Gascoines Group Newark Cattle Market Ltd Saracens securities Ltd v HM Inspector of Taxes

In giving the reason for our decision (which is that Saracens was an associated company of Gascoines and Newark for the purposes of section 13(3))we have found it convenient first to apply the statutory provisions to the facts of this appeal and then to consider the arguments put forward by the Appellants. We hope in this way to do justice to the considerable time and effort which both Messrs. Gascoine (and especially Mr Timothy Gascoine) had devoted to the preparation of their arguments for all three Appellants.

We start with the position of Gascoines. Section 416(2)(a) provides that a person shall be taken to have control of a company for the purposes of Part XI of the 1988 Act if he possesses the greater part of the share capital of the company. Mr Gascoine Senior possessed 71% (which is the greater part) of the share capital of Gascoines and so Mr Gascoine Senior had control of Gascoines for those purposes.

Turning to the position of Newark, section 416(2) provides that a person shall be taken to have control of a company for the purposes of Part XI of the 1988 Actif he is able to exercise direct or indirect control over the company's affairs. Because Newark was a wholly owned subsidiary of Gascoines, and because Mr Gascoine Senior owned the greater part of the share capital of Gascoines, he was able to exercise indirect control over the affairs of Newark at the level of general meetings of the shareholders of Newark, and so, Mr. Gascoine Senior is taken to have control of Newark for the purposes of Part XI of the 1988 Act, within the general words of section 416(2). Also, section 416(6) provides that there may be attributed to any person all the rights and powers of any company of which he has control. Thus there may be attributed to Mr Gascoine Senior all the rights and powers of Gascoines (a company of which he has control) and, as the rights and powers of Gascoines include the control of Newark (of which Gascoines owned all the shares), the control of Newark may be attributed to Mr Gascoine Senior. Thus by this route also, Mr Gascoine Senior had control of Newark for the purposes of Part XI of the 1988 Act.

Turning to the position of Saracens, section 416(2)(a) and (3) provide that two or more persons together shall be taken to have control of a company for the purposes of Part XI of the 1988 Act if they possess the greater part of the share capital of the company. As the Trustees of the 1987 Trust own 99% of the shares of Saracens they together have control of Saracens for those purposes. Section 417(3)(b) provides that a settlor is associated with the trustees of any settlement of which he is a settlor. Thus Mr Gascoine Senior, as a settlor, is associated with the Trustees of the 1987 Trust. Section 416(6) provides that there may be attributed to any person the rights and powers of any company of which his associates have control. Thus there may be attributed to Mr Gascoine senior the rights and powers of Saracens which is a company of which his associates (the Trustees of the 1987 Trust) have control. Thus Mr Gascoine Senior has control of Saracens for the purposes of Part XI of the 1988 Act..

Section 13(4) provides that a company is to be treated as an associated company of another if both companies are under the control of the same person. Section 13(4) incorporates the construction of “control” which is provided by section 416. Section 416 provides a construction of “control” for the purposes of Part XI of the 1988 Act. For the reasons which appear below we have concluded that the incorporation into section 13(4) of the section 416 construction of “control” necessarily obliges us to conclude that where a person is taken to have control of a company for the purposes of Part XI of the 1988 Act by virtue of section 416, that person is also to be taken to have control of the company for the purposes of section 13(4). As all of Gascoines, Newark and Saracens are under the control of Mr Gascoine Senior for the purposes of section Part XI of the 1988 Act, and therefore for the purposes of section 13(4), they are associated companies for the purposes ofsection 13(3).

Thus Saracens is an associated company of both Gascoines and Newark for the purposes of section 13(3).

The first argument for the Appellants was that control in section 13(4)meant control over the company's affairs in general meeting, in other words, actual control. Although section 13(4) imported the meaning of control from section 416 it did not import the provisions about being "taken to have control".

Mr Timothy Gascoine, for all the Appellants, argued that when section 13(4) stated that "control" was to be construed in accordance with section 416, it did not say which part of section 416 it was referring to. There were two references to control in section 416 (both in section 416(2)), namely "a person shall be taken to have control of a company" and "control over the company's affairs". He argued that it was the latter meaning which was imported into section 13(4) and he cited Steele v EVC International NV [1996] STC 785.

Steele concerned double taxation relief and the question whether a Dutch company was controlled by two or more connected persons. Section 839 of the 1988 Act defined connected persons and section 839(7) and (8) provided:

The facts of Steele were thatEVC was jointly owned by two other companies each of which had similar powers over it both at board level and management level. The Inland Revenue argued that the two companies were persons acting together to secure control of EVC and so were connected persons as defined by section 839(7). The Special Commissioners allowed EVC's appeal on the ground that there was no evidence of any agreement that the two companies would act together to ensure that the affairs of EVC were conducted in accordance with their joint will and so the two companies were not connected persons. The High Court (Lightman J) over-ruled that decision holding that the two shareholding companies were acting together to secure their control of EVC. The Court of Appeal referred to section 416 and held that "control of the affairs of a company" meant control at the level of general meetings of the shareholders as control at that level carried with it the power to make the ultimate decisions as to the business of a company and in that sense to control its affairs. The two shareholders had control over EVC at the level of general meetings; they were acting together and were therefore connected persons.

Mr Timothy Gascoine invited us to apply that definition of control to the facts of these appeals. He argued that, if that were done, then Mr Gascoine Senior would have control of Gascoines and also of Newark and so those two companies would be associated with each other. However, under that definition, it was the Trustees of the 1987 Trust who would have control over Saracens and so Saracens would not be associated with either Gascoines or Newark.

Even if there were no subsequent authority to guide us we would have hesitated to regard the principle in Steele as conclusive of the issues in this appeal. The issue in Steele was whether two or more persons were acting together to secure or exercise control of a company, which is not the issue in the present appeal, and the legislation being construed was section 839(7) and (8) of the 1988 Act whereas the legislation with which we are concerned is section 13(4). Further, the statutory test which was identified in Steele was whether the two shareholders controlled the affairs of EVC whereas in the present appeal the statutory test which it is sought to apply is whether Mr Gascoine Senior hadcontrol over all three companies having regard to aconstruction of “control” in accordance withsection 416.

However, there is subsequent authority which concerns the same issue as that in this appeal and which also concerns the application of the same legislation. That subsequent authority is the judgment of the House of Lords in R v Inland Revenue Commissioners, ex parte Newfields Developments Limited [2001] STC 901. That appeal was concerned with the question as to whether two companies (Newfields and Lawrek) were associated for the purposes of the small companies' relief. The share capital in Newfields was held by the trustees of the will trust of Mr Walker whose widow had a life interest under the trust. Lawrek was a company (actually)controlled by the trustees of a discretionary trust established by Mr Walker. Those trustees therefore (actually) had control of Lawrek. The trustees of the will trust were associates of Mrs Walker under section 417(3)(b) because she had an interest under the trust. The trustees of the discretionary trust were associates of Mrs Walker under section 417(3)(b) because her husband was a settlor of that trust. The Inland Revenue attributed all the rights and powers of the trustees of both trusts in respect of Newfields and Lawrek to Mrs Walker with the result that under section 416(2) she was taken to have control ofboth companies and so Lawrek was an associated company of Newfields. This attribution was upheld by the House of Lords.

At paragraphs [10] and [11] Lord Hoffmann, having set out section 416, said:

In the light of that specific guidance we are unable to conclude that, for the purposes of section 13(4), the meaningof control is restricted to control over the company's affairs through general meetings. As Lord Hoffmann says, the definition is "enormously widened" by the subsequent subsections of section 416.

Mr Timothy Gascoine asked us to prefer the decision in Steele to that in Newfields. However, besides the obvious point that the judgment in Newfields is a judgment of the House of Lords and must therefore be applied by all other courts, we discern no inconsistency between the two decisions. Steele was concerned with the meaning of “control” in the context of persons acting together to secure or exercise control, whereas Newfields was concerned with the meaning of “control” in the context of whether a person has control of a company, or a company is under the control of identified persons. Section 416 (the applicable legislation) makes it clear that the answer to question arising in Newfields requires a wider enquiry than the answer to the question arising in Steele.

In support of his first argument Mr Timothy Gascoine pointed out that it was easier to replace all references to "control" in other sections with the words "control over the company's affairs" than with the words "shall be taken to have control" as the latter created contextual difficulties. However, whatever the contextual difficulties, we are of the view that the words "taken to have control" are meant to be much wider than the words "control over the company's affairs". They deliberately widen the definition of control so as to include concepts which might not at first sight appear to denote control. Section 13(4) imports the whole of section 416 and so also imports the provisions about being "taken to have control".

As we understand it, the Appellants' second argument was that, although section 13(4) imported the meaning of control in section 416, it did not import the definition of associate in section 417.

In this connection Mr Timothy Gascoine referred to sections 298(1)(a) and 312(1). Section 298 appears in Chapter III of Part VII of the 1988 Act. Part VII contains the general provisions relating to the taxation of income of individuals and Chapter III (sections 289 to 312) contains the provisions relating to enterprise investment schemes. Section 293 defines qualifying companies and 297 defines qualifying trades. Section 298(1) provides that for the purposes of section 297 a person has a controlling interest in a trade carried on by a company if he controls the company. Section 312 provides that, in Chapter III of Part VII, "control" should be construed in accordance with section 416(2) to (6) and "associate" has the meaning in subsections (3) and (4) of section 417 except that in those subsections "relative" shall not include a brother or sister.

From this it is clear that, in the context of enterprise investment schemes, the legislation wishes to import only part of the definition of control in section 416 (namely, that part in subsections (2) to (6)) and a definition of associate which modifies that in section 417. This indicates to us that when the legislation wishes to import part only of a definition, or a modified version of a definition, that is stated specifically. It does not follow that there is a need to mention every provision which is imported without modification; rather we would expect that every necessary provision is imported unless specifically stated otherwise. Thus the reference in section 13(4) to section 416 is to the whole of section 416 (or at least to those parts of section 416 which are relevant in the context) and to such provisions of section 417 as are necessary to the construction of section 416.

Mr Timothy Gascoine also referred to sections 755 and 756. These sections appear in Chapter IV of Part XVII of the 1988 Act. Part XVII contains provisions about tax avoidance and Chapter IV (sections 747 to 756) contains provision about controlled foreign companies. Section 755(2) (now repealed) referred to a "controlling company" as a company which had control of a foreign subsidiary and section 756, which is the interpretation section for Chapter IV, provides in section 756(3):

Again, this example supports our view thatwhen the legislation wishes to import part only of a definition, or a modified version of a definition, that is stated specifically and that it does not follow that there is a need to mention every provision which is imported without modification. Thus the intention of section 756 is to import only subsections (7) to (9) of section 417.

As section 13(4) does not state which parts of section 416 are to be imported it must be assumed that all necessary parts must be imported. Section 13(4) does not mention section 417 and so we have considered whether that means that the definitions in section 417 are not imported. We find the answer to this question in Newfields, where the House of Lords can be seen to have imported so much of section 417 as was necessary to their construction of section 416 in the context of section 13(4). The importation of the definition of “control” in section 416, which is called for by section 13(4), is an importation of that definition as it is to be construed in its context in Part XI of the 1988 Act. By this means there is an effective incorporation into section 13(4) of so much of section 417 as is necessary to construe the section 416 definition of “control” in that context.

We also note that section 756 modifies section 416(6) for the purposes of controlled foreign companies and that does raise the question as to whether section 416(6), which refers to the control of five or fewer participators which reference has no application to small companies, should be applied unmodified for the purposes of section 13(4). Again this question was answered in Newfields where the House of Lords decided that the concluding words of section 416(6) did not form part of the definition of control for the purposes of section 13(4) but that the rest of section 416(6) had to be applied.

The Appellants' third argument was that section 416 was included within the group of sections dealing with close companies. Accordingly, many of its provisions related only to the question as to whether a company was a close company and were not relevant for deciding about control for the purposes of section 13(4). That was the only way to interpret section 416(6) and the concluding words of section 416(6) explained the only purpose for the attributions. Further, the concluding words only resulted in a company being "treated" as under the control of five or fewer participators, not as being under such control

Section 416 appears in Chapter I of Part XI of the 1988 Act. Part XI (sections 414 to 422) contains the provisions relating to close companies and Chapter I (sections 414 to 417) contains the interpretative provisions. Section 414 defines a close company mainly as one under the control of five or fewer participators. Section 416 defines "associated company" and "control" and section 417 defines "participator", "associate", "director" and "loan creditor". We thus agree with Mr Timothy Gascoine that section 416 appears in the group of sections relating to close companies and that its primary purpose is to define when a company is a close company. However, the whole of section 416 is imported by section 13(4) and so the importation must be taken into account in the determination ofthe question as to whether companies are associated for the purposes of the small companies' relief. We agree that parts of section 416, and, in particular, the concluding words of section 416(6), are not appropriate in the context of small companies' relief. We considered whether that meant that the whole of section 416(6) should be disregarded when considering section 13(4) or only the concluding part. In Newfields the House of Lords decided that the concluding words of section 416(6) did not form part of the definition of control for the purposes of section 13(4) but that the rest of section 416(6) had to be applied.