Johnston Publishing (North) Ltd v HM Revenue & Customs

I have before me an appeal from the Special Commissioners which raises a short but important point as to the applicability or not of deeming provisions in relation to the taxation of chargeable gains arising out of what may or may not be group transactions. To focus in the finest detail, I shall be concerned with the meaning and effect, in context, of the word “associated” where it appears for the second time in section 179(2) of the TCGA 1992.

The Commissioners for HM Revenue and Customs (“the Commissioners”), who appeared below, as they do before me, by Mr Christopher Tidmarsh QC, succeeded before the Special Commissioner, Mr John Clark, who released his reasoned decision on 9^th October 2006. The taxpayer, Johnston Publishing (North) Limited, which appeared before me, as below, by Mr John Gardiner QC leading Mr Philip Walford, appeals against the Special Commissioner’s decision. Because of name changes since the transactions in question, it is convenient to refer to the taxpayer by the acronym UPNH. I shall refer below to the facts in summary form but they are fully set out in the Special Commissioner’s judgment and are not in dispute. The contest, essentially one of statutory construction, cannot be understood without a sight of the statute and it is accordingly to that which I shall first turn.

It is section 179(2) TCGA 1992 which is at the heart of the issue but all the relevant provisions fall within Part VI of TCGA 1992 which is headed, under the broader heading of ‘Companies, Oil, Insurance, etc.’, as follows:-

Groups of companies

170 Interpretation of sections 171 to 181

(1)

….

(2)

Except as otherwise provided—

(a)

references to a company apply only to a company, as that expression is limited by subsection (9) below, which is resident in the United Kingdom;

(b)

subsections (3) to (6) below apply to determine whether companies form a group and, where they do, which is the principal company of the group;

….

(d)

“group” and “subsidiary” shall be construed with any necessary modifications where applied to a company incorporated under the law of a country outside the United Kingdom.

….

….

(6)

A company cannot be a member of more than one group; …

Transactions within groups

171 Transfers within a group: general provisions

(1)

Notwithstanding any provision in this Act fixing the amount of the consideration deemed to be received on a disposal or given on an acquisition, where a member of a group of companies disposes of an asset to another member of the group, both members shall, except as provided by subsections (2) and (3) below, be treated, so far as relates to corporation tax on chargeable gains, as if the asset acquired by the member to whom the disposal is made were acquired for a consideration of such amount as would secure that on the other’s disposal neither a gain nor a loss would accrue to that other; …

Companies leaving groups

179Company ceasing to be member of group: post-appointed day cases

(1)

     If a company (“the chargeable company”) ceases to be a member of a group of companies, this section shall have effect as respects any asset which the chargeable company acquired from another company which was at the time of acquisition a member of that group of companies, but only if the time of acquisition fell within the period of 6 years ending with the time when the company ceases to be a member of the group; and references in this section to a company ceasing to be a member of a group of companies do not apply to cases where a company ceases to be a member of a group in consequence of another member of the group ceasing to exist.

(2)

Where 2 or more associated companies cease to be members of the group at the same time, subsection (1) above shall not have effect as respects an acquisition by one from another of those associated companies.

(3)

If, when the chargeable company ceases to be a member of the group, the chargeable company, or an associated company also leaving the group, owns, otherwise than as trading stock—

(a)

the asset, or

(b)

property to which a chargeable gain has been carried forward from the asset on a replacement of business assets,

then, subject to subsection (4) below, the chargeable company shall be treated for all the purposes of this Act as if immediately after its acquisition of the asset it had sold, and immediately reacquired, the asset at market value at that time.

….

(10)

For the purposes of this section—

(a)

2 or more companies are associated companies if, by themselves, they would form a group of companies,

….”

The relevant facts have never been in issue; if I may briefly state them, respecting that preference for acronyms of which those engaged in such operations are enamoured, they are these: on 7^th July 1997 UPNH became a member of the UNM Group by way of being a wholly owned subsidiary of UNMG, a member of that Group. On the same day, but after UNMG had been registered as the shareholder of UPNH, UPNH made a rights issue to UNMG in return for £314,700,000. Then another member of the UNM Group, UPN, which owned a number of operating subsidiaries, offered to sell the share capital in those subsidiaries to UPNH. That was stage 1. Then, still on 7^th July 1997, UPNH agreed to buy UPN’s shares in those operating subsidiaries for £310,000,000. Still on that busy day, UPNH became registered holder of those shares and paid UPN that price. That was stage 2. At neither stage 1 nor stage 2 were UPN and UPNH such that they were themselves then “associated” (within the meaning of section 179(10)). However, as UPN and UPNH were members of the same UNM Group, that transfer, being an intra-group dealing, was treated, pursuant to section 171 TCGA 1992, as for a consideration that gave rise neither to a gain or a loss to UPN. Yet later on 7^th July 1997, UPN, by now replete with the purchase money paid to it for the sale of its operating subsidiaries to UPNH, paid a dividend of £280,000,000 out of its distributable profits to its parent, URN, another member of the UNM Group. Plainly the value of UPN was thereby diminished. Then, still on 7^th July 1997, UPNH bought URN’s holding in UPN for £4,700,000. UPNH was registered as owner of the whole issued share capital in UPN. UPN, by way of being owned by UPNH, was still at this stage in the UNM Group. The disposition of shares in UPN from URN to UPNH – stage 3 – was another intra-group dealing at, for tax purposes, neither gain nor loss to URN.

So much for the 7^th July 1997. The next stage – stage 4 – occurred on 27^th February 1998 when UNMG sold the whole share capital in UPNH for, in all, £365,897,000 to a company in a wholly unrelated group. At that stage, stage 4, UPNH ceased to be a member of the UNM Group. At the same time, UPN, as a subsidiary of UPNH, also ceased to be a member of the UNM Group but, by then, UPNH and UPN (and other subsidiaries of UPNH) were together such as to be “associated” within section 179(10). Later there was correspondence in which the Inspector of Taxes indicated it may be appropriate to assess UPNH at a figure of £280,000,000 in respect of its deemed gain. On 1^st March 2004 an assessment was raised on UPNH. UPNH appealed. The appeal was transferred to the Special Commissioners. The figure for the amount has not been agreed between the parties; that has been left to await the final outcome of UPNH’s appeal.

It will be useful, before turning to the parties’ argument on the meaning and effect of section 179(2), to have in mind two things: first, the broad approach to intra-group dealings and taxation and, secondly, the “Envelope scheme”. As for the broad approach to intra-group dealings, it is explained, by reference to the then-current legislation, in a judgment of Hoffmann J., as he then was, in Westcott (Inspector of Taxes) v Woolcombers Ltd [1986] STC 182. The appeal from him to the Court of Appeal was dismissed – see [1987] STC 600. In the judgment at first instance Hoffmann J., describing the underlying fiscal policy, at page 190 said:

“The policy of para 2(1) of Schedule 13 [the precursor of section 171] is to recognise that in the case of transactions between members of a group of companies, the legal theory that each company is a separate entity does not accord with economic reality. It gives effect to that policy by, broadly speaking, ignoring transactions within the group, computing the gain as the difference between the consideration given when an asset was acquired by the group and the consideration received when it left the group, and charging the tax on whichever company made the outward disposal…. Thus all the provisions with which we have been concerned are directed to neutralising the tax effects of transactions which are disposals in legal theory but not in real life”.

In the Court of Appeal – [1987] STC 600 at 606 – Fox L.J. agreed with Hoffmann J.’s view of the fiscal policy which the legislation embodied.

As for the “Envelope scheme”, it was explained as long ago as 1992 by Millett J., as he then was; see NAP Holdings UK Limited v Whittles (Inspector of Taxes) [1992] STC 59 at 64 as follows:

“Following the 1965 Act it became apparent to the Revenue that advantage was being taken of the two rules to postpone tax liability in an artificial manner. First, there was a scheme (sometimes known as the 'envelope' scheme) which made use of the 'in-group rule'. A company, owning an asset (other than shares) which has appreciated in value, wishes to sell it. The company incorporates a subsidiary and transfers the asset to it (no chargeable gain) in return for an issue of the subsidiary's shares (not a disposal: those shares have an acquisition cost reflecting the current value of the asset). The company then sells the shares in the subsidiary for their current market value (no chargeable gain). Thus, the company which has actually realised the gain is not charged at all; and the taxability of the gain is postponed until the purchaser of the subsidiary's shares sells the asset (to which the original low base cost still attaches). That may never happen.”

Millett J. then described an alternative scheme called the “reorganisation rule”. He continued, at page 64g as follows:

“What became ss 278 and 279 are acknowledged to have been added to the 1965 capital gains tax code to deal, respectively, with schemes of those types.”

The section 278 there referred to is the forebear of the section 179 with which I am concerned. Millett J.’s judgment in NAP Holdings was, in substance, upheld in the House of Lords where, at [1994] STC 979 at 987-988, Lord Keith described as “particularly important” the emphasis that had been placed in Woolcombers “on the policy aspect of the matter”.

The taxpayer’s argument is as follows, following through the requirements of section 179(1). The chargeable company is UPNH. It has ceased to be a member of the UNM Group. It ceased to be that in February 1998. It had, within six years before that cesser, acquired an asset – UPN’s shares in UPN’s operating subsidiaries – for £310,000,000. At the time of that acquisition both UPNH and UPN were members of the same group, the UNM Group. Section 179(1) is thus satisfied. However, section 179(2) disapplies section 179(1). UPN and UPNH, having ceased at one and the same time to be members of the UNM Group, were companies associated with one another within the meaning of section 179(10) because, as from July 1997, UPN was a subsidiary of UPNH. The relevant acquisition was by one of those associated companies, UPNH, from the other, UPN. Accordingly, says the Appellant, section 179(1) applies but is then disapplied, with the result that UPNH is not to be treated under section 179(3) as if it had sold the asset and had immediately reacquired it at market value at that time.

The only way in which Mr Tidmarsh’s argument differs from that of Mr Gardiner is that Mr Tidmarsh argues that section 179(2) does not disapply section 179(1). Mr Tidmarsh points out that at the time of UPNH’s acquisition of the shares in UPN’s operating subsidiaries in July 1997 the relationship between those two companies, vendor and purchaser, albeit that they were members of the same UNM Group, was not such that by themselves they would have formed a group of companies for the purposes of section 179(10). They were not at the time “associated” within the meaning of section 179(10). That did not come about until UPNH bought URN’s holding in UPN later the same day and when, accordingly, UPNH became registered holder of the whole issued share capital in UPN. At the time of the acquisition in question between the two companies, UPNH and UPN, they not being, says Mr Tidmarsh, “associated companies”, the acquisition was not “by one from another of those associated companies” within section 179(2). Accordingly, say the Commissioners, section 179(1) was not disapplied and, in turn, the deeming provisions of section 179(3) applied.

On that analysis, the only difference between the parties is whether, for the purposes of section 179(2), the disponor and disponee have to be “associated companies” at the time of the acquisition in question or whether that is not required. If it is not required, the taxpayer succeeds; if it is required the Commissioners succeed.

The Special Commissioner, Mr John Clark, concluded in the Commissioners’ favour. Mr Gardiner repeatedly described the Special Commissioner’s reasoning as fiscal theology and false fiscal theology at that. It is true that Mr Clark’s reasoning spread into areas such as a theory as to the inflation of sub-group values that, perhaps, would have been better omitted, as also better omitted was his reference that it was not right to use section 179(1) to construe section 179(2). However, in his reasoning he returned, time and again, to the point of construction at the heart of the case and, in concluding as he did, argues Mr Tidmarsh, he was guilty of no error of law.

It is a very short point but none the easier for that. Mr Gardiner is entitled to say, as he does, pointing at 179(1), that the draftsman is very conscious of points of time; in section 179(1) he speaks of the time of acquisition and the time when a company ceases to be a member of the group. In section 179(2) he uses the phrase “at the same time”. The natural reading of section 179(2) is, by reason of the first use of the word “associated”, says Mr Gardiner, that the disponor and disponee should be associated when, at the same time as one another, they cease to be members of the Group. Had the draftsman wished to introduce another temporal requirement as to association, his draftsmanship of section 179(1) showed that he well knew how so to provide and, moreover, in his not expressly referring to the need for the companies to be associated at any time other than on leaving the group, he can be taken not to have intended that to be required.

Mr Tidmarsh’s answer is to point to the redundancy of the word “associated” when it secondly appears, were that to be correct. The draftsman had already provided, in the expression “where 2 or more associated companies ceased to be members” that the companies should be associated as at their leaving the group together; unless one gives some added meaning to the word “associated” where it secondly appears, that second appearance will have added nothing. Nothing would have been added that would not have been present if the Act had said, of the acquisition, that it should be “by one from another of those companies”. On conventional lines Mr Tidmarsh argues that redundancy is to be avoided if possible. On that footing, he says that the second time the word “associated” appears it is intended to require that the companies should be associated at the time of the acquisition which, in subsection (2), is being described.

Mr Gardiner is quite candid about the redundancy; he accepts that the draftsman could have said “by one from another of those companies”, leaving out the word “associated”, in its second appearance, altogether. But, he says, to jump from that to saying that the word introduces the notion that the disponor and disponee shall have had to be associated at the time of the acquisition is to pile far too much onto the second appearance of the word “associated”, a second appearance that may have been intended to do no more than simply, for clarity’s sake, to repeat, as the opening words of subsection (2) had required, that the companies should be “associated” when they had together left the original group.

Both sides took me to Dunlop International AG v Pardoe (Inspector of Taxes) [1998] STC 459 per Lightman J. and at [1999] STC 909 CA. The Dunlop case was concerned with the construction of section 179’s forebear, section 278 of the Income and Corporation Taxes Act 1970, the language of which, although set out in a slightly different way, was, so far as concerned section 278(2), identical to that of section 179(2). Dunlop was, in effect, concerned with the meaning and effect of the word “associated” when it first appeared in subsection (2). At page 474 Lightman J. at first instance said:

“The purpose must plainly be that the benefit of deferral of the tax charge conferred by s 273 [the precursor of section 171] could safely and sensibly be continued in respect of an acquisition by one group company from another, notwithstanding their cesser of membership of that group, if at the same time they would form in whole or in part a new group.”

In the Court of Appeal Lightman J.’s construction was upheld. Chadwick L.J. at page 919 explained:

“The question is whether it was enough that the companies were associated companies immediately before they each ceased to be members of the old group; or whether they must remain associated companies (within a new group) immediately after they have each ceased to be members of the old group.”

Looking broadly to the purpose of the provisions, Chadwick L.J. added at page 920:

“The object is to prevent the transferee company from taking the asset out of the group in circumstances in which the gain will not crystallise on a subsequent disposal - because there will be no subsequent disposal.”

Whilst in Dunlop the effect of the word “associated” in the latter part of section 179(2) was not before them, the Court’s interpretation tends, if anything, to support the argument put before me by Mr Tidmarsh, although such support may not only be obiter but, indeed, inadvertent. I thus do not feel it is safe to rely on fine analysis of the judgments in Dunlop in order to answer the question, one of construction, now before me.

Each side sought to envisage anomalous consequences which the other side’s construction would lead to. That is, of course, a perfectly respectable technique, especially in the construction of taxing statutes, but it does have its limitations. First of all, a construction by way of suggested comparative anomalies cannot displace the plain meaning and intendment (if it is plain) of the statutory language. Secondly, it is far from every anomaly, even when it is demonstrated, that has a displacing effect; it could be that Parliament had been content to tolerate some minor ones. It is only when the anomaly is such that it must be taken by the Court not to have been intended by Parliament that it has a displacing effect. Thirdly, there may be displacing effects operating in opposite directions, leading the Court to ignore anomalies and to revert to a pure construction of the statutory words themselves. Fourthly, and of particular application to the appeal before me, I am in an area – intra-group deeming provisions – which has long been recognised as having within it anomalies that have to be tolerated – see Lord Keith’s speech in NAP Holdings supra at page 988a.

Against that background I have not found argument as to “the shareholder tier” (dealings with shares where the value of an asset is reflected in the value of the shares of the company which holds the asset) and the “asset tier” (where it is the asset itself which is disposed of) and to the so-called double charge theory and the answer to the double charge theory as helpful in construing section 179(2). Indeed, if I have adequately understood the respective arguments, then neither side draws my attention to anomalies so unlikely to have been intended but that follow from his opponent’s arguments that render it impossible to accept the other’s argument. One is therefore thrown back to the simplest of questions; what is the effect of the word “associated” where it secondly appears in 179(2)?

Mr Gardiner in his Skeleton Argument refers to an observation by Lord Hoffmann in Walker v Centaur Clothes Limited [2000] 1 WLR 799 at 805 where his Lordship, said in a tax context,

“My Lords, I seldom think that an argument from redundancy carries great weight, even in a Finance Act. It is not unusual for Parliament to say expressly what the courts would have inferred anyway.”

But it is fair to note that the citation suggests, as will be common experience, that an argument from redundancy can sometimes, even in a Finance Act, carry weight. Moreover, I would doubt, if the word “associated” had not been present in its second appearance in section 179(2), that any court could have inferred the meaning which, relying upon its presence, Mr Tidmarsh urges. Mr Gardiner also reminds me of Nourse L.J.’s observation in Omar Parks Ltd v Elkington [1992] 1 WLR 1270 CA at 1273 where he said:

“It is perfectly true, as was pointed out by Mr Howard on behalf of the plaintiff … that if that is the only function of the words 'on the application of the owner', they could just as well have been omitted. If a long experience of legislative drafting had brought with it a conviction that an Act of Parliament never included words of surplusage, that would no doubt have been a persuasive point. But that is not our experience and I for one do not complain of it. An emphasis of the obvious, unnecessary to a judge who has had the benefit of argument, may yet be welcome to a busy practitioner who has not.”

But it is legitimate to doubt, in assessing whether the second “associated” is mere surplusage, whether even the busiest of practitioners, reading section 179(2) would, on finding the word “associated” in its line 3, need to have emphasised for him that the word had also been used in line 1, had it not been intended thereby to add something rather than merely to repeat the adjective. The taxpayer’s argument, as it seems to me, has no explanation for the second appearance of “associated” save to say that it is an elementary and precautionary drafting device. But, given the very short distance between the first appearance of the word and the second, and given that the taxpayer’s meaning would have been so readily achieved without that second appearance of the word, I do not find that the taxpayer has any adequate explanation of its second appearance. I thus look about for a construction that does give it meaning.

By contrast, the Commissioners’ argument that, in effect, the latter part of section 179(2) should read “as respects an acquisition (while they were associated) by one from another of those companies” is, as it seems to me, something which the Courts not unreasonably could infer from that second appearance of the crucial word, especially where it appears in a section which, as is shown in the Dunlop case, is drafted in a very compressed style. It was held in Dunlop – see page 917 f-g in the report in the Court of Appeal - that the draftsman had used, in the then-current legislative equivalent of section 179(1) and (3), a “convenient shorthand” for a condition which, fully expressed, was some 22 words long. Mr Tidmarsh does not admit that any expansion or explanation is needed of the word “associated” in its second appearance but, even if any were needed, it would, as I have shown, be modest by Dunlop standards.

When he opened the appeal, Mr Gardiner described the point before me as, at root, a pure question of construction on a limited point such that it could be decided within 20 minutes. The hearing took the whole day but, at the end, the matter does come down to a very short point; is there a redundancy which has no reasonable explanation or should the Commissioners’ construction be accepted as a way of avoiding it? I do not feel able to say that the Special Commissioner was wrong in attaching real weight to the redundancy argument and, like him, I would thus prefer, in point of construction, that the acquisition spoken of in the latter part of section 179(2) is between a disponor and a disponee who, at the time of that acquisition, were associated with one another in the sense required by section 179(10).

For the reasons I have given, I dismiss the appeal.