Muller UK & Ireland Group LLP & Ors v The Commissioners for HMRC

The legislation which is relevant to this decision can most conveniently be divided into two groups:

As regards the first group, Section 1273 provides that a UK limited liability partnership which is carrying on a trade with a view to profit, and the members of that limited liability partnership, are to be treated for UK corporation tax purposes as if the limited liability partnership were a partnership.

Since it is common ground that the LLP was a limited liability partnership which carried on a trade with a view to profit, the LLP was required by Section 1273 to be treated as if it were a partnership. Accordingly, in the rest of this decision, we will refer to the LLP as if it were a partnership. Although we will not refer expressly to limited liability partnerships, as such, all references to a partnership should be taken to include a limited liability partnership carrying on a trade with a view to profit, such as the LLP.

Section 1259 is the provision in the CTA which deals with the UK corporation tax treatment of a partnership and its members. It provides as follows:

This section applies if a firm carries on a trade and any partner in the firm (“the partner”) is a company within the charge to corporation tax.

For any accounting period of the firm, the amount of the profits of the trade (“the amount of the firm's profits”) is taken to be the amount determined, in relation to the partner, in accordance with subsection (3) or (4).

If the partner is UK resident—

determine what would be the amount of the profits of the trade chargeable to corporation tax for that period if a UK resident company carried on the trade, and

take that to be the amount of the firm's profits.

If the partner is non-UK resident—

determine what would be the amount of the profits of the trade chargeable to corporation tax for that period if a non-UK resident company carried on the trade, and

take that to be the amount of the firm's profits.

The amount of any losses of the trade for an accounting period of the firm is calculated, in relation to the partner, in the same way as the amount of any profits….”

Section 1259 is subject to certain specific computational rules in Section 1260 but none of those is relevant in the present context.

The question of precisely how Section 1259 applies, in particular in the context of Part 8, is the critical point at issue in these proceedings.

In this decision, we will refer to:

The CTA 2009 was a consolidating Act. The predecessor provision to Section 1259 was Section 114 of the Income and Corporation Taxes Act 1988 (“Section 114”) and the relevant part of Section 114 said as follows:

The second group of provisions are part of the code set out in Part 8 dealing with the treatment of intangible fixed assets and goodwill for UK corporation tax purposes. In very broad terms, the code so created is an accounting-based regime pursuant to which a corporation tax payer is subject to corporation tax in respect of intangible fixed assets and goodwill on the profits and losses shown in its accounts in respect of those assets.

In that regard, Section 729 provides that:

by way of amortisation ....

The regime in Part 8 was introduced by the Finance Act 2002 (the “FA 2002”) and took effect from 1 April 2002. Prior to the introduction of the new regime, intangible fixed assets and goodwill were subject to tax on the basis of the generally-applicable historic distinction within the UK tax legislation between capital items and revenue items. In moving to a new accounting-based regime in the FA 2002, it was necessary for Parliament to create a clear divide between those intangible fixed assets and goodwill which were intended to fall within the new regime and those intangible fixed assets and goodwill which were intended to remain subject to the old rules. The provision which Parliament introduced to do this was Section 882. At the time when the LLP acquired the Material Assets from the Corporate Members, the opening part of Section 882 said as follows:

The general rule is that this Part applies only to intangible fixed assets of a company (“the company”) that—

are created by the company on or after 1 April 2002,

are acquired by the company on or after that date from a person who at the time of the acquisition is not a related party in relation to the company…”

are acquired by the company on or after that date in case A, B or C from a person who at the time of the acquisition is a related party in relation to the company…”

Section 882 then went on:

None of those additional provisions has any direct relevance to the question which is at issue in the present proceedings and therefore we have not set them out in this decision.

It may be seen that, in the context of assets which had been acquired by the relevant company, as opposed to assets which had been created by the relevant company – which is to say, in Sections 882(1)(b) and 882(1)(c) – a fundamental threshold question was whether the person from whom the assets had been acquired was a “related party” to the company in question. Assets which had been acquired on or after 1 April 2002 from a person who was not a “related party” to the company in question fell within the regime automatically whereas assets which had been acquired on or after that date from a person who was a “related party” to the company in question fell within the regime only if certain other conditions were met – in other words, fell within Case A, Case B or Case C, as mentioned above.

The definition of a “related party” for the purposes of Part 8 as a whole was set out in Section 835. At the time when the LLP acquired the Material Assets from the Corporate Members, the relevant parts of Section 835 provided as follows:

This section explains when a person (“A”) is a “related party” in relation to a company (“B”) for the purposes of this Part.

In a case where A is a company, A is a related party in relation to B if—

A has control of, or holds a major interest in, B, or

B has control of, or holds a major interest in, A.

In a case where A is a company, A is a related party in relation to B if A and B are both under the control of the same person…”

Section 835(3) was expressed to be subject to certain exceptions in Section 835(4) but none of those exceptions is relevant in the present case.

At the time when the LLP acquired the Material Assets from the Corporate Members:

For completeness, we should mention that Section 837 contained a definition of a “major interest” – another term to which Section 835 referred – but, for reasons which will become clear, it is unnecessary to set that definition out in this decision.

Finally in relation to the legislation in Part 8, certain amendments were made to Section 882 by Section 52 of the Finance Act 2016 (the “FA 2016”). That provision inserted the following new provisions into the Section after Section 882(5):

The above provisions were stated in Section 52(5) of the FA 2016 to “have effect in relation to accounting periods beginning on or after 25 November 2015” and then Sections 52(6) and 52(7) of the FA 2016 provided as follows:

For the purposes of subsection (5), an accounting period beginning before and ending on or after 25 November 2015 is to be treated as if so much of the accounting period as falls before that date, and so much of the accounting period as falls on or after that date, were separate accounting periods.

An apportionment for the purposes of subsection (6) must be made—

in accordance with section 1172 of CTA 2010 (time basis), or

if that method produces a result that is unjust or unreasonable, on a just and reasonable basis.”

It may be seen that the new Section 882(5A) introduced by Section 52 of the FA 2016 extended the definition of a “related party” in Section 882 to include circumstances where the “participation condition”, as defined in Section 148 of the Taxation (International and Other Provisions) Act 2010 (the “TIOPA”), was met as between the two persons in question. For reasons of brevity, we will not set out in this decision the terms of Section 148 of the TIOPA, together with the interpretive provisions relating to that Section in Sections 157 to 163 of the TIOPA. It suffices for present purposes to say that each Corporate Member will have satisfied the “participation condition” (as so defined) in relation to the LLP at the time when the LLP acquired the Material Assets because the same company – TM Dairy - was directly or indirectly participating in the management, control or capital of the relevant Corporate Member and the LLP.

At the hearing of these appeals, it was common ground that:

The area of dispute between the parties turned on exactly how the provisions of Part 8 should apply in the case of a partnership. In particular, their dispute centred on the manner in which Section 882(1) should apply in the case of a partnership given that that provision limited the application of Part 8 to assets acquired on or after 1 April 2002:

Mr Trevett, who was representing the Appellants, submitted that, to the extent that the taxable profits of the notional company related to the Material Assets, Part 8 should apply on the basis that the Material Assets fell within the regime in Part 8. This was because, in applying the provisions of Section 882(1) to the notional company arising as a result of the statutory fiction, those assets should not be treated as having been acquired by the notional company from a “related party”.

His primary submission in this regard was that Section 1259 was no more than a computational provision which merely required the profits of the partnership to be calculated as if “a UK resident company carried on the trade”. It did not deem the partnership to be a company or clothe the notional company required to be assumed for the purposes of the calculation with any particular characteristics. Instead, the company in question was purely notional, generic and unspecific. It did not actually exist and it was not deemed to exist. That meant that, although one had to take into account the actual transactions into which the partnership entered in order to determine the taxable profits of the notional company, the notional company was incapable of having any “related party”. In short, it was not permissible to take into account in calculating the taxable profits of the notional company under Part 8 the identity of the person from whom the intangible fixed assets or goodwill in question had been acquired.

In the alternative, even if, contrary to the view set out above, it was necessary to consider whether the notional company had acquired the assets from a “related party”, when one turned to the definition of “related party” in Section 835, one had to apply that definition by reference to the partnership because the notional company did not actually exist and was not deemed to exist. When one did that, one found that a partnership was incapable of having any “related parties” because a partnership was not a company and so could not be “B” for the purposes of Section 835(1). As a result, none of the members of the partnership was capable of falling within any of the provisions in that section.

Consequently, on either analysis, all that was necessary in this case for the Material Assets to fall within the regime in Part 8 was that they had been acquired by the LLP on or after 1 April 2002.

Mr Tidmarsh, who was representing the Respondents, disagreed. He submitted that Section 882 set out comprehensive rules for determining which intangible fixed assets and goodwill were to be included in the regime described in Part 8 and which were not. This meant that, in the case of a partnership which had acquired intangible fixed assets and goodwill, it was impossible to calculate the taxable profits of the partnership as if it were a company, as the statutory fiction required, without:

Once one did that in the present case, it was clear that each Corporate Member was a “related party” of the notional company whose taxable profits were being determined and this meant that the Material Assets fell outside Part 8 so far as the notional company was concerned.

Mr Tidmarsh added that, even if he was wrong in that primary submission, the position had been put beyond doubt in relation to debits accruing on and after the effective date of the amendments to Section 882 made by the FA 2016. Those amendments made it clear that, at least so far as those debits were concerned, each Corporate Member was to be regarded as having been a “related party” of the notional company at the time of acquisition, because they widened the definition of “related party” with effect from the effective date of the change to encompass persons who satisfied the “participation condition” (as defined in Section 148 of the TIOPA) in relation to a partnership and each Corporate Member did satisfy that condition in relation to the LLP.

Mr Trevett submitted that the change in law purportedly made by the FA 2016 was ineffective for two reasons. The first was that any extension to the definition of the term “related party” made after the Material Assets had been acquired could not change the fact that, at the time when the Material Assets had been acquired, the Corporate Members were not “related parties”. The second was that, even if the extension could, in principle, have had that retrospective effect, the relevant provisions had been drafted deficiently and could not properly be construed as having had that effect.

It may be seen that the point in dispute in these appeals is a very narrow one, which is the manner in which the statutory fiction imposed by Section 1259 is to be applied in the context of Sections 882(1)(b) and 835.

In relation to the legislation as it stood before the enactment of the FA 2016, the Appellants allege that, since the statutory fiction is merely for the purpose of computing the taxable profits of the trade and Section 1259 refers to “a” company, the Section is not to be taken to deem the LLP to be a company for the purposes of determining whether each Corporate Member was a “related party”, whereas the Respondents say that it is impossible to calculate the taxable profits of the notional company without addressing the question of whether each Corporate Member was a “related party” on the basis that the LLP actually was a company and taking into account the actual ownership of the LLP.

In relation to the amendments made by the FA 2016, the Appellants allege that the amendments are incapable of applying because the amendments do not affect acquisitions made before the amendments became effective and have, in any event, been drafted deficiently, whereas the Respondents say that the amendments do apply to deprive the Corporate Members of relief for debits accruing in respect of the Material Assets on and after the amendments took effect.

We should stress that those are the only issues between the parties.

It was common ground that, as with all legislation:

The parties were also agreed that, in this case, the provision pertaining to the calculation of the taxable profits of partnerships which was relevant was Section 1259 – the provision which was in force at the time when the LLP acquired the Material Assets – and not its statutory predecessor, Section 114.

However, the parties disagreed in relation to the construction of the relevant legislation to which the principles described in paragraph 39 above gave rise.

Mr Trevett submitted that the starting point in the process had to be Section 1259 (and Part 17 as a whole) as those provisions were of general application in relation to partnerships, before taking into account any specific computational provisions. They made it clear that a partnership was not itself an assessable entity. Instead, as part of the process of calculating the taxable profits which were assessable on each UK resident member, it was first necessary to calculate the taxable profits of the partnership as if it were a UK resident company. This required one to take into account the actual transactions into which the partnership had entered and then to calculate the profits arising out of those transactions on the hypothesis that the partnership was a company. However, it went no further than that. It did not require some more generally-applicable assumption that the partnership was a UK resident company or deem the partnership to be a UK resident company. Nor did the statutory fiction require the notional company to be assumed to have any particular characteristics. The reference was simply to “a company”, generically. That meant that, when one considered in the case of each Corporate Member how Section 882 should apply in the present case in relation to the LLP’s acquisition of the Material Assets, one had to conclude that Section 882(1)(b) was satisfied.

Mr Trevett explained that this conclusion arose for one of two alternative reasons, both of which were based on the fact that the LLP was not actually a company and was not deemed to be a company by Section 1259.

The first reason was that, as the LLP was not actually a company and was not deemed to be a company by Section 1259, the limitation in Section 882(1)(b) to assets acquired from a person who was not a “related party” was simply incapable of applying in relation to the acquisition of the Material Assets by the LLP. The fact that there was no actual or deemed company making the acquisition meant that there could be no “related party” in relation to the acquiror. The part of Section 882(1)(b) which referred to whether or not the disponor of the relevant intangible fixed assets or goodwill was a “related party” was therefore impossible to apply. Consequently, it was unnecessary to read the definition of “related party” in Section 835 at all. Instead, the test imposed by Section 882(1)(b) should be treated as being satisfied in relation to the Material Assets simply because the Material Assets were, as a matter of fact, acquired by the LLP on or after 1 April 2002.

Mr Trevett went on to say that, if we were not persuaded by the argument set out above, and we considered that the whole of Section 882(1)(b) had to be applied, on its terms, to the present facts, then an alternative basis for reaching the same conclusion was that, when one turned to consider the terms of the definition of “related party” in Section 835, none of the Corporate Members was a “related party” of the LLP. This was because, as the LLP was not actually a company and was not deemed to be a company, the LLP could never be the entity referred to as “B” in Section 835(1) and therefore none of the Corporate Members satisfied any of the tests set out in that section. Thus, none of them was a “related party” so far as the LLP was concerned.

In response, Mr Tidmarsh said that both Section 1259 and Section 882 were part of the same enactment and it followed that they should be construed, so far as possible, consistently and so as to fit together. That was not to say that the construction of those provisions which the Respondents were proposing was in any way based on what was said to be the purpose of the legislation and without regard to the actual words used in the legislation. On the contrary, it was the right way to construe the words actually used. It was therefore entirely consistent with the approach of Henderson J in Gripple.

Turning to the first reason given by Mr Trevett as to why the Material Assets in this case should be treated as falling within Part 8 in determining the taxable profits of the notional company, it was important to note that Section 882 was the gateway to the operation of Part 8. The heading to the section, along with the use of the word “only” in the preamble to Section 882(1), made it clear that a company could fall within the regime in Part 8 in respect of particular intangible fixed assets or goodwill only if one of the three provisions in Section 882(1) applied to the creation or acquisition of those assets. The section was comprehensive in nature and left no possibility that a company might fall within the regime in respect of intangible fixed assets or goodwill in any circumstances other than those specified in Sections 882(1)(a), (b) or (c).

By way of expanding on the above, in order for Part 8 to apply to any asset in determining the taxable profits of the notional company for the purposes of Section 1259, each of the following conditions needed to be satisfied in relation to the asset:

It was therefore self-evident from the way in which the legislation had been structured that, in order for Part 8 to apply to any asset in determining the taxable profits of the notional company, it was not sufficient for the notional company merely to have satisfied the first, third and fourth condition and only part of one of the limbs of the second condition. Instead, the whole of one of the limbs of the second condition needed to have been satisfied too. This meant that it was not sufficient for the notional company merely to have acquired the relevant intangible fixed assets or goodwill on or after 1 April 2002. To adopt that approach would involve disregarding a crucial part of the language which Parliament had chosen to use in Section 882(1)(b).

Moreover, although (at a stretch) it might be possible to regard the notional company as satisfying the second part of the fourth condition - to the effect that it was within the charge to corporation tax in respect of its activities - simply on the basis of the language used in Section 1259(3) itself and without regard to any specific characteristics of the partnership to which the notional company related, it was implicit in the third condition that, in order to satisfy that condition, the notional company had to be invested with the characteristics of the partnership to which it related. In other words, the notional company needed to be treated as carrying on the trade which the partnership was in fact carrying on if it was to satisfy that condition.

As for the second reason given by Mr Trevett as to why the Material Assets in this case should be treated as falling within Part 8 in determining the taxable profits of the notional company – which was that the Corporate Members were not “related parties” of the notional company under Section 835 because the LLP was not a “company” for the purposes of applying that definition - there was no reason to apply Section 835 in the context of Section 882(1)b) on a basis other than the assumption that the notional company was an actual company with the ownership attributes of the LLP. This was simply a logical corollary of the fact that Section 835 was being considered in the context of determining the taxable profits of a notional company, as required by Section 1259. It did not involve any extension of the statutory fiction required by Section 1259 beyond the computation process. It was instead simply an integral part of that computation process. In the same way that a notional company had to be assumed for the purpose of applying Section 882(1)(b), so a notional company had to be assumed for the purpose of construing the terms of Section 835 in the context of Section 882(1)(b). They were both part of the computation process.

It may be seen from the above description that there was a difference between the parties as to whether or not Section 1259 was a deeming provision.

Mr Trevett said that Section 1259 was not a deeming provision. It merely required the determination of what would have been the taxable profits of the trade carried on by the partnership in question if a UK resident company had carried on that trade. There was no sense in which this required a company to be deemed to exist. Instead, the company to which the section referred was no more than a statutory fiction required for computational purposes. Once that computation was carried out, the purpose of the section was fulfilled and the notional company had no further role to play. In particular, in this context, no deeming as to the ownership characteristics of the notional company was required.

For his part, Mr Tidmarsh said that, although the word “deemed” did not appear in Section 1259, the operation which was required to be carried out by the section was to treat as existing something which did not in fact exist and that operation could properly be described as “deeming”. Indeed, in the leading textbook on statutory interpretation, Bennion, Bailey and Norbury on Statutory Interpretation (“Bennion”), the authors had pointed out that the language used to set up a statutory hypothesis varied and that “[the] traditional form of words ‘shall be deemed’ has generally given way to expressions such as ‘treated as’, ‘regarded as’ or ‘taken to be’. Whatever form is used the effect is the same” (see Bennion at paragraph [17.8]). Mr Tidmarsh said that, in this case, Section 1259 had used one of those very phrases in that Section 1259(3)(b) expressly instructed the reader, after determining the amount of the taxable profits of the notional company in Section 1259(3)(a), to “take that to be the amount of the firm’s profits”.

He added that, in order to make sense of the statutory fiction which was required by the section, the notional company had to be allocated attributes. This was consistent with the dicta of Peter Gibson J in Marshall v Kerr [1994] STC 638 (“Kerr”) at 649 to the following effect:

It was also consistent with the conclusion in Bennion that “[the] effect of the authorities discussed below may be summarised as being that the intention of a deeming provision, in laying down a hypothesis, is that the hypothesis shall be carried as far as necessary to achieve the legislative purpose, but no further.”

Critically, the Respondents were not saying that the notional company should be deemed to have an existence beyond that needed for the purpose of computation. They were merely saying that the statutory fiction needed to encompass the whole of the computation process and not just part of it.

Mr Trevett made the following five points in response to the submissions set out in paragraphs 54 to 57:

Mr Trevett said that the Appellants’ construction of the legislation was supported by the recent decision of the Upper Tribunal in the case of BCM Cayman LP and another v The Commissioners for Her Majesty’s Revenue and Customs [2022] UKUT 198 (TCC) (“BCM”). He said that, in BCM, the Upper Tribunal had:

Mr Trevett said that, although the conclusions set out above were drawn in relation to a corporate member of a partnership which was a non-UK resident company within the charge to corporation tax, they also applied, by logical extension, in a case where the relevant corporate member of the partnership was a UK resident company. What this demonstrated was that the assumption which Section 1259 required to be made did not have a general effect on the way profits were ascertained or the classification of loan relationships.

He submitted that the same approach had been taken by Park J in the case of Davies v Hicks [2005] STC 850 (“Davies”). In Davies, the Respondents had attempted to extend a statutory fiction required for computational purposes – namely, the fiction that shares which had been the subject of a disposal could be matched with shares which were acquired on the following day – to mean that the settlement which was the disponor of the shares in question continued to hold the shares when the trustees of the settlement became non-UK resident between the time of disposal and the time of acquisition. They had thus argued that the change in residence of the trustees triggered a deemed disposal of the shares under Section 80 of the Taxation of Chargeable Gains Act 1992 even though, in reality, the trustees did not hold any shares at that time. In that regard, Park J had held that:

Mr Tidmarsh said that the Respondents’ construction of the legislation did not involve taking the statutory fiction in Section 1259 any further than for the purposes of computation. As such, it was entirely consistent with the decision in BCM. It was merely the case that the computation itself required certain characteristics to be imputed to the notional company. In BCM, the taxpayer, which was a member of a trading partnership, had attempted to use the trading attributes of the partnership to impart a trading nature to the loan which the taxpayer had taken out in order to acquire its interest in the partnership. It was not surprising that the Upper Tribunal had rightly rejected that proposition. It involved an attempt to extend the statutory construct beyond the computational and into a characterisation of the nature of the loan taken out by the partner. However, that proposition was a long way from the approach which the Respondents were adopting in this case.

In addition, this case was distinguishable from the situation in Davies. In Davies, the Respondents had tried to extend a statutory construct which was required for the purposes of a particular chargeable gains computation into other areas of the chargeable gains legislation. In contrast, in this case, the Respondents were not straying beyond the computation in question in their application of the statutory construct. They were not saying that Section 1259 should be regarded as having continuing effects after the computation had been completed. They were merely saying that, in order properly to carry out the computation required by Section 1259, it was necessary to take account of the characteristics of the notional company imparted by the characteristics of the partnership from which it had derived. The notional company computation could not properly be completed without taking into account those attributes.

Mr Trevett pointed out that the Appellants’ approach in this context was entirely consistent with, and therefore supported by:

Both SP4/98 and Inland Revenue 5 related to Section 114 but, as the Upper Tribunal had noted in BCM, the language used in Section 114 was not materially different from the language used in Section 1259 in this respect. Indeed, if a distinction could be drawn in this respect between the language in Section 1259 and the language in Section 114, it was even clearer in Section 1259 than in Section 114 that no deemed company was created. This was because, whereas Section 114 stated that the taxable profits of the trade were to be computed “as if the partnership were a company”, Section 1259 merely said that the taxable profits of the trade carried on by the partnership were to be computed as if a UK resident company carried on the trade.

In SP4/98, the Inland Revenue had said that:

Inland Revenue 5 included a technical note suggesting areas in which the legislation relating to loan relationships, foreign exchange and financial instruments could be improved and modernised. The technical note:

Mr Trevett explained that the difficulties noted in SP4/98 and Inland Revenue 5 had led to amendments to the loan relationships legislation in the FA 2002 – now set out in Sections 380 to 384. That legislation specifically disapplied Section 114 in calculating the profits and losses arising from the loan relationships of a partnership, treating each member of the partnership as a party to the partnership’s loan relationships and setting out rules for determining when the connected persons rules should apply to a loan relationship between a partnership and one of its members.

The FA 2002 had also introduced the derivatives regime and the same approach had been adopted in drafting the legislation creating that regime. The relevant legislation – now set out in Sections 619 to 622 – also disapplied Section 114 in calculating the profits and losses arising from the derivative contracts of a partnership and required each member of the partnership to be treated as a party to those derivative contracts.

The FA 2002 had also brought into existence the regime which was now in Part 8 and yet, for reasons no-one could explain, the regime had not included similar provisions to those set out in the same Act in relation to loan relationships and derivative contracts. The result was that it was clearly the intention of Parliament that Section 114 (and now Section 1259) should apply in calculating the profits and losses arising to each UK resident corporate member of a partnership in respect of the partnership’s intangible fixed assets and goodwill. It followed that, so far as concerned the application of the legislation to the intangible fixed assets and goodwill of a partnership, the position was identical to the one which had pertained in relation to loan relationships before the changes in law brought about by the FA 2002 and it could be seen that the connected persons rules did not apply in relation to loan relationships between a partnership and one of its members at that time.

Mr Tidmarsh reminded us that the task on which we were engaged was to determine what Parliament meant when it enacted the relevant legislation and that the relevant legislation in this case was Section 1259 and not its predecessor, Section 114.

It followed that the Respondents’ interpretation of Section 114 prior to the enactment of the FA 2002 was irrelevant to our conclusion for two reasons – it did not represent the views of Parliament and it related to a different statutory provision from the one which we were presently considering.

He added that, in any event, there were hints in SP4/98 that the reason for the statement of practice was not so much that the provisions in relation to connected persons in the loan relationships legislation did not apply in the case of partnerships but more that taxpayers were encountering considerable practical difficulties in applying the legislation in that area and therefore the Respondents had decided that the simplest solution was to disapply the legislation.

Mr Tidmarsh submitted that the changes made by Parliament to the loan relationships regime in the FA 2002 (and the terms on which the derivative contracts regime was created in that Act) did not come close to showing that Section 114 did not have effect in the context of the loan relationships regime (and could not have had effect in the context of the derivative contracts regime) in the manner in which the Respondents were now contending in relation to the regime in Part 8. The changes merely demonstrated that, in the context of the loan relationships and derivative contracts regimes, Parliament wished to introduce complex rules for taxing transactions with connected parties which involved excluding the application of Section 114. Section 114 might have worked perfectly well in the context of those regimes had those complex rules not been introduced.

Moreover, reverting to the point that Part 17 was part of the same piece of legislation as Part 8 and that the two sets of provisions should therefore, so far as possible, be construed consistently so as to fit together, it would be perverse if Parliament, having set out in Section 882 a comprehensive code for determining which assets were to be subject to Part 8, were, in the very same Act, to have created a loophole for companies acting through partnerships. If there was a way of construing the CTA 2009 in a way that rendered the legislation consistent and logical, then that approach should be adopted ahead of a construction which produced the opposite result.

The Appellants pointed out that the fact that the notional company was not an actual or deemed company and therefore could not be “B” for the purposes of Section 835(1) was not the only difficulty with attempting to apply the definition of “related party” in the context of a partnership. There were some others.

For instance:

A separate point was that, even if it were to be assumed that:

Having said that, the Appellants accepted that, if the assumptions described in paragraphs 78(1) and 78(2) were to be made in this case, then:

The Respondents position in relation to this question was somewhat different from the one set out above. In their view, as long as the notional company could be “B” for the purposes of Section 835, then:

Turning to the question of whether the new provisions introduced by Section 52 of the FA 2016 might affect the position, Mr Trevett said that there were two reasons why those provisions had no impact on the issue in dispute in the present case.

The first reason was that the acquisition of the Material Assets in this case had occurred in 2013 and the change in law had not taken effect until 25 November 2015 (the “Effective Date”). Section 882(1)(b) looked at the position as it stood at the time when the relevant assets were acquired. It required the disponor to be a person other than a “related party” at the “time of the acquisition”. It followed that, even if each Corporate Member were to have become a “related party” of the notional company comprising the LLP by virtue of the change in law, that change in law would have occurred after the “time of the acquisition” and therefore could not affect the application of Part 8 to the Material Assets at any point.

In response to Mr Trevett’s first reason, Mr Tidmarsh made two submissions.

The first was that corporation tax was an annual tax and therefore the conditions in Section 882 needed to be re-examined in each accounting period in which a deduction for an expense was claimed to see if, at that time, one of the conditions in Section 882(1) was satisfied in relation to the asset to which that expense related. It followed that, even if the legislation did not operate in the manner for which the Respondents were contending in accounting periods commencing prior to the Effective Date, it was clear that, in relation to accounting periods commencing (or deemed to commence) on or after the Effective Date, each Corporate Member was a “related party” of the notional company and therefore none of the conditions was so satisfied. Thus, debits accruing on and after the Effective Date were to be treated as accruing in respect of assets falling outside the Part 8 regime.

The second submission was that this way of applying Section 882(1) following the change in law was apparent from the terms of Sections 52(5) to 52(7) of the FA 2016. Those provisions had stipulated that the change in law was to take effect in relation to accounting periods beginning on or after the Effective Date but then, crucially, had gone on to provide for any accounting period which straddled that date to be split into two so that the part of the straddling accounting period falling prior to that date was to be treated as a separate accounting period from the part of the straddling accounting period falling on and after that date. Mr Tidmarsh said that, if the change in law was incapable of affecting acquisitions of assets made prior to the Effective Date, as the Appellants were alleging, then there would have been no reason for the draftsman to have provided for the straddling accounting period to be split into two in this manner.

Mr Trevett said that the second reason why the new provisions could have no impact on the issue in dispute in the present case was that, even if they were capable of having effect in relation to debits accruing in accounting periods commencing (or deemed to commence) on or after the Effective Date, the language used in the new provisions was predicated on an assumption by the draftsman that Section 1259 required references in Section 882 to “a company” to include references to a partnership. That was how Section 882(5B) had been worded. For the reasons which he had already explained, that assumption was incorrect. Section 1259 had no such effect. The notional company to which reference was made in Section 1259 was solely for the purpose of determining the taxable profits of the partnership. It had no wider effect than that and, consequently, Section 882(5B) was a nonsense and was ineffective in extending in relation to partnerships the change made by Section 882(5A) in relation to companies.

Mr Tidmarsh conceded that the new Section 882(5B) was not happily worded. He agreed that the new provisions were not very easy to apply because Section 1259 did not, in and of itself, expressly require references in Section 882 to “a company” to be read as including references to a partnership. All that Section 1259 said was that the taxable profits of the trade carried by a partnership were to be calculated as if the trade was being carried on by a notional company.

However, it was clear from the language used in the new Section 882(5B) that the draftsman had assumed that to be the case. As a result, there were only two possible approaches to construing the new provisions. Either they had had no effect at all – as the Appellants were submitting – or they could be construed on the basis that the assumption made by the draftsman as to the impact of Section 1259 on the application of Section 882 was correct and therefore resulted in an extension to the definition of “related party” in the partnership context.

There were a number of reasons why the latter was the preferred approach.

First, the former approach involved giving no effect whatsoever to the new provisions whilst the latter gave effect to the stated purpose underlying the introduction of the new provisions in the explanatory notes which had accompanied the introduction of the draft clauses that became Section 52 of the FA 2016. It was clear from the Court of Appeal decision in Flora v Wakom (Heathrow) Limited [2006] EWCA Civ 1103 (“Flora”) at paragraph [16] that explanatory notes accompanying draft legislation were an admissible aid to construing the legislation insofar as they cast light on the objective setting or contextual scene of the statute or the mischief at which the legislation was aimed.

In this case, the summary at the start of the explanatory notes in question had stated that “[the] clause confirms that arrangements involving bodies such as partnerships or Limited Liability Partnerships (LLPs) cannot be used to move assets into the Part 8 rules in ways that were not intended by the legislation”. The background section of the notes had then gone on to say that:

Moreover, as something which was of relevance to Mr Tidmarsh’s second submission in relation to Mr Trevett’s first point – at paragraph 85 above - paragraph [10] of the explanatory notes stated categorically that “[the] rules apply to debits and credits irrespective of when the relevant transfers of intangible fixed assets took place”.

Mr Tidmarsh said that the terms of the explanatory notes made it clear that the purpose of the legislation was to counteract claims that Part 8 applied to assets that were transferred to a partnership or limited liability partnership without an effective change in economic ownership and that that purpose should be taken into account in construing the new provisions.

Secondly, Mr Tidmarsh submitted that the Respondents’ approach to the new provisions was consistent with the proposition set out by the Court of Appeal in GDF Suez Teesside Limited v The Commissioners for Her Majesty’s Revenue and Customs [2018] EWCA Civ 2075 (“GDF Suez”) at paragraph [87] to the effect that, “[where] an Act makes textual amendments to an earlier Act the intention is usually to produce a revised text that may be construed as whole” although “[the] original wording…may be used as an aid to interpreting the meaning of words that are unaltered.”

This meant that, when one looked at the CTA 2009 after the amendments effected by the FA 2016 had been made, it was necessary to look at the Act as a whole regardless of the fact that the amendments might have had an effect on other sections of the Act. And, looking at the CTA 2009 as a whole following the amendments made by the FA 2016, it was clear that Section 882(5B) was predicated on the assumption that the effect of Section 1259 was to require references in Section 882 to “a company” to include references to a partnership.

Thirdly, Mr Tidmarsh said that it had been held in previous cases such as the House of Lords decision in Inco Europe Limited v First Choice Distribution (a firm) [2000] 1 WLR 586 (“Inco HL”) that it was permissible for a court to correct obvious drafting errors in legislation in certain narrowly-defined circumstances. Those were where “the court [is] abundantly sure of three matters:

the intended purpose of the statute or provision in question;

that by inadvertence the draftsman and Parliament failed to give effect to that purpose in the provision in question; and

the substance of the provision Parliament would have made, although not necessarily the precise words Parliament would have used, had the error in the Bill been noticed.

The Court of Appeal had adopted a similar approach in correcting an obvious drafting error in the stamp duty land tax legislation – see Pollen Estates Trustee Co Limited v The Commissioners for Her Majesty’s Revenue and Customs [2013] 1 WLR 3785 (“Pollen”) at paragraphs [45] to [49].

In this case, it was clear that:

Adopting that approach in the present case, a court or tribunal was permitted to read certain additional words into Section 882(5B) so that it read as follows (with the additional words in italics):

In his closing submission, Mr Trevett responded to the points made by Mr Tidmarsh in paragraphs 87 to 99 above as follows.

As regards the admissibility of the explanatory notes as an aid to construing the new legislation, he pointed out that:

As regards the question of whether the deficient drafting in Section 882(5B) could be remedied by applying the principles set out in Inco HL, he said that:

In relation to the terms of the original legislation before its amendment pursuant to Section 52 of the FA 2016, it may be seen that the Appellants seek to justify the inclusion of the Material Assets in the notional company calculation under Part 8 on two grounds.

The first is that the requirement in Section 882(1)(b) to the effect that the relevant intangible assets or goodwill needed to be acquired from a person other than a “related party” was simply incapable of applying. This is because the notional company was no more than a statutory construct for the purpose of computing the taxable profits to be allocated to the relevant Corporate Member. It was not an actual or deemed company. As such, the very concept of a “related party” had no meaning in the context of the relevant calculation.

The second, and quite distinct, ground is that, even if the concept of a “related party” did have relevance in the context of the notional company calculation, the terms of the “related party” definition and, in particular, the fact that “B” in Section 835(1) was required to be a company, meant that, when one applied the terms of the definition, none of the Corporate Members could be said to be a “related party” of the notional company.

The Respondents oppose both of those propositions and we have concluded that they are right to do so.

Before setting out the reasons for our conclusions, we think it is important to say something about the decision in BCM, as it is a recent case which touches on the effect of Section 1259 to which Mr Trevett referred in support of his submissions. In our view, the decision in BCM sheds no light whatsoever on the issues which we are addressing in this case. The question at issue in BCM was whether the appellant - a non-UK resident company which had borrowed to acquire interests in a UK trading partnership - could claim relief for the interest which it incurred in respect of its borrowings as trading expenses. In seeking that relief, the appellant submitted that the fact that the UK partnership in which it had acquired the interests by using the borrowings was carrying on a trade meant that the borrowings had been taken out for the purposes of that trade. In making that submission, the appellant sought to rely on the fact that a partnership has no independent personality for tax purposes with the result that each partner should be regarded as carrying on the trade of the partnership directly. In paragraph [161] of its decision, the Upper Tribunal rejected that proposition. In so doing, it noted that:

It was in that context that the Upper Tribunal made the observations which it did about the language in Section 1259(4) and, in particular, the use of the indefinite article in that section to refer to the notional company. In making those observations, the Upper Tribunal were saying that the mere fact that the first stage in the process of computing the taxable profits of a non-UK resident corporate member of a trading partnership required the assumption that the trade of the partnership was being carried on by a notional non-UK resident company did not mean that the actual non-UK resident corporate member whose taxable profits were being determined should be regarded as carrying on the trade of the partnership. That was not a surprising conclusion but it sheds absolutely no light on the questions we are addressing in these appeals. As Mr Tidmarsh rightly observed, these appeals are about the manner in which the process of computing the notional company’s taxable profits is to be conducted. They are not about attempting to extend, beyond the computational process, the statutory fiction which is required by Section 1259.

For these reasons, we do not think that the decision in BCM is of any assistance to the Appellants in relation to either of the two propositions described in paragraphs 104 and 105 above.

We now turn to consider each of those propositions, in turn.

The first proposition is that, in carrying out the notional company calculation required by Section 1259, the requirement in the second part of Section 882(1)(b) – to the effect that the acquisition in question was from a person who was not a “related party” – should somehow be ignored because it is incapable of applying. We emphatically reject that proposition. We agree with the Respondents that the three scenarios laid down in Section 882(1) are intended to be, and are expressed to be, exhaustive of the circumstances in which intangible fixed assets and goodwill fall within the regime in Part 8. It follows that, in a case where a partnership holds intangible fixed assets or goodwill, it is impossible to carry out the notional company computation which is required by Section 1259 without asking whether, in relation to the intangible fixed assets or goodwill in question, the notional company which has to be assumed in order to carry out the computation required by Section 1259 created or acquired the relevant intangible fixed assets or goodwill in one of the three scenarios described in Section 882(1).

The Appellants accept that the provisions in Part 8 of the CTA 2009 generally apply in carrying out the notional company calculation and that, in carrying out that calculation, it is necessary to look at the actual transactions entered into by the partnership. However, they claim that, because the notional company is just that – a generic company which is assumed for computational purposes only and not an actual company – the identity of the person or persons from whom the partnership acquired the relevant assets is somehow irrelevant. We disagree. We think that, in the same way that the actual transactions carried out by the partnership inform the notional company calculation, so too do the actual identities of the counterparties to those actual transactions, and for precisely the same reason. It is implicit in carrying out the notional company calculation that all of the actual facts and circumstances surrounding the transactions into which the partnership has entered are taken into account when the notional company calculation is carried out.

For the above reasons, we have concluded that, in carrying out the notional company calculation in this case to the extent that it related to the Material Assets, it is necessary to address the question of whether the Material Assets were acquired from a person who was not a “related party” of the notional company and, hence, whether each Corporate Member was a “related party” of the notional company.

We think that the answer in relation to this first proposition is clear.

The parties’ respective arguments in relation to the second proposition are a bit more finely-balanced.

We see some force in the Appellants’ submissions to the effect that:

Each of the above points has given us pause for thought. However, on balance, we have concluded that, as is the case with the first proposition, the second proposition is incorrect. We say that for the following reasons:

There are three final observations which we should make in relation to this issue.

The first is that we do not agree with the submission made on behalf of the Appellants to the effect that, in agreeing with the Respondents in relation to the two propositions, we are deeming the notional company to have an existence which extends beyond the computational (see paragraph 58(2) above). On the contrary, we think that, contrary to that submission, it is impossible fully to carry out the notional company computation in the context of intangible fixed assets and goodwill, as Section 1259 directs, without taking into account both the identities of the disponors to the notional company and the ownership characteristics of the notional company. That is exactly what the language in Section 882 requires.

The second is that we think that there is an inconsistency in the Appellants’ position in relation to the two propositions and their assumption that the application of Part 8 is not precluded in this context by the terms of Section 803(b). The latter provision prevents intangible fixed assets or goodwill from falling within Part 8 where they are held for the purpose of activities in respect of which “the company is not within the charge to corporation tax”. It is implicit in the Appellants’ conclusion to the effect that Part 8 applies in this case that Section 803(b) is inapplicable and therefore that they believe that the Material Assets are to be treated as having been held for the purpose of activities in respect of which “the company is …within the charge to corporation tax”. We do not see how that test can be satisfied unless the statutory fiction in Section 1259 is to be taken into account for the purpose of applying Section 803(b). And, if the statutory fiction is to be taken into account for that purpose, why should it not also be taken into account for the purpose of applying Section 882(1)(b) and the definition of “related party” in Section 835 to which that Section refers?

The two provisions – Sections 882 and 803(b) – seem to us to have similar standing in terms of computing the taxable profits of the notional company in the context of intangible fixed assets and goodwill. Section 882 is a gateway provision, which identifies the assets which are to be allowed to enter the regime, whilst Section 803(b) is an anti-avoidance provision, which identifies the assets which, although they would otherwise be allowed to enter the regime, are required to be excluded from the regime. We do not readily see how the statutory fiction can be applied to one of them but not the other, as the Appellants’ position suggests.

The final point is that, without pre-empting the conclusions which we set out below in relation to the impact on the position of the changes made by Section 52 of the FA 2016, the way in which the new Sections 882(5B) and 882(5C) were drafted suggests to us that the proponents of the changes had no doubt that the requirement in Section 882(1)(b) - to the effect that the relevant intangible fixed assets or goodwill needed to be acquired from a person other than a “related party” - was applicable to notional companies as well as to actual companies. That was why Section 882(5B) referred to the fact that, for the purposes of determining under Section 1259 the profits to be allocated to a member of a partnership, the references to “a company” in Section 882 were to be read as including references to a partnership. Although we agree with Mr Tidmarsh that the relevant provisions were not happily worded, we think that it is clear from the language used in Sections 882(5B) and 882(5C) that the proponents of the changes had no doubt that a notional company, as well as an actual company, had to establish that the intangible fixed assets or goodwill in question had not been acquired from a “related party” before Section 882(1)(b) could be satisfied and, thus, that the Appellants’ first proposition was clearly incorrect.

On the other hand, so far as the second proposition is concerned, the proponents of the changes appear to have been less confident that the existing tests in Section 835 for determining a “related party” were adequate to apply in the context of a notional company in all cases. That was why, at the same time as the new provisions sought to extend the term “related party” to include circumstances where the “participation condition” in Section 148 of the TIOPA was met, the explanatory notes presented the new provisions as merely confirmatory in nature. This suggests to us that the proponents of the changes might have believed that the existing legislation probably achieved its objective but was not certain to do so. Hence, the desire to put the situation beyond doubt. It may be seen from the conclusion we have reached in relation to the second proposition that we think that those concerns were unjustified.

The conclusions which we have set out above are sufficient to dispose of these appeals in favour of the Respondents.

As such, it is, strictly speaking, unnecessary for us to address the submissions made by the parties in relation to the impact of the new provisions introduced by Section 52 of the FA 2016. That is because those provisions would potentially be relevant only if we had concluded that, prior to their introduction, the notional company should be regarded as satisfying Section 882(1)(b) in relation to the acquisition of the Material Assets. However, in deference to the submissions made by the parties at the hearing, we set out below our conclusions in relation to them. Those conclusions are, of course, founded on the hypothesis that, under the terms of the legislation as it stood prior to the enactment of the FA 2016, no Corporate Member could be or was a “related party” of the notional company at the time when the LLP acquired the Material Assets – which is to say that the conclusions set out in paragraphs 103 to 123 above are wrong.

There are two distinct areas of contention in relation to the FA 2016, both of which stem from deficiencies in the drafting of the relevant legislation.

The first arises out of the fact that the approach taken by the draftsman was simply to extend the definition of a “related party” for the purposes of Section 882. That gives rise to potential difficulties because the test imposed by Section 882(1)(b) is based on the status of the disponor at the “time of the acquisition”. The explicit reference in the Section to the time at which the disponor was required not to be a “related party” inevitably begs the question of whether, in relation to particular assets, simply extending the definition of “related party” with effect from a date falling after the date when those assets were acquired can ever have any effect on debits arising in respect of those assets, whether before, on or after the effective date of the change. For example, in this case, on the hypothesis that no Corporate Member was a “related party” of the notional company at the time when the Material Assets were acquired, how can legislation which purported to extend the meaning of “related party” with effect from a date falling after the date when the Material Assets were acquired have any impact on the application of Section 882(1)(b) in relation to the Material Assets, given that the Section specifies that the “related party” status of a Corporate Member so far as the Material Assets are concerned is to be determined at the “time of the acquisition”?

The second area of dispute arises only if the change to the definition of “related party” was capable of having that impact and it relates to the fact that the language used in the new Sections 882(5b) and 882(5C) was clearly predicated on an assumption by the draftsman that Section 1259 required references in Section 882 to “a company” to include references to a partnership. In circumstances where we are operating on the basis of the hypothesis that no Corporate Member was capable of being a “related party” of the notional company at the time when the LLP acquired the Material Assets – which is the basis on which we are necessarily addressing this question - that assumption was clearly incorrect. Consequently, it is necessary to consider whether those provisions could have any effect whatsoever, founded as they were on a fundamental misapprehension of the way that the existing legislation applied.

We think that the first of the questions described above is the more difficult of the two.

We would start by saying that it is very tempting to conclude that the drafting deficiency mentioned in paragraph 127 above, coupled with the hypothesis on which we are addressing this question, prevents the new provisions from applying at any time to any debits arising in respect of the Material Assets. This for the simple reason that the new provisions were enacted after the LLP acquired the Material Assets and therefore, given the reference in Section 882(1)(b) to the “time of the acquisition”, could not affect the way in which that Section applied to the notional company at any stage. In that regard, we do see some force in the argument that the express reference in the Section to the “time of the acquisition” means that the Section applied on a “once-and-for-all” basis at that moment in time and that, as long no Corporate Member was a “related party” at that time, no subsequent change to the definition of “related party” could change the position. If that argument is right, then, in order for the extended definition of “related party” to be read into Section 882(1)(b) when applying that Section in relation to debits accruing on and after the Effective Date in respect of assets acquired before the Effective Date, something more was required than simply providing for the extended definition to apply on and after the Effective Date. For example, it might be said that, in order to have that effect, the new provisions needed to provide expressly that debits accruing on and after the Effective Date were to be calculated as if the extended definition of “related party” had applied at the time of the acquisition. The new provisions did no such thing.

If that conclusion is right, then, on the hypothesis that no Corporate Member could be or was a “related party” of the notional company at the time when the Material Assets were acquired, Section 882(1)(b) was satisfied not only before the Effective Date, when the new provisions took effect, but also on and after the Effective Date.

However, after giving this question some considerable thought, and recognising that the position is finely-balanced, we have concluded that that is not the right answer. On the contrary, for the reasons which follow, we have concluded that the extended definition of “related party” should be read into Section 882(1)(b) when applying that Section in relation to debits accruing on and after the Effective Date in respect of assets acquired before that date.

Three arguments were made by the Respondents in support of this conclusion.

The first was that paragraph [10] of the explanatory notes to the clauses which became Section 52 of the FA 2016 stated that “[the] rules apply to debits and credits irrespective of when the relevant transfers of intangible fixed assets took place”. As such, the intention of the Government in introducing the new provisions was clearly that the amended definition of “related party” should apply in determining whether debits accruing on and after the Effective Date fell within the regime no matter when the relevant acquisition was made.

The second was that Sections 52(5) to 52(7) provided for the new provisions to take effect in relation to accounting periods commencing on or after the Effective Date and then deemed the accounting period current as at the Effective Date to be split into two accounting periods. Mr Tidmarsh pointed out that the only reason to provide for the accounting period straddling the Effective Date to be split into two accounting periods was that debits accruing on and after the Effective Date in respect of acquisitions made before the Effective Date were intended to be affected by the new provisions. There could be no other reason for splitting the straddling accounting period in this way.

The final one was that corporation tax is an annual tax and therefore the question of whether a Corporate Member was a “related party” of the notional company at the “time of the acquisition” had to be revisited in each accounting period in which debits in respect of the Material Assets arose and not on a “once-and-for-all” basis solely at the “time of the acquisition”. Upon doing that in this case, the fact that, on and after the Effective Date, each Corporate Member was a “related party” of the notional company at the “time of the acquisition” under the amended legislation meant that debits accruing on and after the Effective Date were outside the regime because Section 882(1)(b) was no longer satisfied in relation to the assets giving rise to those debits.

We do not consider the first reason to be persuasive in and of itself.

That is because we agree with the point made by Mr Trevett in paragraph 101(1) above to the effect that the decision in Flora makes it clear that:

The second reason is somewhat more persuasive than the first, given that, although it too depends on a perceived intention in relation to the operative provisions, the intention on which reliance is being placed is reflected not in explanatory notes but in the legislation itself, in the form of the commencement provisions. We agree with Mr Tidmarsh that the only logical reason for splitting the straddling accounting period into two was that the draftsman considered that the extended definition of “related party” would apply to debits accruing on and after the Effective Date in respect of acquisitions made before that date. Indeed, Mr Trevett did not provide us with any other explanation for the terms of the commencement provisions. It follows that, were we to reach a contrary conclusion to the one we have reached, that would have the effect of rendering the commencement provisions, as drafted, redundant. We are naturally reluctant to reach a view which has that consequence.

Having said that, we do not think that this second reason, in and of itself, would be sufficient to justify the conclusion we have reached. That is because, as a matter of general principle, the terms of commencement provisions cannot impart a meaning to the operative provisions to which the commencement provisions relate that is at-odds with the language used in the operative provisions themselves. However, in this case, for the reasons which we are about to give, we think that the operative provisions are capable of being construed in a manner which is entirely consistent with the commencement provisions. The commencement provisions are therefore supportive of that conclusion.

Turning then to the third reason given by Mr Tidmarsh, we have concluded that it is for that reason that the Respondents should succeed in relation to this question. We believe that it is possible to read the legislation in the manner for which the Respondents are contending and that, in fact, the relevant construction is, on balance, the better reading of the legislation.

The starting point is to recognise that corporation tax is an annual tax and that it is necessary to consider afresh in respect of the debits arising in each accounting period whether Section 882(1)(b) is satisfied in respect of the assets which have given rise to those debits. That does not mean that whether or not the disponor is a “related party” needs to be determined afresh in each accounting period by reference to the then-prevailing facts. The relevant time for determining whether a person is a “related party” is always the “time of the acquisition” and only the “time of the acquisition”. However, it does mean that, in applying the legislation in the later accounting period and thus considering whether the disponor was a “related party” at the “time of the acquisition”, it is necessary to apply the law as it stands in the later accounting period and not simply the law as it stood at the “time of the acquisition”. Thus, in this case, once the new provisions took effect, they were required to be taken into account in accounting periods commencing (or deemed to commence) on or after the Effective Date in determining whether each Corporate Member was a “related party” at the “time of the acquisition”.

As we have said, this approach is appropriate because corporation tax is an annual tax and therefore the conditions for a debit to qualify for relief need to be tested in the accounting period in which the debit arises. It is also consistent with the proposition in GDF Suez at paragraph [87] (and set out in paragraph 94 above) to the effect that “[where] an Act makes textual amendments to an earlier Act the intention is usually to produce a revised text that may be construed as whole”. In the present context, that means that, once the new provisions took effect, Part 8 was to be construed as if the new provisions had been part of Section 882 ab initio. In the words of Hobhouse LJ in the Court of Appeal decision in Inco Europe Limited v First Choice Distribution (a firm) [1999] 1 All ER 820 “the effect of an amendment to a statute should be ascertained by construing the amended statute. Thus, what is to be looked at is the amended statute itself as if it were a free-standing piece of legislation and its meaning and effect ascertained by an examination of the language of that statute.”

We should make it clear that nothing we have said in paragraphs 141 to 143 above is inconsistent with the proposition that “related party” status is to be determined only by reference to the “time of the acquisition” and not on an ongoing basis by reference to the then-prevailing facts. The present circumstances are different from a case where assets are acquired from a person who is not a “related party” and then the disponor becomes a “related party” at some point after the acquisition but at a time when debits in respect of the acquired assets are still accruing. The Respondents accepted that, in such a case, the debits accruing after the disponor became a “related party” as a result of the change in facts would be unaffected by the disponor’s change in status to “related party”. We agree. As a policy matter, it seems logical to us that the question of whether the person from whom the assets have been acquired is a “related party” should logically be tested only at the “time of the acquisition” and not at any point thereafter. However, that is not to say that, in testing the disponor’s status by reference to the facts as they stood at the “time of the acquisition”, changes in law which have been made after the “time of the acquisition” but on or before the time when the relevant debits accrued can simply be disregarded. We therefore also agree with the Respondents that a case where the disponor becomes a “related party” by reason of a change in the relevant facts taking place after the “time of the acquisition” is very different from the present circumstances where, after the “time of the acquisition”, without any change in the relevant facts, a person may be regarded as having become a “related party” at the “time of the acquisition” by virtue of a subsequent change in law.

For the reasons set out above, we believe that, on the hypothesis that no Corporate Member could be or was a “related party” at the “time of the acquisition” prior to the Effective Date, the position would need to be re-examined in relation to debits accruing on and after the Effective Date by taking into account the impact of the new provisions on the definition of “related party”.

Turning then to the terms of the new provisions themselves, we need to consider whether, on the hypothesis that no Corporate Member could be or was a “related party” at the “time of the acquisition” prior to the Effective Date, the new provisions were effective in depriving each Corporate Member of relief for its appropriate share of the debits accruing in accounting periods commencing (or deemed to commence) on or after the Effective Date.

We are again inclined to favour the Respondents’ position in this respect. We recognise that, on the basis of the hypothesis on which we are addressing this question, the draftsman of the new Sections 882(5B) and 882(5C) was proceeding on a fundamental misunderstanding of the then-existing statutory framework. It is perfectly clear from the language used in those provisions that the draftsman was under the apprehension that the effect of the statutory fiction was that references in Section 882 to a “company” were to be read as including a partnership in a case where Section 882 was applying in the context of the notional company computation required by Section 1259. As it happens, we think that the draftsman’s apprehension was correct. However, for the purposes of this part of the decision, we are necessarily assuming that it was not.

On that assumption, the new Sections 882(5B) and 882(5C), read literally, had no effect whatsoever. However, the purpose of the relevant provisions was clear, both in the terms of the provisions themselves and by reference to the explanatory notes which accompanied the new clauses that became the provisions. Moreover, the failure of the drafting to achieve the intended purpose was clearly inadvertent and the substance of the provisions which Parliament would have made in the absence of that error was readily apparent. As such, for the reasons given by Mr Tidmarsh and summarised in paragraph 98 above, we think that all three of the conditions which need to be satisfied before the principle set out in Inco HL and Pollen can apply are satisfied in this case and that that principle can therefore be used to remedy the deficiencies in the drafting of the relevant provisions.

For completeness, we should note that the drafting defect in the relevant provisions is, we think, of a different order from the drafting defect which we addressed in paragraphs 129 to 145 above.

In the latter case, whilst the method chosen to achieve the change in the definition of “related party” in relation to debits accruing on and after the change in law in respect of assets acquired before the change in law was not entirely felicitous, it is possible, for the reasons we have given, to construe the legislation as it stands in such a way as to give effect to the will of Parliament, as reflected in the commencement provisions (and, as it happens, the intention of the Government, as reflected in the explanatory notes). There is no need to do any violence to the legislation as it stands in order to give effect to that will (and that intention.)

In contrast, in relation to the language used in the operative provisions themselves, the drafting defect is much more egregious. We are confronted with operative provisions which, on the basis of the hypothesis on which we are construing them, make no sense in and of themselves and therefore it is necessary apply the principle set out in Inco HL and Pollen to remedy that deficiency. This is permissible because, even though, on the basis of that hypothesis, the drafting is a nonsense, its intention is perfectly clear on the face of the provisions and the substance of the provisions which Parliament would have enacted in the absence of that error was readily apparent. There is no need to have recourse to the explanatory notes.

Since the Appellant does not dispute that each Corporate Member met the “participation condition” in Section 148 of the TIOPA, it follows that, even if we are wrong to have concluded that, under the legislation at it stood before the FA 2016 was enacted, each Corporate Member was a “related party” at the time when the Material Assets were acquired:

In ending this decision, we would summarise our conclusions in relation to these appeals as follows:

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.