disposal where an asset left the group without requiring any corresponding acquisition by a third party. 48. Mr Gibbon relied on the description of “ sales of assets ”. He submitted that this terminology naturally implies a disposal to someone else, rather than the disposal which arises on the satisfaction of a debt. We do not accept that section 171A is intended to be limited to sales of assets and Mr Aaronson referred us to various transactions where there was a disposal but no sale of an asset and which would clearly fall within section 171A. For example the grant of an option. 49. There is a danger that an exercise which involves consideration of competing constructions as to the meaning of words in external material deflects from the primary issue of construing the Act itself. We do not consider that the Explanatory Notes really help in discerning the intention of Parliament in section 171A . They give a helpful context, but we consider both counsel are placing rather too much significance on the words used in the Notes. It is very much a broad summary of the circumstances in which clause 100 came to be included in the Finance Bill 2000. 50. We were also referred to a number of commentaries on section 171A. In particular from Bramwell on Taxation of Companies and Company Reconstructions , Simon’s Direct Tax Service , and Tiley & Collison’s UK Tax Guide . Mr Gibbon had initially relied on Bramwell and Simon’s Direct Tax Service and was met with a rebuttal from Mr Aaronson referring to previous editions of those texts and reference to Tiley & Collison . In the end both parties accepted that none of these texts really help to resolve the point of construction we are dealing with. 51. Mr Aaronson identified a number of situations which were not covered by section 171A but which were brought within the section by way of amendment in the Finance Act 2009. These situations all deal with the position where there is a disposal not involving a company outside the group. In particular: (1) Section 24 TCGA 1992 (disposals where assets are lost or destroyed or become of negligible value). (2) Section 25 TCGA 1992 (disposals where an asset ceases to become a chargeable asset on becoming situated outside the UK) (3) Section 161 TCGA 1992 (disposals where a non-trading asset is appropriated to trading stock) (4) Section 179 TCGA 1992 (disposals where a company ceases to be a member of a capital gains group) (5) Section 185 TCGA 1992 (disposals on a company ceasing to be resident in the UK) (6) Section 199 TCGA 1992 (disposals where an asset ceases to be chargeable by virtue of ceasing to be dedicated to an oil field). 52. Mr Aaronson submitted that these omissions from the original section 171A were “ remedied ” by section 31 Finance Act 2009 . The new section 171A introduced in 2009 provides as follows: “( 1) This section applies where— (a) a chargeable gain or an allowable loss accrues to a company (“company A”) in respect of an asset (or would so accrue but for an election under this section), (b) at the time of accrual, company A and another company (“company B”) are members of the same group, and (c) had company A disposed of the asset to company B immediately before the time of accrual, section 171(1) would have applied. … (3) In this section “the time of accrual” means the time the chargeable gain or allowable loss accrues to company A (or would so accrue but for an election under this section). (4) Companies A and B may make a joint election to transfer the chargeable gain or allowable loss, or such part of it as is specified in the election, from company A to company B. ” 53. The effect of the new section 171A is that rather than having a deemed transfer of the asset between A and B, if a chargeable gain would otherwise accrue and if section 171(1) would have applied to a disposal between A and B, they can jointly elect to transfer the chargeable gain from A to B. 54. There is no dispute between the parties that if the appellant had transferred the Loan Notes to GR3 before redemption then that transfer would have had the benefit of section 171(1) . However Mr Aaronson submitted that this was not one of the gaps in the Finance Act 2000 provision that was plugged by the Finance Act 2009 . The present case was an actual disposal outside the group which was equivalent to a disposal to C. The Finance Act 2009 remedied the position in relation to hypothetical (or deemed) disposals and situations which fell to be treated as a disposal and re-acquisition by the same person. 55. If Mr Gibbon is right in his submissions, he accepts that the Finance Act 2009 would today give relief to the appellant in that it could jointly elect with GR3 to transfer the chargeable gain to GR3. However he cautioned against reliance on later legislation in construing an earlier Act. In that respect he referred us to Oliver LJ in Finch v IRC [1985] 1 Ch 1 at p15 d-g : “ Reliance was placed on the decision of the House of Lords in Kirkness v John Hudson & Co Ltd [1955] AC 696 and, particularly, on the speech of Viscount Simonds in that case, for the proposition that, where earlier legislation is ambiguous, recourse may be had to subsequent legislation as an aid to its construction. Now undoubtedly that case is authority for the proposition, but it is essential for its application that there is first established an ambiguity in the earlier legislation. It is clear from Viscount Simonds's speech, and from that of Lord Reid, that 'ambiguity' in this context does not mean merely that different minds may come to different conclusions as to the meaning (see pp. 711, 713 and 735). If subsequent legislation is to be invoked, the earlier provision must be such that, to use Lord Buckmaster's phrases in Ormond Investment Co. v. Betts [1928] A.C. 143, 154, 156, it is 'open to two perfectly clear and plain constructions' or 'fairly and equally open to divers meanings' (emphasis supplied) … It is, as it seems to me, clear from this that it is not enough to show simply that there are two arguable constructions. One has to go further and show that they are both equally tenable, and that there are no indications in the Act under construction favouring one rather than the other. ” 56. Mr Gibbon suggested that there was no ambiguity in section 171A in the sense described by Oliver LJ. The appellant’s construction was not equally tenable. Mr Aaronson submitted that the description of the necessary ambiguity by Oliver LJ was not good law and it was sufficient if the ambiguity was such that the provision was capable of bearing more than one meaning. He referred to a number of passages from Spath Holme Ltd but we do not see anything in that case which casts doubt on what was said by Oliver LJ. 57. Mr Aaronson submitted that the immediate context of section 171A is section 171 . That is undoubtedly correct. Relief is available pursuant to section 171(1) where there is a disposal of an asset from company A “to” company B. This uses the same language as that found in section 171A(1)(b) . He went on to submit that if the language used in section 171 did not apply to a disposal by way of the satisfaction of a debt there would be no need for the exclusion in section 171(2)(a) set out above because on HMRC’s argument satisfying a debt does not constitute a disposal by one person to another. Mr Aaronson made the same point in relation to section 171(4) dealing with compensation for the loss or destruction of an asset. 58. However, as Mr Gibbon submitted “ arguments from redundancy ” carry little weight. He referred us to Walker v Centaur Clothes Group Ltd [2000] 1WLR 799 at 805 where Lord Hoffmann states: “ My Lords, I seldom think that an argument from redundancy carries great weight, even in a Finance Act. It is not unusual for Parliament to say expressly what the courts would have inferred anyway. ” 59. In that case it was HMRC seeking to argue that if the taxpayer’s construction was correct then another provision would be redundant. Mr Aaronson suggested that the weight of such an argument would depend on the nature of the provision being construed. For example, if the construction being contended for was a more sensible interpretation of the provision being construed, which appears to have been the position in Walker , then the redundancy of another provision carried little weight. Similarly, if the provision said to be redundant was plainly not necessary which he said was not the position in the present case. 60. Whilst we can accept the logic of this suggestion, we do not consider that in the circumstances of the present case the construction contended for by HMRC is such that the redundancy argument does carry much weight. It is equally plausible as Mr Gibbon submits that sections 171(2)(a) and 171(4) were inserted for the avoidance of doubt. The concept of the satisfaction of a debt or the receipt of compensation for loss or damage to an asset being treated as the disposal of an asset to another company is one that might otherwise give rise to at least some doubt in this context. 61. Mr Aaronson submitted that there was no discernible legislative purpose in excluding the right of a company to avail itself of section 171A in relation to the repayment of loan notes. However it can also be argued that there was no discernible legislative purpose in excluding the transactions in the six provisions referred to above. We accept that the exclusion of those transactions is plain on the face of section 171A as originally enacted, and the position in relation to loan notes is less clear cut. However we consider that even if there was no discernible legislative purpose, that is what Parliament chose to do through the clear language it used. 62. Mr Gibbon submitted and we accept that section 171A was not an essential part of the relief available under section 171(1) . Prior to Finance Act 2000 , section 171 operated without any relief in the absence of an actual transfer between members of the same group. It cannot be said that there was anything irrational about the scheme of the TCGA 1992 prior to the introduction of section 171A . When that section was introduced, it was a matter for Parliament to define the limits of the liberalisation which it was introducing. It could only do so by reference to the language used in section 171A . It could have drawn a line in a different place. Indeed the line was subsequently moved with the amendment to section 171A in Finance Act 2009 . There is nothing rational or irrational in Parliament drawing the line where it did. 63. Referring to what Lord Hoffmann said in Belize Telecom Ltd, Mr Aaronson asked what would the words used in section 171A convey to a reasonable reader having all the background knowledge which was available to him. For this purpose he suggested that a reasonable reader would take into account the matters which he had referred us to by way of submission. Having done so a reasonable person would find that the language was apt to cover any disposal outside the group. 64. We take into account the context provided by section 171 and indeed the TCGA 1992 as a whole. We consider that the words used are clear and plainly require the disposal of an asset to C. Those words were chosen deliberately and appear a number of times in section 171A and section 171 . Parliament must be taken to be aware of the distinctions made in the TCGA 1992 between actual disposals, hypothetical (or deemed) disposals and transactions which are “treated as” disposals. Further, Parliament would also have been aware that not all of these types of disposals for the purposes of CGT involve the corresponding acquisition of an asset by another party. In the light of that context it seems to us that section 171A clearly does require a disposal to C. 65. By way of illustration, section 24(1) TCGA 1992 provides that there shall be a disposal of an asset on the occasion of the entire loss, destruction, dissipation or extinction of the asset. The section permits the taxpayer to generate an allowable loss. There is no need for the provision to specify any corresponding acquisition of the asset and it does not do so. 66. Similarly in section 24(2) TCGA 1992 where an asset comes to have negligible value the taxpayer can make a claim to that effect and CGT applies as if the taxpayer had sold and immediately re-acquired the asset. This permits the taxpayer to generate an allowable loss but it is necessary to specify a re-acquisition for the purposes of any future disposal of the asset. 67. These are merely examples of situations where Parliament has specifically dealt with the immediate consequences of a transaction which it has defined to be a disposal. Indeed it is notable that sub-sections (2) and (4) of section 171 deal with two types of transactions in different ways. By sub-section (2) the satisfaction of a debt is excluded from relief. By sub-section (4) it is stated that for the purposes of section 171(1) the transaction is treated as being a disposal to a particular person. This indicates that Parliament had in mind the significance of what immediately follows the disposal, in particular the requirement for an acquisition by another company. 68. In our view section 171A defines the transactions which are to qualify for the relief granted by the section. It does so in terms not just of the disposal of the asset but also in terms of the immediate consequences which must follow if relief is to be available. Namely that the asset must be transferred to and thus acquired by a third party. That is the natural and ordinary meaning of the words used and the context does not require any different meaning. 69. This is not a case such as Inco Europe Ltd v First Choice Distribution [2000] 1 WLR 586 where we are invited to read a statutory provision with the addition of any words so as to give proper effect to the intention of Parliament. We accept Mr Gibbon’s submission that the choice of words in section 171A was clear and deliberate. Decision 70. For the reasons given above we find that NBNZ did not acquire any asset on the disposal of the Loan Notes by the appellant. Leaving aside the point of statutory construction, the appellant did not dispose of an asset to NBNZ and therefore the election purportedly made pursuant to section 171A was not effective. 71. On the construction issue, for the reasons given above we find that section 171A did require the acquisition of an asset by NBNZ and again the election purportedly made pursuant to section 171A was not effective. 72. In all the circumstances we dismiss the appeal. 73. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. JONATHAN CANNAN TRIBUNAL JUDGE RELEASE DATE: 21 December 2012

Cited in 2 later judgments