Kellogg Brown & Root Holdings (UK) Ltd v HM Revenue and Customs

This is an appeal brought by a taxpayer against a decision of Sir Andrew Morritt C, upholding a decision of the Special Commissioner, Dr John Avery Jones CBE. The appeal raises two issues of construction; the first centres on the meaning of the word “group” in section 286(5)(b) of the Taxation of Chargeable Gains Act 1992 (“the 1992 Act”), and the second concerns the ambit of section 416(2) of the Income and Corporation Taxes Act 1988 (“the 1988 Act”). By a respondent’s notice Her Majesty’s Commissioners of Revenue and Customs (“HMRC”) raise a further issue which principally turns on the ambit of section 28 of the 1992 Act.

The Special Commissioner had dismissed an appeal against an amendment made by HMRC to the appellant’s tax return, disallowing a claim to deduct a capital loss of £14,867,445 against chargeable gains in its accounting period ended 31 December 2000. He held that the capital loss was not available to be so deducted on the basis that it was a loss between connected persons falling within section 18(3) of the 1992 Act, which provides that a loss arising on a disposal between connected persons can only be deducted from chargeable gains arising on other disposals between the same connected persons. For similar, if not identical, reasons, the Chancellor agreed.

The appellant, Kellogg Brown & Root Holdings (UK) Ltd, formerly known as Halliburton Holdings Ltd (“HHL”), is a United Kingdom incorporated and tax resident company. HHL was a directly wholly-owned subsidiary of Halliburton Holdings Inc (“HHI”), which and was itself a wholly-owned subsidiary of Halliburton Company (“Halliburton”), a United States-based multinational company publicly listed on the New York Stock Exchange carrying on engineering and other operations worldwide. HHL had two insurance subsidiaries, Highlands Insurance Company (UK) Limited (“HICUK”) and Highlands Underwriting Agents Limited (“HUAL”).

Halliburton had a number of wholly owned subsidiaries apart from HHI. Only one of those is relevant for present purposes, namely Highlands Insurance Group Inc (“HIG”). During 1995, Halliburton decided to divest itself of its global insurance division by floating off HIG, which would thus become the ultimate parent company of all the insurance companies then in the Halliburton group. In the UK, the intention was that the shares in the HICUK and HUAL would be transferred to a newly incorporated UK company called Highlands Holdings (UK) Limited (“HHUKL”), which was formed as a subsidiary of HIG, the company which was to be the new independent US parent company of the insurance division.

The floating off of HIG was governed by a “Distribution Agreement” dated 10 October 1995. Pursuant to that agreement, at 8.30 am (Houston time) on 23 January 1996, Halliburton’s shares in HIG were distributed to the shareholders of Halliburton as at 4 January 1996, which was the record date for the distribution. A little later on 23 January 1996, at 8.45 am (Houston time), pursuant to a “Disposal Agreement” dated 18 January 1996, HHL made a disposal of the entire share capital of its two insurance subsidiaries, HICUK and HUAL, to HHUKL. Under the terms of the Disposal Agreement, it was specifically provided that the obligation to complete the disposal of HICUK and HUAL was “conditional on ... the Distribution [of the shares in HIG] pursuant to the Distribution Agreement”. The capital loss that was claimed, which HMRC have disallowed, arose on HHL’s disposal to HHUKL of the share capital in HICUK and HUAL.

The following table, provided by counsel for HHL, helpfully illustrates the position:

Halliburton’s shares were widely held and traded daily. On 31 December 1995, it had approximately 16,400 shareholders of record, and only one of those shareholders, who owned 5.95 per cent, had more than 5 per cent of the shares. The Special Commissioner found that on 23 January 1996 the shareholders of Halliburton Company and of HIG were not identical (there appears to have been a difference of about 16 per cent, presumably reflecting transactions in Halliburton shares effected between 4 January and 23 January 1996). However, unsurprisingly in the circumstances I have described, he also concluded that it would be possible to identify a collection of shareholders who owned the greater part of the share capital of both companies.

As its name indicates, the 1992 Act is concerned with the computation of, and assessment of liability for tax on, capital gains. The cross-appeal raises issues as to the time at which transactions occur, or are deemed to occur. This requires one to consider the effect of section 28 of the 1992 Act (“section 28”), which is entitled “Time of disposal and acquisition where asset disposed of under contract”, and provides as follows:

“(1)

Subject to section 22(2), and subsection (2) below, where an asset is disposed of and acquired under a contract the time at which the disposal and acquisition is made is the time the contract is made (and not, if different, the time at which the asset is conveyed or transferred).

(2)

If the contract is conditional (and in particular if it is conditional on the exercise of an option) the time at which the disposal and acquisition is made is the time when the condition is satisfied.”

In general, a taxpayer can set off against his liability for tax on capital gains any capital loss which he has suffered. However, as is of central importance on this appeal, this right is cut down by section 18 of the 1992 Act (“section 18”), which is concerned with “Transactions between connected persons”, and is in the following terms:

“(1)

This section shall apply where a person acquires an asset and the person making the disposal is connected with him.

(2)

Without prejudice to the generality of section 17(1) the person acquiring the asset and the person making the disposal shall be treated as parties to a transaction otherwise than by way of a bargain made at arm's length.

(3)

Subject to subsection (4) below, if on the disposal a loss accrues to the person making the disposal, it shall not be deductible except from a chargeable gain accruing to him on some other disposal of an asset to the person acquiring the asset mentioned in subsection (1) above, being a disposal made at a time when they are connected persons.”

The reference to “connected persons” at the end of section 18(3) takes one to section 286 of the 1992 Act (“section 286”), which is headed “Connected persons: interpretation”, and, so far as relevant, provides as follows:

“(1)

Any question whether a person is connected with another shall for the purposes of this Act be determined in accordance with the following subsections of this section (any provision that one person is connected with another being taken to mean that they are connected with one another). ....

(5)

A company is connected with another company-

(a)

if the same person has control of both, or a person has control of one and persons connected with him, or he and persons connected with him, have control of the other, or

(b)

if a group of 2 or more persons has control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person with whom he is connected.

(6)

A company is connected with another person, if that person has control of it or if that person and persons connected with him together have control of it.

(7)

Any two or more persons acting together to secure or exercise control of a company shall be treated in relation to that company as connected with one another and with any person acting on the directions of any of them to secure or exercise control of the company.

(8)

In this section "relative" means brother, sister, ancestor or lineal descendant.”

The reference to “control” in section 286 of the 1992 Act is expanded in section 288(1) of that Act (“section 288(1)”), which states that: “unless the context otherwise requires … ‘control’ shall be construed in accordance with section 416 of the [1988] Act”. Section 416 of the 1988 Act (“section 416”) is one of the provisions in Part XI of that Act which is concerned with “close companies”, that is, companies which are controlled by a few individuals who would be able, in the absence of those provisions, to accumulate income in such a company without having to pay personal (as opposed to corporation) tax on it. In very general terms, a company cannot be “close”, if, under section 414, it is not controlled by fewer than six people, or, under section 415, if at least 35% of its shares are quoted.

Section 416 is headed “Meaning of ‘associated company’ and ‘control’”, and is in these terms, so far as relevant:

“ ...(2) For the purposes of this Part, a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, direct or indirect control over the company's affairs, and in particular, but without prejudice to the generality of the preceding words, if he possesses or is entitled to acquire -

(a)

the greater part of the share capital or issued share capital of the company or of the voting power in the company; or

(b)

such part of the issued share capital of the company as would, if the whole of the income of the company were in fact distributed among the participators (without regard to any rights which he or any other person has as a loan creditor), entitle him to receive the greater part of the amount so distributed; or

(c)

such rights as would, in the event of the winding-up of the company or in any other circumstances, entitle him to receive the greater part of the assets of the company which would then be available for distribution among the participators.

(3)

Where two or more persons together satisfy any of the conditions of subsection (2) above, they shall be taken to have control of the company.

(4)

For the purposes of subsection (2) above a person shall be treated as entitled to acquire anything which he is entitled to acquire at a future date, or will at a future date be entitled to acquire.

(5)

For the purposes of subsections (2) and (3) above, there shall be attributed to any person any rights or powers of a nominee for him, that is to say, any rights or powers which another person possesses on his behalf or may be required to exercise on his direction or behalf.

(6)

For the purposes of subsections (2) and (3) above, there may also be attributed to any person all the rights and powers of any company of which he has, or he and associates of his have, control or any two or more such companies, or of any associate of his or of any two or more associates of his, including those attributed to a company or associate under subsection (5) above, but not those attributed to an associate under this subsection; and such attributions shall be made under this subsection as will result in the company being treated as under the control of five or fewer participators if it can be so treated . “

The term “associate” in section 416 is defined in subsection (3) of section 417 in relation to a participator, as being, in summary terms, (a) any relative of his, “relative” being limited by section 417(4) to direct ancestor, direct descendant, or sibling, or (b) any trustee of a settlement with which he or a relative of his is a settlor, or (c) any trustee of a deceased’s estate in which the participator has an interest.

Application of section 28 would appear, at least at first sight, to result in the distribution of the shares in HIG being treated for the purposes of that Act as having taken place on 16 October 1995. This is because the Disposal Agreement was executed on that day, and appears to have been unconditional. Accordingly, at least on the face of it, subsection (1), rather than subsection (2), of section 28 applies. On closer analysis, this point may be open to argument, because, as discussed below, the directors of Halliburton were at any time entitled, under the terms of the Disposal Agreement, to refuse to give effect to it. However, that is not a point which requires to be determined in order to resolve the issue at stake on this appeal.

Much more importantly, because completion of the Disposal Agreement was conditional on the prior completion of the Distribution Agreement, it would appear, again at least on the face of it, that subsection (2) of section 28 applied to it. On that basis, the disposal of the shares by HHL in HICUK and HUAL should be treated for the purposes of the 1992 Act as having occurred after, indeed immediately after, the company to whom they were sold, HHUKL, had ceased being a wholly owned, albeit indirect, subsidiary of Halliburton, the company which is and was at all times the owner, through its wholly owned subsidiary, HHI, of HHL.

By their respondent’s notice, however, HMRC argue that this analysis is wrong, and that, in order to give effect to the evident purpose of section 18, either the disposal should, despite the provisions of section 28(2), be treated as occurring on the date of the Disposal Agreement, 18 January 1996, or that one is not required by section 18 to consider the existence of the “connection” as at the date of the disposal, but one should consider it at the date of the contract which gave rise to the disposal, 18 January 1996. If either of these arguments is right, then it is clear that section 18(3) would apply as the two parties to the disposal were, as at 18 January 1996, members of the same group on any view. Alternatively, HMRC argue that, even if section 28(2) applies, on a proper analysis of the contractual documentation, the Disposal Agreement became unconditional before HIG ceased to be a wholly owned subsidiary of Halliburton, in which case, again, HMRC’s reliance on section 18(3) would be unassailable.

If, as the Special Commissioner and the Chancellor concluded, HMRC’s arguments as just summarised are wrong, then it is necessary to consider whether, as they also concluded, HMRC were correct in contending that section 18(3) nonetheless still applies to the Disposal, even though it was effected at a time when HHL was not a direct subsidiary of Halliburton, and even though HHL (via HHI) and HHUKL were subsidiaries of different quoted companies, namely Halliburton and HIG respectively.

In that connection, the essential finding of fact made by the Special Commissioner was that, as at 23 January 1996, when the Disposal took place, there was a sufficient degree of identity between the shareholders in the two publicly quoted companies, Halliburton and HIG, to be able to say that, if they got together, the same shareholders could control the two companies – i.e. that over 50 per cent of the shares of each of those two companies were in the hands of the same people. On the basis of that finding, the Special Commissioner held that section 18(3) applied to the Disposal, and the Chancellor agreed.

On its appeal, HHL raises two reasons why section 18(3) does not apply. The first reason it is convenient to consider is that, assuming that, as at 23 January 1996, the same “group of 2 or more persons ha[d] control” of the two ultimate holding companies, Halliburton and HIG, section 416, properly interpreted, does not extend that conclusion to the parties to the Disposal, HHL and HHUKL. The second reason is that the mere fact that there was such an identity of shareholders in Halliburton and HIG does not mean that those shareholders amounted to a “group” within the meaning of section 286(5)(b) .

On their cross-appeal, as explained in paragraph 16 above, HMRC raise two arguments based on statutory construction, involving the interrelationship of section 18 and section 28, and a third argument based on the contractual provisions of the Distribution Agreement and the Disposal Agreement (“the Agreements”). I shall deal with those arguments in turn.

HMRC’s first contention is that the Disposal should not be treated as having taken place on 23 January 1996. In the light of the clear and general words of section 28(1) and (2), which seem to me to be plainly intended to apply throughout the Act, save where section 22(2) applies, I find this a very difficult contention to accept. There is no doubt but that the performance of the Disposal Agreement was genuinely dependent on the Distribution having taken place pursuant to the Distribution Agreement. In other words, the Disposal Agreement was genuinely “conditional” on the Distribution of the shares in HIG pursuant to the Distribution Agreement. In those circumstances, section 28(2) clearly applies, and the right date is 23 January 1996. Further, choosing 18 January 1996 as the date of the Disposal, as HMRC’s case suggests, flies in the face of the fact that it is the date which would apply if section 28(1) was in point, and section 28(1) is expressly stated to be “[s]ubject to ... subsection (2)”. It cannot be right to ignore the clear and general wording of a provision such as section 28(2) simply because it may appear to produce what at least HMRC suggest is a slightly surprising result on a rather unusual set of facts.

HMRC’s alternative argument on statutory construction seems to me to be a little more attractive. Thus, while the disposal giving rise to the chargeable gain in section 18(3) is specifically referred to as taking place “at a time when [the parties to the transaction] are connected persons”, there is no such express linking of the time of connection and the time of the transaction in relation to the disposal giving rise to the loss which is sought to be set off against that gain.

Nonetheless, it appears to me, particularly in the light of the use of the verb in the present tense, “is”, in section 18(1), that it is plain that the question of the connection must be considered at the time of disposal, which, as just mentioned, is dictated by section 28. The use of the present tense “acquires” in relation to the transaction, and the use of the present tense “is” in relation to the connection, in the very brief and clear section 18(1) really foreclose any argument that one can take different dates for the two things. The point is reinforced by the connection being with “the person making the disposal” which is also redolent of the present tense. Further, if one could take a different date for assessing the connection, how is one to choose a date? HMRC suggests that one should choose a date for the connection which best accords with the purpose of section 18. That would introduce subjectivity and unpredictability, not to mention a risk of circularity of reasoning, into a taxing statute, which seems to me to be thoroughly inappropriate.

Furthermore, I think that there is a good reason why, in relation to the connection at the time of the disposal giving rise to the gain, the draftsman in section 18(3) expressly refers to that disposal “being a disposal made at a time when they are connected persons”. The purpose of those words is to spell out that, in relation to that disposal, one assesses the connection at the time of that disposal, and not at the time of the disposal referred to in section 18(1). Without those words, there could be a real argument as to which date one took for assessing the connection in relation to the disposal giving rise to the gain. There is no such need for similar express words in section 18(1).

Finally, there is HMRC’s argument that, on the true construction of the Agreements, the Disposal Agreement became unconditional before the shares in HIG were distributed. I do not see how that could be right. The Disposal Agreement was stated in terms to be conditional on the shares in HIG actually being distributed. In addition, Mr Gardiner QC for HHL primarily contended that the Distribution Agreement did not, according to clause 4.02 thereof, create a binding obligation on Halliburton to effect the distribution of the shares of HIG, so that there could be no question of the Disposal Agreement becoming unconditional until the actual distribution of the HIG shares had been effected at 8.30 am (Houston time) on 23 January 1996. I agree. In any event, even if the Distribution Agreement had become specifically enforceable at some point before then, it would not, as I currently see it, mean that the Disposal Agreement became unconditional at that point. The latter agreement, according to its terms, only became unconditional on the actual distribution, and, as the parties to the two Agreements were different, the fact that the Distribution Agreement had become enforceable by the parties would have been irrelevant.

Accordingly, in agreement with the Chancellor and the Special Commissioner, I consider that, for the purposes of section 18, the disposal of the shares in HICUK and HUAL pursuant to the Disposal Agreement was effected immediately after the distribution of the shares in HIG pursuant to the Distribution Agreement. That means that it is necessary to consider the arguments raised by HHL on its appeal.

Assuming that, after the distribution of the shares in HIG, Halliburton and HIG could be said to be “connected” by virtue of section 286(5)(b), which is the final issue which has to be considered, it is said on the appeal that this does not mean that HHL, the company disposing of the shares in HICUK and HUAL under the Disposal Agreement, and HHUKL, the company acquiring those shares under the Disposal Agreement, are “connected”. That issue must be determined by reference to the provisions of section 416.

The Special Commissioner decided that the combined effect of subsections (3) and (6) of section 416 meant that HHL and HHUKL were “connected”, if, as one is assuming at this stage, their ultimate holding companies, Halliburton and HIG, were “connected”.

On behalf of HHL, Mr Gardiner attacks this conclusion on two grounds. First, he says that the reference in section 416(3) to “two or more persons together” means that there has to be some sort of agreement or other arrangement between those persons before it can be said that they fall within its ambit. I do not accept that argument. First, such a construction does not accord with the natural meaning of section 416(3). Secondly, such a construction would conflict the purpose of Part XI of the 1988 Act, as it would be only too easy for two or more individuals to avoid its provisions by establishing that, however close their personal relationship, they exercised any shareholder rights independently. Thirdly, for the same reason, the question whether a company was close could lead to a long enquiry whose outcome would be unpredictable. Fourthly, as Mr Baldry, for HMRC, argues, HHL’s more limited meaning is difficult to reconcile with the fact that “control” in section 416(2) is defined as extending to a person “able to exercise” control. Fifthly, there is no difficulty giving section 416(3) this meaning, given that the limit to the number of persons who can control a close company is five.

HHL contends that the word “together” has no purpose if section 416(3) applies where “the two or more persons” act independently. That may well be right, but the mere fact that a word is unnecessary under a particular interpretation is a very weak reason for rejecting that interpretation, if, as here, the word could be seen as performing an emphatic function. In any event, it could be said that, without the word, it would be unclear whether the subsection applied where one individual satisfied one of the three conditions in subsection (2), and another individual satisfied another of those conditions.

HHL are, however, in my view on stronger ground in the argument that the Commissioner was wrong to conclude that section 416(6) could be relied on by HMRC. In essence, the issue comes down to whether the word “person” in that subsection can, as the Special Commissioner held and as HMRC contend, be read as extending to “persons”. At first blush, as Mr Baldry contends, the answer should be that it does, as the singular normally includes the plural – see section 6 of the Interpretation Act 1978. However, there appears to me to be considerable force in the point that section 416(6) is concerned with each separate person who falls, or is claimed to fall, within section 416(2) or (3). The notion that subsections (4), (5) and (6) are all directed to the position and rights of an individual person appears to me to be consistent with the language of those subsections, when read together with the two preceding subsections, and also to be consistent with their purpose. However, for reasons I will explain in paragraphs 33 and 34 below, it is unnecessary to resolve that issue, and I think it would be better to leave it open for determination on facts which do require it to be resolved.

The Chancellor decided that section 416 applied for two separate reasons. The first was the same reason as that of the Commissioner, the correctness of which I have left open. The second reason was that it was unnecessary to go beyond subsection (3), on the basis that, if as I have concluded is right, subsection (3) applies in a case such as this, then Halliburton and HIG had, respectively, “indirect control” of HHL and HHUKL and therefore subsection (2) was satisfied without the need to invoke subsection (6).

In my opinion, that latter reason was correct. As a matter of ordinary language, the shareholders of company A “indirect[ly] control” company B, at least in the absence of special circumstances (e.g. an unusual voting structure) if all (indeed if a majority) of the shares of company B are owned by company A. Indeed, the concept of “control” in section 416 has been held to mean “control at the level of general meetings of the company” – Steele v. EVC International NV [1996] STC 785, 794j per Morritt LJ. As to “indirect” control, it is hard to see why, in the example I have just given, the shareholders of company A do not indirectly control company B. The view that the reference to indirect control in section 416(2) should be construed widely, or at least should not be construed narrowly, is supported by the words “without prejudice to the generality of the foregoing” in the same subsection.

Mr Gardiner argues that this is wrong in the light of the fact that it is impliedly excluded by section 416(6), if (as I have left open) that subsection does not apply to a case such as this. In my view, that is not right. As Lord Hoffmann said in R v IRC ex p Newfields Developments Ltd [2001] 1 WLR 1111, paragraph 10, the “fairly simple notion” of control in section 416(2) “is enormously widened by subsequent subsections”. To the same effect, Lord Scott of Foscote (who gave the only other reasoned speech) said at [2001] 1 WLR 1111, paragraph 41, that the opening words of section 416(2) (including the reference to “indirect control”) “prescribe a test of actual control” and that section 416 goes on “in the remaining part of subsection (2) and in subsections (4), (5) and (6) to describe circumstances in which, whether or not a person has actual control, the person ‘shall be taken to have control’.” It seems to me that those observations confirm the approach taken by the Chancellor, and which I would adopt, namely to give the opening part of section 416(2) its ordinary meaning, and certainly not to give it an artificially narrow meaning because of the following subsections. This approach to section 416 confirms my view that the reference to “indirect control”, and any other expression in subsection (2), should be given its natural meaning in the context of that subsection, and should not be given a narrow meaning because of subsections (4) to (6)

Accordingly, HHL’s argument that section 286(5)(b) does not apply is the crucial question and it is to that question which I now turn.

The Chancellor, in agreement with the Special Commissioner, held that the word “group” in section 286(b) should be given its “ordinary meaning” which “is satisfied by a common relation without any requirement for a common purpose”, to quote from paragraph 36 of his judgment. As the Chancellor explained in the same paragraph of his judgment, this was essentially because there was no reason to depart from the ordinary meaning, and because the purpose of the provision was “to identify whether that collection or group has control ... [and] control is to be construed in accordance with section 416 [which] requires the group to be ‘able to exercise ... control’.”

While accepting that this was a linguistically defensible conclusion, Mr Gardiner contends that the word “group” can have a variety of meanings depending on its context, and that consideration of the consequences of the construction favoured by the Special Commissioner and the Chancellor demonstrate that that construction cannot be right. In particular, he says that, in the context of section 286(5)(b), a “group” cannot extend to a collection of thousands of disparate shareholders in a publicly quoted company. Otherwise, particularly as many large institutions routinely hold shares in FTSE 100 companies, it could transpire that many apparently independent large companies, even multinationals, will turn out to be “connected” for the purpose of section 286(5)(b), and hence for the purposes of section 18. This would produce wholly unfair and plainly unintended consequences for such companies. It could also prove to be very difficult to determine whether such companies were connected on a certain date. Accordingly, while accepting that the word “group” could extend to a disparate group of thousands of shareholders as a matter of pure language, he argues that it should not be so construed here.

I have considerable sympathy with Mr Gardiner’s contention on this point. It does seem unlikely that the legislature could have intended two independent companies, both of which are quoted and all (or the great majority) of whose shares can be traded on the London (or any other) Stock Exchange, to be at risk of falling within the ambit of section 286(5)(b). It would mean that there would be difficulties in identifying whether two such companies were connected: there would often be thousands, even tens of thousands, of shareholders, many of whom could change from day to day, and many of whom may hold their shares on trust for others. If a company wished to check before it enters into a transaction, or indeed if HMRC wished to investigate after a transaction, there would seem to be no power to compel disclosure from a shareholder unless the shareholding was more than 5 per cent. Even if most quoted companies are not connected if this wide definition is adopted, it would be difficult to tell when two companies, such as Halliburton and HIG, which have been connected, actually cease to be connected. Quite apart from this, if such quoted companies were connected, the capital gains tax consequences would be rather capricious, and hard to justify.

I had wondered whether HHL’s case was assisted by the fact that section 286(5)(b) referred to “a group of 2 or more persons” having control, on the basis that the words I have emphasised appear to add nothing on HMRC’s case, and can be contrasted with section 416(3), which refers to “two or more persons” having control. In other words, I wondered whether the reference to a group in section 286 should be given a more specific meaning than HMRC suggest, because otherwise it would be surplusage, and because of the contrast with section 416, which must have been in the mind of the drafter of section 286, as the section 416 definition is imported into section 286 through section 288.

However, on closer analysis, it seems to me that the explanation for the introduction of the words “a group of” before “2 or more persons” was attributable to drafting requirements. Some such collective noun was necessary both because section 286(5)(b) refers to two collections of shareholders, and because of the need to cater for the state of affairs in the last part (“or could be regarded as consisting ....”). If anything, therefore, this point rather assists HMRC’s case, as it serves to explain why, on their construction, there is a reference to a “group” in section 286(5)(b). Indeed, the reference to “a group” in section 286(5)(b) may explain why the word “together”, which is found in section 416(3) and is discussed in paragraph 29 above, and is also found in section 286(6) and (7), is missing from section 286(5)(b). Where the drafter refers to more than one person having control, he uses “together”, rather than “group of”, but where the drafting requires a collective noun, he uses “group of”, but then does not need “together”, so he omits it (a point rather weakened by the absence of “group” and “together” in section 286(5)(a)).

The problem which HHL’s argument faces is the meaning to be given to the word “group” in section 286(5)(b). If, as HMRC argue and the Special Commissioner and the Chancellor held, it means “collection”, it is a simple and clear concept, and its meaning accords with one of the natural meanings of the word “group”, although it does seem to have at least the potential for consequences which are surprising and inconvenient. Once one seeks to depart from that meaning, and searches for an alternative which does not have the surprising consequences that “collection” could have, it seems to me that one runs into difficulties.

Mr Gardiner suggests that to be a group for the purpose of section 286(5)(b) a collection of people must have “a commonality which allows it to act as a group on the grounds of some common relation or purpose”. He also says that, the shareholders in Halliburton and in HIG were, in neither case, a “group” for this purpose, as there was no suggestion that they were acting in concert or collaboratively: they had different views about the company, different investment aspirations, different financial objectives, and, save to a small extent or in unusual circumstances, would not know of each other as shareholders, or be in any way in communication with each other about the company.

The first problem with such a definition is that it is rather imprecise, and could lead to uncertainty and manipulation – the same sort of problem as I mentioned when discussing HHL’s argument on the meaning of “together” in section 416(3) in paragraph 29 above. The second problem is that HHL’s argument plays somewhat fast and loose with its own definition: as Mr Baldry points out, there is a “common relation” between the shareholders of a company by virtue of their all being such shareholders. Accordingly, one has to restrict “the common relation or purpose” to a more specific activity or relationship.

Thirdly, there is also force in the point that HHL’s definition sits rather uneasily with the fact that, in section 286(5)(b), the group is described as one which “has control” of a company, and a person is in “control” of a company, by virtue of section 288(1) and section 416(2), not merely if he “exercises control”, but also if he “is able to exercise ... control”, over the company. The purpose of section 416 is clearly to extend the concept of control to a collection of persons who would be capable of exercising control if they got together into Mr Gardiner’s concept of a group, but have not in fact done so. In other words, the provisions of section 416(2), imported into section 286(5)(b) seem rather to support the notion that a disparate collection of shareholders are envisaged as being in “control” of a company. However, the point is not that compelling. If the meaning of “group” is the more limited one for which HHL contends, then it is true that the latter aspect of the section 416(2) definition will rarely, if ever, come into play. But it is scarcely surprising if one small part of a complex definition provision imported from another statute has no part to play when it comes to be applied in a different statutory context. The position would not be entirely different from that arrived at by the House of Lords in the Newfields case [2001] 1 WLR 1111.

As Longmore LJ observed during the argument, the problem identified by Mr Gardiner in the construction favoured below, and supported by HMRC, arises from the fact that the drafter of sections 286 and 288 of the 1992 Act, which appear to be concerned with any company, irrespective of the number of persons who might be able to control it, has chosen to take a definition of “control” from a provision in a different statute, section 416 of the 1988 Act, which can only apply where control is vested in no more than five persons. The impracticality and unfairness which are relied on, if the decisions below as to the meaning of “group” in section 286(5)(b) are correct, cannot be said to come into play, at any rate to anything like the same extent, if the section 416 definition is limited to finding whether control is vested in five or fewer persons.

With some regret, and in agreement with the Special Commissioner and the Chancellor, I have come to the conclusion that HHL’s case on this point should be rejected. The natural meaning of the word “group” in the context of section 286(5)(b), whether read on its own or read together with section 416, is as the tribunals below decided. Conceptual difficulties and impracticalities would arise if one were to give the word the rather imprecise meaning for which Mr Gardiner argues. The explanation for the possible problems which may arise on the natural construction is the arguably inappropriate application of a definition created in one statute for a limited purpose to a provision in a different statute which has a much wider ambit, and there is a limit as to how far the courts can go in correcting that sort of oversight.

The problems which Mr Gardiner identifies may or may not exist in practice, and, even if they do, they may not have existed in the 1960s, when, we were told, these provisions were first introduced, and when the shareholdings in large publicly quoted companies may have been very differently held from how they are now. In any event, no such problems seem to have arisen until this case, and the facts of this case are very unusual. If HMRC seek to raise the point in relation to two companies which are, and long have been, independent, then it will be very much up to them to prove that section 286(5)(b) is satisfied. The fact that section 50(6) of the Taxes Management Act 1970 places an initial general onus on the taxpayer challenging an assessment does not affect the point that, if HMRC’s assessment relies on the fact that two apparently independent companies are “connected” under the terms of section 286(5)(b), then that would be for HMRC to prove.

For these reasons, I would dismiss HHL’s appeal.

“Group” can, of course, mean what the taxpayer would like it to mean. When in 1876 Walter Bagehot (in Physics and Politics page 213) observed that mankind could “only make progress in co-operative groups” he no doubt did have in mind a commonality acting with a common purpose in some such way as Mr Gardiner submits that Parliament must have intended when using the word “group” in section 286(5)(b) of the Taxable of Chargeable Gains Act 1992. But that is not to my mind the primary meaning of the word “group”. Moreover, Mr Gardiner’s construction would inevitably give rise to the kind of problems which my Lord, the Master of the Rolls, has indicated in paragraph 43 of his judgment.

I entirely agree with my Lord’s judgment and, while I am not quite so sanguine as my Lady is about the consequences, only time will tell whether she is right.

I have read the judgment of the Master of the Rolls in draft and I agree with it. I add a few words only because I do not share his regret at the conclusion we have both reached as to the meaning of the word ‘group’.

It seems to me that, in its ordinary and natural meaning, ‘group’ must mean a collection of people. I can see no warrant at all for the suggestion that the word implies some kind of common purpose. Mr Gardiner’s submissions were based largely on the premise that construing ‘group’ as the Chancellor did, would give rise to unintended and highly undesirable consequences. It might mean, he said, that large multinational companies which had operated independently for years would find themselves caught by the ‘connected persons’ provisions because they had 51% of their shareholders in common.

I find that submission to be without merit. First, there is not a shred of evidence to support Mr Gardiner’s contention; it is pure speculation. But in my view, it is speculation unfounded on reason. Even allowing for the fact that a substantial proportion of the shares in large companies are likely to be held by institutional shareholders rather than individuals, it seems to me to be fundamentally unlikely that a sufficient number of the same institutions (and there are quite a lot of them in play) would by chance have purchased a sufficient shareholding in two large companies so as to give those shareholders control over both companies. For one thing, the global nature of share trading militates against such a result. For another, the permutations and combinations of possible shareholders are unimaginably large.

I am fortified in my view that such an eventuality is highly unlikely by the figures disclosed in the present case. Starting on 31 December 1995, Halliburton had 16400 shareholders. On 23 January 2006, the shares in HIG were distributed to those persons who had been Halliburton shareholders at 4 January 1996, which I take to be the same shareholders as were identified on 31 December (there having been little if any opportunity for trading in the meantime). By 23 January 1996, less than 3 weeks later, there was a 16% difference between the shareholder groups, due to trading. But as there was 84% held in common, the companies were connected. If trading continued a similar rate, the companies would have been connected for only a further 7 or 8 weeks. It may be that in January 1996 there was an unusual flurry of trading occasioned by the hiving off transaction but, even allowing for that, it seems to me that the companies would not have remained connected for more than a few months. And that was from the starting point of 100% in common. It is unimaginable that two independently established companies could by chance acquire a common controlling shareholder group.

In my view, although the commonality of control of two independent companies is a theoretical possibility, the potential permutations and combinations of shareholders makes the contemplation of such an event quite fanciful. In my judgment, the word ‘group’ has an ordinary meaning which it must be given. Such a construction will not lead to unintended and undesirable consequences.