J&A Young (Leicester) Ltd & Ors v Revenue & Customs [2015] UKFTT 638 (TC)

FTT-Tax
J&A Young (Leicester) Ltd & Ors v Revenue & Customs
[2015] UKFTT 638 (TC) · 2015-09-29
[74]As regards the proposition that the words "in connection with" usually have a very wide meaning, there are many authorities to this effect, e.g. in the non-tax context of exclusive jurisdiction clauses, see per Peter Gibson LJ [33] in DSM Anti-Infectives BV & Anor v Smithkline Beecham Plc & Anor [2004] EWCA Civ 1199 . 75. In the context of tax legislation, the prepositional phrase “in connection with” was considered by the Court of Appeal in HMRC v Barclays Bank plc [2007] EWCA Civ 442 . Barclays had made payments to pensioners and surviving spouses to compensate for withdrawal of free assistance in preparing tax returns and executor and trustee services. In determining whether the payments were taxable as 'relevant benefits' the Court of Appeal decided that the payments were made 'in connection with past service' for the purposes of sections 596A(1), 612(1) Income and Corporation Taxes Act 1988 and that Parliament intended the charge to tax to extend to an indirect as well as to a direct “connection”. Arden LJ recognised the breadth of the phrase "in connection with", saying [30]:[30]"Parliament has used a broad expression, namely the expression "in connection with". " 76. David Richards J, whose decision in the High Court was affirmed by the Court of Appeal in Barclays , ( [2007] STC 747) also drew attention to the breadth of the expression "in connection with":
"69. I accept that the term 'in connection with' does not pose a causal test. Contrast the terms 'by reason of' [employment] and 'therefrom' [that is, 'from' an employment] which were the terms in issue in Wilcock ( Inspector of Taxes ) v Eve [1995] STC 18 . These latter terms clearly postulate a causal test. They ask whether the employment relationship caused, that is, gave rise to, the receipts under scrutiny. 70. The phrase 'in connection with' is much wider. This phrase does not pose a causal test. So authorities such as Wilcock v Eve are of no assistance. Rather the phrase 'in connection with' simply asks whether there is a link ('connection') between past services and the benefits referred to in s 611(1). The test is one of fact and degree. However, it is not limitless. The quality and strength of the nexus which must be satisfied to establish the requisite 'connection' between two items depends on the context of the statutory provision which is being construed. Here s 612(1) which defines 'relevant benefits' is defining 'benefits' which have a sufficient connection to 'past services' of employees to be characterised as effectively deferred emoluments (using the language of Sch E)." 77. On appeal, Arden LJ also considered the wide meaning of the words “in connection with” and the particular need to consider their meaning in their statutory context, as follows: “[18] The primary question in this case is the proper meaning of the words 'in connection with past service' in s 612(1) of ICTA. The expression 'in connection with' could describe a range of links. In Coventry and Solihull Waste Disposal Co Ltd v Russell (Valuation Officer) [1999] 1 WLR 2093 at 2103, Lord Hope held that in this situation the court must look closely at the surrounding words and the context of the legislative scheme: 'The majority in the Court of Appeal held that it was a sufficient answer to the appellant's argument to construe the words “in connection with” as meaning “having to do with”. This explanation of the meaning of the phrase was given by McFarlane J in [ Re Nanaimo Community Hotel Ltd [1944] 4 DLR 638]. It was adopted by Somervell L.J. in [ Johnson v Johnson [1952] P 47 at [50–51]. It may be that in some contexts the substitution of the words “having to do with” will solve the entire problem which is created by the use of the words “in connection with.” But I am not, with respect, satisfied that it does so in this case, and Mr. Holgate did not rely on this solution to the difficulty. As he said, the phrase is a protean one which tends to draw its meaning from the words which surround it. In this case it is the surrounding words, when taken together with the words used in the Amending Order of 1991 and its wider context, which provide the best guide to a sensible solution of the problem which has been created by the ambiguity.' [19] Accordingly, the other parts of the definition of 'relevant benefits' and the surrounding provisions of the legislative scheme, will inform the court as to the extent of the link required by any particular provision. Thus the court must examine the function or purpose of the definition of 'relevant benefits'. Here, the purpose of the definition is to identify the chargeable payments under a retirement benefits scheme. At the very least, Parliament is unlikely to have intended to limit connections to direct connections. That would have left the possibility that taxpayers could easily circumvent the charging provisions. Furthermore, it must have been foreseen that, over the life of the scheme, changes might be made to benefits. The changes would not simply involve a straight exchange or substitution of one benefit for another, but, on occasion, the loss of a benefit and the rendering of some monetary recompense. The charging provisions could only fairly apply if they applied to the giving of the new benefits, or recompense, as much as to the giving of the benefit originally provided by the scheme. It is also significant that Parliament did not limit itself to payments in consideration for services. [20] Thus I conclude that a connection may be indirect for the purpose of the definition of relevant benefits.” 78. Arden LJ continued at [30]: "
There is no doubt that the court should, when interpreting a statutory provision, examine not just that provision but also the context in which it appears in the legislation in question. It may then be able to form a view as to the purpose of the provision in question and that knowledge may inform its thinking as to the choice of meaning to be offered where choices are available. The context of the provision in question, however, will not of itself justify the court in limiting the provision to that context, and thus reducing its apparent scope, unless there is some indication in the legislation that this is what Parliament intended. The effect of Mr Peacock's submission, is that the court should read down the definition of 'relevant benefits' to conform with the concept of a conventional 'retirement benefits scheme'. In my judgment, there is nothing in the legislation to justify this course. Indeed, the indications are the other way. Parliament has used a broad expression, namely the expression 'in connection with'. Having cast the net widely, Parliament has drawn it in particularly by imposing a limit that there should be a connection with service. The limitations prescribed by Parliament are the limitations that the court should apply. The context of occupational pension schemes cannot be used to narrow the phrase 'in connection with past service' yet further." 79. Finally, we should mention the judgment of the Court of Appeal in Ideal Life Assurance Company Ltd vHJ Hirschfield and A H Hirschfield [1943] K.B. 442 where du Parcq LJ, delivering the judgment of the Court, stated (at page 446) that the phrase "in connection with" was not a term of art and had to be construed in accordance with its ordinary meaning. 80. In this case the statutory wording of Condition B (paragraph 10 (3) (b) Schedule 29A FA 2004) provides that "residential property" is not "taxable property" if it is used in connection with business premises held as an investment of the pension scheme. The only question in dispute in relation to this provision is whether the Property was used in connection with the Yard. 81. The wording of Condition B requires us to look at the use of the residential property: that use must be "in connection with", in this case, the Yard. 82. It is common ground that the Property constituted "residential property" within the meaning of paragraph 7 (1) (a) because the Property was used "as a dwelling." There was no other use to which the Property was put during the periods material to these appeals. 83. The question, therefore, is whether the use of the Property as a dwelling was connected with the Yard. 84. Ms Balmer submitted that it was not necessary for any particular Polish employee to live at the Property. Indeed, some employees continue to work at the Yard after they had moved out of the Property and some other employees worked at the Yard but did not live at the Property. Secondly, Ms Balmer submitted that occupation of the Property had to be for the better performance of the employees’ duties. We do not consider "necessity" to be the correct test nor do we consider that there is a requirement that the occupation should be for the better performance of employees’ duties. There is no justification in the statutory language for imposing these further restrictions. 85. Ms Balmer also argued that the use of the Property must be connected with the use of the Yard. We do not agree. If this is what Parliament intended then Parliament could have said so, but it did not. It is only the use of the Property that is relevant and that use must be connected with business premises (the Yard) not its use. Ms Balmer's suggested interpretation requires us to read in words which Parliament did not use and we see no justification for doing so. 86. Ms Balmer further submitted that Condition B was an exception to an anti-avoidance provision and therefore should be construed narrowly. She also asserted that Condition B was intended to extend the exception in Condition A to self-employed individuals. These were people who needed to occupy particular premises by lease in order to carry on their business. 87. The difficulty with this interpretation is that the wording of the statute appears to provide no justification for it. As for the proposition that Condition B was intended to benefit self-employed persons, there is no restriction contained in Condition B which would exclude use of residential property by employees. Certainly, we were provided with no support for this interpretation in the legislative history of Condition B (although we will discuss the statutory forerunners of paragraph 10 (3) (b) Schedule 29A FA 2004 below). We therefore reject this submission with its implicit limitation on the meaning of the statutory language. 88. Ms Balmer gave the example of a pension fund buying a car park which was used to enable employees to park and walk to their office ( the office being business premises also owned by the pension fund). If the Appellants' submissions were accepted then the car park would be "used in connection with" the office. Parliament cannot have intended this result. Again, we do not agree with the submission. Paragraph 10 Schedule 29A is limited in its application to residential property. It would have no application whatsoever to a car park. 89. We should also note that the wording of Condition B in Schedule 29 A represented a relaxation from the previous version of the legislation from which Condition B was evidently derived. Paragraph 13 of the Personal Pension Schemes (Restriction on Discretion to Approve) (Permitted Investments) Regulations 2001 (SI 2001/117) ("the 2001 Regs") provided so far as material:
"A freehold or leasehold interest in any residential property which is – … (B) a property which is, or is to be, occupied by a person who is neither a member of the self-invested personal pension scheme nor connected with a member of the scheme in connection with the occupation by that person of business premises held as an investment by the scheme ." (Emphasis added)
90. It will be seen that Regulation 13 required that the person occupying the residential property also had to occupy the business premises held as an investment by the scheme. Paragraph 10 (3) (b) Schedule 29A FA 2004 represents of relaxation of this requirement with the result that the business premises do not have to be occupied by the same person who occupied the residential property. It seems to us that this is consistent with the intention of Parliament to permit a looser form of "connection" between the use of the residential property and the business premises held by the scheme. 91. Is the fact that the Property was acquired for the purpose of providing accommodation for Polish employees working in the Yard and was used solely by such employees for this purpose sufficient to establish the nexus which Condition B requires? In our view it is sufficient. 92. By using the words "used in connection with", Parliament intended to give a broad meaning to the exception contained in Condition B. The authorities demonstrate that "in connection with" is a wide expression. If Parliament had wanted to give a restrictive meaning to Condition B it would not have used a phrase which is well-recognised as being one of great breadth: indeed it is inconceivable that it would have done so. It could, for example, have required the connection between the residential property and the business premises be a direct one or one which conferred a direct benefit upon the business premises or required that the occupation of the residential property was required or necessary for the better enjoyment of the business premises. Parliament did not do so – it did not draw the net tightly, to use Arden LJ’s expression – and it is not for this Tribunal to read into legislation restrictions which Parliament refrained from imposing. 93. What, then, can we glean from the legislation or its legislative history that would enable us to understand Parliament's purpose when it framed Condition B? 94. As we have already noted, Condition B is a relieving provision. The statutory context is that residential property is taxable property unless the property in question falls within certain exemptions, of which Condition B is one. The obvious intent of Parliament was therefore to identify the types of residential property that would escape a charge to tax. That said, we cannot ignore the fact that, in framing an exemption to the limitation in respect of residential property, Parliament chose to use the very wide expression "used in connection with". 95. Mr Vallat referred us to a Technical Note produced by HMRC on 5 December 2005. HMRC's Technical Notes, of course, reflect HMRC's views and intentions. These may or may not necessarily be the same as those of Parliament. In this instance, however, the Technical Note of 5 December 2005 was expressly referred to in the Explanatory Notes to Clause 159 Schedule 21 Finance (No. 2) Bill 2006 i.e. the proposed legislation which became, by amending the Finance Act 2006, Schedule 29A FA 2004. In the Explanatory Notes [3] , at paragraph 293, there is a "Background Note" which states as follows:
"The Government announced this measure in the 2005 Pre-Budget Report on 5 December. HMRC published a Technical Note giving details of the proposed changes on that date." 96. We can therefore assume, by virtue of this cross-reference, that Parliament had in mind the contents of the 5 December 2005 Technical Note. The Technical Note stated as follows in relation to residential property: "
Residential Property and Other Assets From A Day, the Government will remove the tax advantages for investing in residential property or certain other assets such as fine wines, classic cars and art & antiques from registered pension schemes which are self-directed. This is to prevent people benefiting from tax relief in relation to contributions made into self-directed pension schemes for the purpose of funding purchases of holiday or second homes and other prohibited assets for their or their family’s personal use. Background The new pensions tax regime, in Chapter 4 of the Finance Act 2004, takes effect from A-Day and provides a single investment regime for all registered pension schemes. As part of this single set of investment rules registered pension schemes were given the right to invest in residential property and other tangible moveable assets. This rule extended to self-directed pension schemes which are, under the current rules prohibited from investing in certain assets. Details of the current rules are set out in regulations at SI 1991/1614 and 2001/117." (Emphasis added) 97. We also observe that, in addition, the Technical Note indicated the Government's intention to apply restrictions not only to direct investment in residential property but also to indirect investment in residential property. The purpose was to ensure that the restrictions on direct investment in residential property could not be side-stepped by investing indirectly through an investment vehicle. The Technical Note continued:
"This type of indirect investment vehicle will allow genuine commercial investment by a self-directed pension scheme without the risk of abuse of the generous tax advantages by scheme members being able to enjoy personal or non-commercial use of the assets held in the investment vehicle . There will also be rules to prevent the use of such vehicles as a means to facilitate investment in prohibited assets with continue scope for personal use of those assets." 98. The rules on indirect investment were enacted in paragraph 16 et seq of Schedule 29 A. 99. As will be seen, the Technical Note indicates an intention to restrict the investment residential property (e.g. holiday homes and second homes) by a pension scheme in circumstances where the members of the scheme or their families (i.e. those enjoying the benefits of tax relief) would derive personal benefit from the property or the property would be used for non-commercial purposes. The restriction on indirect investment is intended to achieve a similar objective. 100. The Property in this case was not used by the members of the Fund in such a way that they (or persons connected with them) derived personal benefit from its occupation. The only direct financial benefit was the rent paid by the Polish employees and any capital appreciation in the value of the Property, which would be benefits to be expected from holding any property as an investment. 101. The drafting of paragraph 10(3) Schedule 29A FA 2004 is consistent with this objective. Paragraph 10(3)(a) prohibits occupation by members of the pension scheme and by persons connected with such members. Paragraph 10(3)(b) then imposes an additional requirement that the use of the residential property must be connected with business premises held by the pension scheme. In context, therefore, it seems that Parliament was intending to exclude from beneficial tax treatment residential property which, broadly, the members or their families occupied or properties which had no commercial connection to other scheme assets. This is at least consistent with the statutory purpose referred to in the Technical Note which was itself referred to in the Explanatory Notes to the relevant Finance Bill. We put it no higher than that because the reference to Technical Note of December 2005 was indirect and the Technical Note was simply illustrating the type of avoidance which was being counter-acted. 102. Accordingly, we conclude that Parliament, by using the broad expression "used in connection with" in Condition B, was not intending to give a restrictive interpretation of type contended for by HMRC in these appeals. We consider that the use of the Property to provide accommodation for Polish employees working in the Yard is a sufficient connection for the purposes of paragraph 10 (3) (b). The Property was purchased for this purpose. The Property was used for this purpose, and for no other purpose, and was used only by such employees. There was no element of personal use or benefit to members of the Fund or persons connected with them. Finally, there was no artificiality about or manipulation involved in these arrangements. In our view, this establishes a sufficiently direct nexus (“connection”) between the use of the Property and the Yard. We therefore consider that Condition B was satisfied. Conclusion 103. We have decided that Condition B was satisfied and that this appeal should therefore be allowed. 104. Finally, we would like to express our gratitude for the careful and insightful submissions made by Ms Balmer and Mr Vallat, which have been of great assistance to the Tribunal. 105. 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. GUY BRANNAN TRIBUNAL JUDGE RELEASE DATE: 07 DECEMBER 2015 [1] There was some confusion concerning the date of purchase of the Property. Initially, the evidence of Mr Young was that the Property had been purchased in January 2007. It was, however, recognised in the course of the hearing that the January date related to the date of registration of the purchase at the Land Registry and the October 2006 date referred to above was accepted by both parties as the actual date on which the Property was purchased by the Fund. [2] s 3(1)(a) OTA 1983 referred to "an asset… which, at the end of the relevant claim period is being or is expected to be used in connection with the field."
This had to be construed in accordance with s 12 (2) OTA 1975 which provided that the reference in s 3(1)(a) was a reference to its use in connection with that field for one or more of the purposes mentioned in s 3(1) OTA 1975. [3] As to the propriety of having recourse to Explanatory Notes as an aid to interpretation, see: Westminster City Council v National Asylum Support Service [2002] UKHL 38 where Lord Steyn said at [5]:
“Insofar as the Explanatory Notes cast light on the objective setting or contextual scene of the statute, and the mischief at which it is aimed, such materials are therefore always admissible aids to construction.”

Cited in 2 later judgments