Bristol and West Plc v The Commissioners for HM Revenue and Customs: [2014] UKUT 0073 (TCC) [2014] UKUT 0073 (TCC)

UPPER TRIBUNAL
TAX AND CHANCERY CHAMBER
[2014] UKUT 0073 (TCC)Case No FTC/77/2013
Between
Bristol and West PlcAppellantThe Commissioners for HM Revenue and CustomsRespondent
Before
Mr Justice Peter SmithGraham Aaronson QC & James Henderson (instructed by Herbert Smith Freehills LLP) for AppellantsKevin Prosser QC & James Rivett (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for RespondentDate 14 February 2014Category: Tax
[75]At a relatively early point in the hearing we indicated to the parties that while we had not reached a decision, it nevertheless seemed to be strongly arguable that even on a literal, let alone a very slightly strained, interpretation, paragraph 28 did not operate in the way in which it had to operate for the Appellant to succeed on the main point in this Appeal.[76]We entirely accept that so far as sub-paragraphs 28(1) and 28(2) are concerned, those sub-paragraphs do aptly refer to the situation of the Appellant and BIBF in relation to the novation. The Appellant’s difficulty, however, is that it is sub-paragraph 28(3) that governs what must be done when a transaction is effected by the parties covered by the opening two sub-paragraphs. And on the literal meaning of subparagraph 28(3) what must happen is that both the transferor and the transferee must be taxed in the manner provided. Sub-paragraph (3) does not apply disjunctively to the transferor and the transferee. Had it provided that where sub-paragraphs (1) and (2) applied, the transferor was to be treated in a particular way, and the transferee in another way, it is arguable that if one (say the transferor) was capable of being treated in the manner provided for it, whilst the other was not, then the transferor should still be treated as provided. But this is not how the paragraph was worded. It required the two companies to be treated in a clearly matching manner. If we address to the Appellant and BIBF the questions of “Is that how you have presented your respective returns?”, and “Would it even have been possible to present your returns on the basis prescribed for the two companies together?”, the answers would manifestly have been “No” and “No”. It is quite clear to us, without remotely straining the language of paragraph 28 to achieve what was manifestly Parliament’s purpose, that paragraph 28 only operates when the parties do what it directs should be done which is to bring into account “for the two companies” the various debits and credits prescribed by the slightly complex rules and the fictitious notions laid down by paragraph 28(3).[77]We then address the follow-on question of what should be done when a transaction has been effected by the parties identified by subparagraphs 28(1) and (2) but the direction prescribed by subparagraph 28(3) cannot be achieved. The resultant choice is between the following two possibilities. The first is to say that if the operative sub-paragraph cannot be applied and operated, then there is nothing Page 19 of 27 to be done. The provision simply does not operate. The alternative is to strain the language of paragraph 28(3) and contend that even if it cannot operate in the manner that is clearly both required, and implicit (from the later notions in the sub-paragraph), it should still be treated as applicable to the one company even though that is not what is envisaged or directed. Since this is manifestly contrary to the obvious intent of Parliament, the conclusion is obvious to us. Our conclusion therefore is that, far from having to stretch the language of paragraph 28 against Mr. Aaronson’s contentions, and in his view “to breaking point”, such that on appeal our decision would be bound to be held to have been wrong, the reverse is the reality.[78]With Mr. Prosser, we accept that paragraph 28 was badly drafted in that none of this dispute would ever have arisen, had the reference to the two companies both being within the charge to corporation tax been extended to refer to that tax “under this Schedule”. However, even without those words, we conclude that, on a literal interpretation of paragraph 28(3), let alone a purposive construction, the direction was to calculate the tax of the two companies together in a manner that was simply not possible on the facts of the novation in this case. Furthermore it would be contrary to the manifest intention of Parliament for us to strain the language to enable it to be relied on by just one party to the transaction when it was clearly inapplicable to the other.[79]Our decision is that paragraph 28 Schedule 26 did not apply at all to the novation effected on 29th August 2003. It follows that in the period ending 31 March 2004 and later periods, the Appellant will be taxable on the £91 million, subject of course to any deduction for any premium initially paid for the swap (we assumed that none was paid, but we were not concerned to look at detailed calculations) and any other deductible costs. We deal in the following paragraphs with the position that we understood to be the agreed position between the parties as to what proportion of the £91 million properly fell to be taxed in the period ending 31 March 2004.” 106 I agree with that analysis. I cannot see how paragraph 28 can operate unless both companies fall within the regime. It is clearly contemplated that both companies are under consideration. It could not be made more clear in sub paragraph (3) which refers to the credits and debits to be brought in to account in the case of the two companies. It follows from that inexorably that the two companies were supposed to be the subject matter of the disregard. That means that both companies must be within the FA 2002 regime. This would achieve group neutrality in that the transaction would be disregarded. However it does not work when one company is not within the 2002 regime. The final point which leads to the construction favoured by the FTT is sub paragraph (3) (b) “the transferor company and the transferee company shall be deemed …….to be the same company”. Page 20 of 27 107 This requirement is fatal to B&W’s ground of appeal. BIBF cannot be the same company because its accounts are being written up on the basis that its opening figure is £91,000,000; that is the whole purpose of the scheme. If its accounts are opened on the figure which B&W acquired the derivatives for it would then operate in the same way where both companies were under the 2002 FA regime but the purpose of the scheme would fail as the £91,000,000 would not disappear. That provision inevitably leads to the conclusion that both companies must be considered to be operating under the regime. 108 The construction as it appears therefore means that both companies must be operating within the regime. MISTAKES IN THE LEGISLATION 109 The consequence of the construction above means that neutrality either way is not achieved where one company is not within the FA 2002 regime. 110 I cannot believe that the draftsman intended that to happen but that appears to be what has occurred when one looks at the wording. CORRECTION OF ERROR? 111 Both sides pray in aid the ability of the Court to imply provisions or exclude provisions on construction of a statutory clause if to do so makes the clause in accordance with the intended object. 112 Thus if I construe paragraph 28 (3) as presently having a requirement that both transferor and transferee be under the 2002 FA regime B&W argue that I can construe the provision so as to enable it to operate where only one of the companies is so caught. 113 Conversely HMRC argue that if on the present construction I am of the view that prima facie it enables the present arrangement set up by B&W and BIBF to take advantage of the fact that the clause applies although only one of the companies to the transaction is caught in the regime I should impliedly construe paragraph 28 (3) as limiting it to cases where both companies are caught by the regime. 114 My view above however is firmly that 28 (3) requires both companies to be subject to the 2002 Act regime. 115 That undoubtedly appears to go against the purpose of the provisions which both parties contend was to achieve neutrality as regards internal transactions taking place within a group. Obviously that would require the present challenged disposition to be ignored. If it is ignored and BIBF’s books do not ignore the transaction for tax purposes then that secures a fiscal advantage. That is hardly neutrality within the group. Conversely if HMRC’s argument is correct the disposition in favour of BIBF is subject to tax when that too is in conflict with the supposed object of neutrality in respect of dispositions within the group. Page 21 of 27 116 For there to be neutrality in this case BIBF’s books should reflect the position that it is deemed to be the transferor company and would have the price paid by B&W inserted as the base figure for its disposition. Assuming the provisions can be construed so as to include a company which does not have an accounting period within the required definitions on the facts of this case it is impossible ironically to achieve that result. The reason for that is that HMRC despite the dispute in respect of B&W’s tax returns did not open an enquiry into the tax returns of BIBF showing a base acquisition cost of £91,000,000. There is no power to reopen BIBF’s return even if it wished. 117 It is undoubtedly the case that the construction I set out above would have operated unfairly if B&W had entered into the transaction in the belief that it would not be caught. One has less sympathy when the entering into the transaction is to achieve a fiscal advantage; such schemes always carry a risk of them being struck down. However I disregard that for the purpose of this decision as required by the decisions referred to above. Whether the transaction is to achieve a fiscal advantage or not is irrelevant if the transaction falls fairly and squarely within the provisions. I have decided for the reasons I have set out above that it does not. PRINCIPLES OF IMPLICATION 118 The problem is section 83 (3) FA 2002 which clearly defines the requirement for the accounting period as a basis for a company being subject to the regime of FA 2002. There are consequential amendments arising out of the Act to be found in schedule 27 but none of them has any relevance. There are transitional provisions in schedule 28 and as I have already said paragraph 1 deals with a change of accounting period with the view to vary the amount of tax that would otherwise be payable. As I have said above, paragraph 1 is applicable to single companies and not merely to companies operating within a group. Apart from that there is nothing in schedule 28 which assists me either. The argument for variation requires a provision akin to that found in schedule 28 paragraph 1 (3) to be incorporated somehow in schedule 26 so that BIBF’s accounting period is deemed to be within section 83 (3) and treated as if it were a period beginning on or after 1st October 2002. That is of course completely artificial as it is in effect rewriting the statutory provision. APPLICABLE PRINCIPLES 119 Mr Prosser QC referred me to a number of authorities. First he referred me to the observations of Nourse J in IRC v Metrolands [1981] STC 193 at page 208 as follows:- “Those were the only authorities to which I was referred to on the extent to which deeming provisions or the like can be carried. From them I deduce these principles. When considering the extent to which a deeming provision should be applied, the court is entitled and bound to ascertain for what purposes and between what persons the statutory fiction is to be resorted to. It will not always be clear what those purposes are. It the application of the provision would lead to an Page 22 of 27 unjust, anomalous or absurd result, then unless its application would clearly be within the purposes of the fiction, it should not be applied. If, on the other hand, its application would not lead to any such result then, unless that would clearly be outside the purposes of the fiction, it should be applied.” 120 The argument is that there is power to deem provisions to apply to give effect to what the purposes are. In the present case both sides say the purpose was to achieve neutrality as regards internal transactions within a group. I bear very close regard however to the warning observations of Nourse J in the above paragraph. 121 Next I was referred to O’Rourke v Binks [1992] STC 703 (CA) per Scott LJ at pages 707-710 as follows:- “So the literal construction of subsection (4) leads to an increased distribution of £1, producing a reduction in the chargeable gain from £332 to £1. This anomaly merits being described as absurd. The other sections of the 1979 Act which deal with small distributions are sections 21, 83 and 107 to 109. Section 83 (premiums on conversion of securities) is in the same terms mutatis mutandis as section 72. It offers no assistance one way or the other to the problem posed by section 72(4). Section 21 is concerned with capital sums received by way of compensation for damage or loss or under insurance policies or on certain other accounts. The provision corresponding to section 72(4) is, as Mr Bretten accepted, confined to cases where the amount of the capital sum received is small as compared with the value of the underlying asset. Sections 107 and 108 deal with the consideration paid on a transfer of land forming part of a larger holding. The provision corresponding to section 72(4) is contained in section 109(2). Mr Bretten accepted that this provision was limited to cases in which the amount of the consideration was small as compared with the value of the holding before the transfer. A legislative intention that section 72(4), and for that matter section 83(4), would apply to “small” cases only would be consistent with the comparable provisions in sections 21 and 109. A construction of section 72(4) that would treat the provision as applying to all capital distributions would be inconsistent and illogical if the statutory scheme is viewed as a whole. Finally, I must refer to the antecedent legislation. The predecessor of section 72(1), (2) and (3) is to be found in paragraph 3 of the Seventh Schedule to the Finance Act 1965. Paragraph 3(2) is in the same terms as section 72(2). These provisions produced the anomaly to which I Page 23 of 27 have earlier referred. The anomaly was remedied by paragraph 9 of the Tenth Schedule to the Finance Act 1966. Sub-paragraph (1) provides:
“Paragraph 3(2) of Schedule 7 to [the 1965 Act]… shall have effect subject to the provisions of this paragraph”
. Sub-paragraph (2) provided:
“None of those provisions shall apply, if immediately before the part disposal there is no expenditure attributable to the asset under paragraphs (a) and (b) of paragraph 4(1) of Schedule 6 to the Finance Act 1965 (deductions allowable in computing a gain) or if the consideration for the part disposal exceeds that expenditure but, if there is any such expenditure and the recipient so elects,- (a) the amount of the consideration for the part disposal shall be reduced by the amount of that expenditure, and (b) none of that expenditure shall be allowable as a deduction in computing a gain accruing on the occasion of the part disposal or any subsequent occasion”
. So sub-paragraph (2) is clearly the predecessor of section 72(4). The language of sub-paragraph (2) makes it impossible, in my opinion, to contend that the part commencing, “but, if there is any such expenditure and the recipient so elects” constitutes a free-standing provision applicable, not only to “small” distributions to which paragraph 3(2) of Schedule 7 to the 1965 Act might otherwise have applied, but also to distributions of any amount. This is a case in which all the signposts point in the same direction and confirm the first impression that, as I venture to think, any reader would have on reading section 72. The ambiguity produced by the absence of any express limitation of section 72(4) to “small” distributions is, in my judgment, resolved by the aids to construction afforded by the anomalies to which Vinelott J. referred, by the comparable provisions in sections 21 and 109 of the 1979 Act and by the antecedent legislation. In Luke v. Inland Revenue Commissioners [1963] A.C. 557, Lord Reid said at page 577:
“To apply the words literally is to defeat the obvious intention of the legislation and to produce a wholly unreasonable result.”
That, in my judgment, is the case here. Page 24 of 27 In Mangin v. Inland Revenue Commissioner [1971] A.C. 739, Lord Donovan said at page 746:
“Thirdly, the object of the construction of a statute being to ascertain the will of the legislature it may be presumed that neither injustice nor absurdity was intended. If therefore a literal interpretation would produce such a result, and the language admits of an interpretation which would avoid it, then such an interpretation may be adopted. Fourthly, the history of an enactment and the reasons which led to its being passed may be used as an aid to its construction”
. The approach indicated in these passages justifies, in my judgment, implying into section 72(4) the natural limitation as to its scope that would correspond with the obvious intention of the legislature, namely, that the subsection should apply only to cases where the amount of the distribution was, in comparative terms, small. Mr Henderson, junior counsel for the Crown, advanced before the judge below two alternative versions of the words that should be implied into section 72(4). Before us Mr McCall, who has led for the Crown, has contended for only one of those alternatives. The learned judge rejected both alternatives on the ground that, “Although subsection (4) construed as free-standing leads to conclusions which are so anomalous as to justify the description of absurd and which cannot have been present to the minds of the draftsmen or legislature, to give effect to the presumed intention would, in the words of Lord Diplock in Carver v. Duncan 85 Simon's Tax Cases 356 on page 352, involve ‘so great a distortion of the actual words the draftsman chose to use and Parliament to approve as to fall beyond the bounds of what it is permissible to achieve by any process of judicial construction.’ ” I entirely agree with the learned judge's premise, expressed at the start of the passage I have cited, but I do not agree that effect cannot be given to the legislature's presumed intention. I would, for my part, read subsection (4) as though, after the initial word “where” the following limitation were included:
“…in a case in which the amount distributed is small compared with the value of the shares in respect of which it is distributed”
. The addition of these words confines the subsection to the cases to which it was intended by the legislature to be confined. None of the express words of subsection (4) are thereby distorted. Page 25 of 27 At page 13 of his judgment the learned

judge said:

“The case is, I think, one where although the court may be satisfied that the result is not one which the draftsman intended and the legislature approved, effect cannot be given to the apparent intention by any process of interpretation”
. In my judgment, it would be a very rare case in which effect could not be given by a permissible process of interpretation to the apparent intention of the legislature. At all events, in the present case I cannot accept that there is any reason why the limitation to which I have referred should not be implied, thereby giving effect to the presumed, the apparent, intention of the legislature.” 122 Thus Lord Justice Scott concludes where a literal reading of statutory provision produces an absurd result it would be a very rare case in which effect could not be given by permissible process of interpretation to the apparent intention of legislator. He thus implied a limit to construction to give effect to the presumed and apparent intention of the legislator. 123 I was referred to the decision of Inco Europe Ltd & Ors v First Choice Distribution (A Firm) & Ors [2000] 1 WLR 586 (HL). This decision concerned provisions of the Arbitration Act 1996 which appeared to have removed the ability of the Court of Appeal to have jurisdiction to entertain an appeal against the grant or refusal of a stay in favour of arbitration. The House of Lords held that the relevant provision was a “consequential” amendment to substitute the new provisions of the Supreme Court Act 1981 and cannot have intended to remove a long standing right. The key part of the judgment of Lord Nicholls (with whom all the other Lordships agreed) is to be found at page 592 – 593 as follows:- “I am left in no doubt that, for once, the draftsman slipped up. The sole object of paragraph 37(2) in Schedule 3 was to amend section 18(1)(g) by substituting a new paragraph (g) that would serve the same purpose regarding the Act of 1996 as the original paragraph (g) had served regarding the Act of 1979. The language used was not apt to achieve this result. Given that the intended object of paragraph 37(2) is so plain, the paragraph should be read in a manner which gives effect to the parliamentary intention. Thus the new section 18(1)(g), substituted by paragraph 37(2), should be read as confined to decisions of the High Court under sections of Part I which make provision regarding an appeal from such decisions. In other words, 'from any decision of the High Court under that Part' is to be read as meaning 'from any decision of the High Court under a section in that Part which provides for an appeal from such decision'. I freely acknowledge that this interpretation of section 18(1)(g) involves reading words into the paragraph. It has long been Page 26 of 27 established that the role of the courts in construing legislation is not confined to resolving ambiguities in statutory language. The court must be able to correct obvious drafting errors. In suitable cases, in discharging its interpretative function the court will add words, or omit words or substitute words. Some notable instances are given in Professor Sir Rupert Cross' admirable opuscule, Statutory Interpretation, 3rd ed., pp. 93-105. He comments, at page 103:
'In omitting or inserting words the judge is not really engaged in a hypothetical reconstruction of the intentions of the drafter or the legislature, but is simply making as much sense as he can of the text of the statutory provision read in its appropriate context and within the limits of the judicial role.'
This power is confined to plain cases of drafting mistakes. The courts are ever mindful that their constitutional role in this field is interpretative. They must abstain from any course which might have the appearance of judicial legislation. A statute is expressed in language approved and enacted by the legislature. So the courts exercise considerable caution before adding or omitting or substituting words. Before interpreting a statute in this way the court must be abundantly sure of three matters: (1) the intended purpose of the statute or provision in question; (2) that by inadvertence the draftsman and Parliament failed to give effect to that purpose in the provision in question; and (3) the substance of the provision Parliament would have made, although not necessarily the precise words Parliament would have used, had the error in the Bill been noticed. The third of these conditions is of crucial importance. Otherwise any attempt to determine the meaning of the enactment would cross the boundary between construction and legislation: see Lord Diplock in Jones v Wrotham Park Settled Estates [1980] A.C. 74, 105. In the present case these three conditions are fulfilled. Sometimes, even when these conditions are met, the court may find itself inhibited from interpreting the statutory provision in accordance with what it is satisfied was the underlying intention of Parliament. The alteration in language may be too far-reaching. In Western Bank Ltd. v. Schindler [1977] Ch 1, 18, Scarman L.J. observed that the insertion must not be too big, or too much at variance with the language used by the legislature. Or the subject matter may call for a strict interpretation of the statutory language, as in penal legislation. None of these considerations apply in the present case. Here, the court is able to give effect to a construction of the statute which accords with the intention of the legislature.” DISCUSSION 124 I am of the opinion that the draftsman intended to create provisions whereby dispositions within a group were neutral fiscally. Paragraph 28 for the reasons I have set out above achieves a symmetry as contended by HMRC Page 27 of 27 but that is not a requirement. There is nothing to suggest there needs to be “symmetry”. However neutrality cannot be achieved when the transferee is not within the regime. I do not believe for one minute the draftsman intended to create a situation whereby B&W could secure a fiscal advantage by reason of internal disposition. Equally I do not believe the draftsman intended to create a situation whereby an internal disposition would achieve a charge to tax. The problem occurred because I suspect the draftsman never thought of the possibility of companies in the same group having differing accounting periods. 125 However am I in a position to correct that? I do not think so. The wording of section 83 (3) is plain. I do not see that I am satisfied that I can identify the substantive provision as required by condition (3) set out by Lord Nichols. To do so in my view would cross the boundary between construction and legislation as set out in the observations of Lord Diplock in Jones v. Wrotham Park Settled Estates [1980] A.C. 74. As I have said to achieve fiscal neutrality requires a negation of B&W’s scheme. Yet there is no power in this case to give effect to the intention of creating fiscal neutrality as BIBF is not before me, its accounts cannot be revisited and it is not a party to the present enquiry. Accordingly I do not see how I can find a way to deal with this gap which does not involve me acting as a legislator which is a step too far. CONCLUSION 126 Accordingly I agree with the FTT as to the construction of paragraph 28 and decline to imply any other provisions or to vary the provisions to give effect to the scheme proposed by B&W. 127 I have been greatly assisted by the cogent and compelling submissions both oral and written, of both Counsel in this case. Mr Justice Peter Smith Release Date 14 February 2014

Cited in 1 later judgment