Gascoines Group Ltd & Ors v HM Inspector of Taxes

This is an appeal by three taxpayer companies Gascoines Group Ltd (“Gascoines”), Newark Cattle Market Company Ltd (“Newark”) and Saracens Securities Limited (“Saracens”) from the decision in principle (“the Decision”) by the Special Commissioners (Dr A N Brice and Mr John Walters QC) handed down on the 21^st July 2003. By the Decision the Commissioners held that Saracens was an associated company both of Gascoines and of Newark for the purpose of entitlement to small companies relief under section 13(1) of the Income and Corporation Taxes Act 1988 (“the 1988 Act”).

Mr Timothy Brennan QC appeared for the Inland Revenue before the Special Commissioners and on this appeal which took place on the 3^rd March 2004.

Mr Timothy Gascoine, a director of Gascoines and Newark, appeared for Gascoines and Newark before the Special Commissioners and on this appeal. The Appellants’ Notice, which he signed on behalf of both these companies, stated that the ground of appeal was that he did not believe that they had a fair hearing before the Special Commissioners.

Mr Christopher Gascoine (a half brother of Mr Timothy Gascoine), a director of Saracens, appeared for Saracens before the Special Commissioners. He signed Saracens’ Appellant’s Notice dated the 16^th September 2003 giving as its address 1 Church Street, Southwell, Nottinghamshire, the offices of all three companies. Saracens’ Appellant’s Notice stated as its ground of appeal that he was dissatisfied in point of law with the Decision. The Chancery Listing Office wrote to him at that address on the 15^th September 2003 regarding obtaining a hearing period. This produced no response. The Inland Revenue wrote to Mr Christopher Gascoine at the same address on the 13^th November 2003 enclosing its skeleton argument and on the 8^th January 2004 (in default of preparation of such a bundle by any of the three companies) a trial bundle. These letters again produced no response. The Chancery Listing Office fixed a three day trial window commencing on Wednesday the 3^rd March 2004, and whilst it sent notification to the other appellants at 1 Church Street, by an oversight it failed to send a notification to Mr Christopher Gascoine. Saracens’ auditor Mr Malcolm Ellison (“Mr Ellison”) signed a witness statement served on behalf of Gascoines and Newark and attended the hearing on the 3^rd March 2004. If Mr Christopher Gascoine did not know of the date fixed for the hearing before (which may appear surprising), Mr Timothy Gascoine spoke to him on Tuesday the 2^nd March 2004 informing him of the hearing due to commence the following day. Mr Christopher Gascoine however decided not to attend. There was in the circumstances no apparent legitimate excuse for his non-attendance or non-communication with the court: if he required an adjournment, he could and should have applied. There is no reason to believe that he ever intended to attend an appeal hearing. Although he did furnish a skeleton argument, he failed to respond to letters written to him. In the circumstances, in accordance with the wishes of the other parties and to save costs and court time, having in mind that the interests of Saracens and the other companies were identical, I decided to proceed with the hearing of the appeal, but notify Mr Christopher Gascoine that he should have the opportunity to address the court at 10.30 a.m. on the 22^nd March 2004 or to make written submissions not later than the 22^nd March 2004. Such notification was immediately made by letter the same day.

Mr Christopher Gascoine did not attend or make any written submissions. But by a letter dated the 18^th March 2004 a Mr P Pitchfork informed my clerk Mr Murphy that “Mr Gascoine is in hospital at the present time but will contact you as soon as he is able to”. Mr Murphy immediately replied asking which Mr Gascoine he was referring to and what was Mr Pitchfork’s involvement in the matter and requesting that he remind Mr Christopher Gascoine that the case was listed at 10.30 a.m. on the 22^nd March 2004. By letter dated the 22^nd March Mr Pitchfork replied. After stating that his involvement was to take copies of mail and distribute it to the right person, he went on: “Mr Gascoine senior was in hospital having an operation. Mr C Gascoine and Mr T Gascoine were both in hospital having had treatment. I believe that all three are now recuperating”. He said that he was unsure if Mr C Gascoine wished to make oral and written submissions. By letter dated the 22^nd March 2004 Mr Murphy said as follows:

“The Judge proposes to give judgment next week (week commencing the 29^th March 2004). If Mr Christopher Gascoine wishes to make oral or written submissions during this week (week commencing the 22^nd March 2004) the Judge is minded to allow him to [do] so, but he cannot allow this matter to be further delayed. Mr Christopher Gascoine should let the Judge know by 4 p.m. Wednesday the 24^th March 2004 what his intentions are in this regard.”

Mr C Gascoine did not communicate further with the court within the time allowed.

As a result of interlocutory directions the only issue determined by the Special Commissioners was whether Saracens, Gascoines and Newark were associated companies in the accounting periods (in the case of Gascoines) ending 30^th September 1993 and 1994, (in the case of Newark) ending 31^st March 1993 and (in the case of Saracens) ending 31^st March 1989 to 1994. The significance of this issue arose from the provisions of the Finance Act 1972 which introduced a relief for small companies in the form of a reduced rate of corporation tax, namely 20% instead of 30%. Companies with lower profits paid less tax. But the relief would be open to abuse if a business could be divided among two or more companies so that each earned profits below the specified threshold. Accordingly the legislation provided that, if a company has one or more associated companies, the relief is reduced. The relevant provisions are now to be found in sections 13, 416 and 417 of the 1988 Act.

Section 13(1) and (2) of the 1988 Act provide for relief in cases where in any accounting period the profits of a company either do not exceed the “lower relevant maximum amount” or exceed the “lower relevant maximum amount” but do not exceed the “upper relevant maximum amount”. Section 13(3) and (4) read as follows:

“…(3) The lower and upper relevant maximum amounts mentioned above shall be determined as follows—

(a)

where the company has no associated company in the accounting period, those amounts are [£300,000] and [£1,500,000] respectively;

(b)

where the company has one or more associated companies in the accounting period, the lower relevant maximum amount is [£300,000] divided by one plus the number of those associated companies, and the upper relevant maximum amount is [£1,500,000] divided by one plus the number of those associated companies.

(4)

In applying subsection (3) above to any accounting period of a company, an associated company which has not carried on any trade or business at any time in that accounting period (or, if an associated company during part only of that accounting period, at any time in that part of that accounting period) shall be disregarded and for the purposes of this section a company is to be treated as an ‘associated company’ of another at a given time if at that time one of the two has control of the other or both are under the control of the same person or persons.

In this subsection ‘control’ shall be construed in accordance with section 416….”

Sections 416 and 417 (so far as material) read as follows:

“416.— …. (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; …

(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(a).

417.—(1) For the purposes of this Part, a ‘participator’ is, in relation to any company, a person having a share or interest in the capital or income of the company, and, without prejudice to the generality of the preceding words, includes—

(a)

any person who possesses, or is entitled to acquire, share capital or voting rights in the company; …

(3)

For the purposes of this Part ‘associate’ means, in relation to a participator—

(a)

any relative or partner of the participator;

(b)

the trustee or trustees of any settlement in relation to which the participator is, or any relative of his (living or dead) is or was, a settlor ….”

As is apparent from its terms associated companies are defined in section 13(4) of the 1988 Act as companies of which one company controls or is controlled by another or which are both under the control of the same person or persons. Again as is apparent from its terms section 416 of the 1988 Act identifies not merely those who have control of a company but also the much wider class or group of those who shall be taken to have control. The consequences of actual control and attributed control are the same. Lord Hoffmann analysed the operation of sections 16 and 17 of the 1988 Act in R v. Inland Revenue Commissioners ex parte Newfields Development Ltd [2001] 1 WLR 1111 (“Newfields”). At paragraph 11 of his speech he said:

“The effect of these cumulative definitions [in sections 416 and 417] is that for the purposes of deciding whether a person “shall be taken to have control of a company” under section 416(2) it may be necessary to attribute to him the rights and powers of persons over whom he may in real life have little or no power of control. Plainly the intention of the legislature was to spread the net very wide.”

On any claim for small company relief, the exercise for the court is to examine the relationship of the candidate for relief with other companies and determine whether applying the statutory criteria the candidate has any associated companies, and if so how many. Any relationship between companies other than the relationship between the candidate and the potential or actual associated company or companies is irrelevant.

The question whether Gascoine, Newark and Saracens were associated requires attention to be focussed on Mr D W H Gascoine. The shareholdings were agreed for the purposes of the hearing:

On these facts: (1) Mr D W H Gascoine had control of Gascoines, because he owned the greater part of the share capital: section 416(2)(a); (2) Mr D W H Gascoine also had control of Newark, because (a) (since he owned the greater part of the share capital in Gascoines, its parent) he was able to exercise direct or indirect control over the affairs of Newark: section 416(2); and (b) Gascoines had control of Newark and all the rights and powers of Gascoines may be attributed to Mr Gascoine under section 416(6); (3) Mr D W H Gascoine also had control of Saracens because: (a) the Trustees of the 1987 Trust owned 99% of Saracens. The Trustees therefore together had control of Saracens because they owned the greater part of the share capital: section 416(2) and section 416(3); (b) the Trustees are associates of Mr D W H Gascoine, because he is a settlor of the 1987 Trust: section 417(3)(b); and (c) therefore, the rights of the Trustees are to be attributed to Mr D W H Gascoine who is to be taken to have control of Saracens: section 416(6).

Accordingly the conclusion to be drawn and only conclusion to be drawn must be that Mr D W H Gascoine had, or has attributed to him, control of all three companies. They are therefore associated companies of each other because they are all under the control of Mr D W H Gascoine: section 13(4). This is what the Special Commissioners decided and they were correct.

Mr Timothy Gascoine addressed to me, as he evidently addressed to the Special Commissioners, lengthy arguments in favour of a contrary conclusion. The two main thrusts of his argument were: (1) that there needed to be established factual or actual control for the relationship of associated company to be established. For this purpose he relied on the decision of the Court of Appeal in Steele v. EVC International [1996] STC 785. That decision on section 839 of the 1988 Act is not apposite. Guidance is to be obtained from the decision of the House of Lords in Newfields which is a decision on the sections in point and which underlines the importance of attributed control – control which is to attributed whether or not actual control exists; and (2) that control of a company (for the purposes of the legislation) can only rest with one person. That is clearly not the case. Control is to be attributed under the Act to the candidates even in situations where control by others as a matter of fact is clear or could likewise be attributed.

Mr Timothy Gascoine made a challenge to the Decision on the ground of bias. This challenge is totally misplaced. It is based upon: (1) the alleged failure of the Special Commissioners to record correctly or deal fully or at all with all his arguments. There was no failure of any significance and it was unnecessary for the Commissioners, as it is unnecessary for me, to deal with all his arguments. There is no substance in this complaint; (2) the fact that Mr Walters QC had advised in connection with Newark and a VAT matter some years before. The clerk to the Special Commissioners had raised this matter with the appellants. The appellants raised no objection. The matter was mentioned again by Mr Walters at the start of the hearing and again no objection was raised. No-one could regard the connection as giving rise to a real risk of bias; (3) the alleged existence of some secret agenda on the part of Mr Walters, an allegation for which support was supposedly to be found in the statement of Mr Ellison. This statement is of no evidential value and it is surprising, indeed disturbing, that an accountant should think it proper to have made it. The allegation is unfounded and should never have been made; and (4) that Mr Walters, having read the papers and skeleton arguments, at the commencement of the hearing appeared already to have formed a provisional view adverse to the appellants. There is however nothing objectionable in his having done so, provided (as he plainly did) Mr Walters retained an open mind: see Costello v. Chief Constable of Derbyshire Constabulary [2001] 1 WLR 1437 at 1440 para 9.

The Special Commissioners were correct to conclude in paragraphs 13 to 18 of the Decision that Saracens was an associated company of Gascoines and Newark. I therefore dismiss the appeal.