The Executors of Paul Hunt & Ors v The Commissioners for HMRC

This is an appeal against a decision of the First-tier Tribunal (Tax Chamber) (the “FTT”) released on 12 May 2025 (the “FTT Decision”) (Footnote: ¹). The Appellants are the executors of Mr Paul Hunt, and Mr James Hunt and Mr Robert Davis. The Respondents are the Commissioners for His Majesty’s Revenue and Customs (“HMRC”).

In the FTT Decision, the FTT dismissed the appeals of the Appellants against counteraction notices issued by HMRC under Chapter 1, Part 13, Income Tax Act 2007 (“ITA”) in relation to consideration received by the Appellants as part of a reduction of capital of Golf Holdings Ltd (“GHL”) on 22 April 2015 (the “Capital Reduction”). In this decision notice, we refer to Chapter 1, Part 13 ITA as the “transactions in securities” or “TIS” legislation.

In summary, the FTT decided that the Capital Reduction met the conditions in section 685(2) ITA and section 685(6) ITA (as it was at the time) did not apply to exclude the Capital Reduction from the TIS legislation.

The Appellants applied to the FTT for permission to appeal on five grounds. The FTT granted permission to appeal on four of those grounds. The Upper Tribunal (“UT”) granted permission to appeal on the remaining ground.

The issues in this appeal are essentially ones of statutory construction. So we will begin by setting out the relevant legislation. The provisions set out below are those which were in force for the periods relevant to this appeal, and so far as relevant to the issues in this appeal. References to section numbers in this decision notice are to the provisions of the ITA in force at that time unless otherwise stated or the context otherwise requires.

Under the transactions in securities legislation, HMRC can issue a notice (a “counteraction notice”) to counteract “income tax advantages” arising from “transactions in securities” by making adjustments to the tax position of a person.

Section 684 set out the conditions that had to be met before a person could be liable to counteraction of an income tax advantage by the issue of a counteraction notice. At the relevant time, section 684 was in the following form:

As can be seen from section 684(1)(b), the TIS legislation could only apply in “circumstances” that “are covered by section 685”. Section 685(1) provided that the circumstances covered by section 685 “are circumstances where condition A or condition B is met”. In this appeal, we are only concerned with condition A.

The relevant provisions of section 685 were as follows:

The transactions in securities legislation was introduced in the Finance Act 1960 (“FA 1960”). Since that time, it has gone through various iterations. The TIS legislation that was in force at the time of the transactions that are relevant to this appeal was contained in Chapter 1, Part 13 ITA in a form following material amendments made by the Finance Act 2010 (“FA 2010”). The TIS legislation was only in force in this form in the period between 24 March 2010 (following changes made by FA 2010) and 6 April 2016, when important amendments made by Finance Act 2016 (“FA 2016”) took effect.

We will refer to those changes later in this decision together with the history of the legislation, which was also the subject of argument before us. For ease of reference, we have set out in the Appendix to this decision notice relevant extracts from the legislation at various stages in the legislative history including: when the TIS legislation was introduced in FA 1960; when it was enacted in the Income and Corporation Taxes Act 1970 (“ICTA 1970”); when it was enacted in the Income and Corporation Taxes Act 1988 (“ICTA 1988”); when it was enacted in ITA; and following amendments made by the FA 2016.

The facts are not in dispute. They are summarised in the FTT Decision at FTT [2] and [7]. We gratefully adopt that summary. It is set out below:

Before the FTT, the Appellants accepted that, if section 685 applied, the remaining conditions for the issue of a counteraction notice were satisfied (FTT [12]).

The only issue before the FTT was whether the effect of section 685(6) was to exclude the repayment of capital which formed part of the Capital Reduction from the circumstances in section 685(2)(a) so that condition A could not be met (FTT [15]). The Appellants did not pursue a separate ground of appeal, which was referred to in their Notices and Grounds of Appeal to the FTT, to the effect that the consideration received by the Appellants pursuant to the Capital Reduction represented share capital and accordingly did not comprise and did not represent the value of assets available for distribution by way of dividend within section 685(4).

On the arguments before the FTT, that issue came down to two key questions:

The FTT dismissed the appeals against the counteraction notices (FTT [71]). Its reasoning was, in summary, as follows:

The Appellants applied to the FTT for permission to appeal on five grounds. The FTT granted permission on four of those five grounds.

The Appellants renewed their application before the UT. The UT granted permission to appeal on all five grounds, albeit that the UT commented in granting permission that the five grounds could be viewed as reasons in support of a single ground of appeal: that the FTT erred in law in its construction of section 685(6) ITA 2007.

In summary, the five grounds of appeal are that:

HMRC, while supporting the outcome of the FTT Decision, also maintain by Respondents’ Notice that the FTT was wrong to conclude that section 685(6) does not contain a drafting error.

The overall issue before us is therefore whether section 685(6) ITA applies to exclude the Capital Reduction from the circumstances of condition A in section 685(2)(a).

In much the same way as before the FTT, this issue was addressed by the parties by reference to two key questions:

We received detailed written and oral submissions from Mr Afzal KC and Mr Sykes KC on these questions. We are grateful to them both for their carefully considered submissions. We will refer to their detailed submissions as we address the issues on this appeal. However, rather than set out their technical arguments at this stage, we will outline the parties’ overall positions.

As a starting point, neither party fully supports the FTT Decision. The FTT itself recognised that the FTT Decision does not produce a “level playing field”. It results in a position where repayments of subscribed capital by companies that under the law of their place of incorporation can distribute capital by way of dividend (typically some non-UK companies and UK unlimited companies) are excluded from the circumstances in section 685(2)(a) and (b) and so excluded from condition A, but repayments of subscribed capital by companies that cannot lawfully distribute capital by way of dividend (such as UK limited companies) are not.

The parties argue, however, for different “level playing fields”. The parties’ respective positions are as follows.

The Appellants say:

This reading of section 685(6), the Appellants say, achieves a level playing field: all returns of subscribed capital irrespective of where the company was incorporated are excluded from the circumstances set out in section 685(2)(a) or (b). Where a distribution (in the broad sense) is identifiable as being sourced from share capital or premium by reference to its accounting treatment, condition A does not apply. Section 685(4) is not in point.

HMRC say:

This reading of section 685(6), HMRC say, achieves a level playing field: all returns of subscribed capital can fall within the circumstances set out in section 685(2)(a) or (b). However, amounts representing a return of subscribed capital are excluded from “amounts available for distribution” in section 685(4)(a)(i) and (ii): in relation to UK limited companies and others that cannot lawfully distribute capital by way of dividend, simply because those amounts are not “available for distribution”; and in relation to companies that can lawfully distribute capital by way of dividend by virtue of section 685(6).

HMRC say that section 685(4) in effect creates a “cap”. The relevant consideration is capped at the amount of the distributable reserves so that any amounts paid out on a return of capital can be relevant consideration to the extent that there are available distributable reserves equal to those amounts.

For both parties, the two questions are interrelated because they both speak to the coherence of the overall regime.

As the issue before us is one of statutory construction, we will begin by reminding ourselves of the relevant principles of statutory construction.

As regards the general principles that we should take into account, Mr Afzal KC referred us to the judgment of Lord Hodge in R(on the application of O (a child)) v Secretary of State for the Home Department [2023] AC 255, [2002] UKSC 3 (“R(O)”), a judgment with which Lord Briggs, Lord Stephens and Lady Rose all agreed. Lord Hodge said this at [29]-[32]:

The key principles that we take from this passage are:

Both parties referred extensively to the legislative history and the case law relating to it in support of their positions. Mr Afzal KC relies on the legislative history and the related case law in support of his submissions that the FA 2010 legislation contained an obvious error and that section 685(6) is confined to repayments of capital by companies that are otherwise able lawfully to distribute capital by way of dividend. Mr Sykes KC relies on the related case law to demonstrate that, irrespective of the wording of the legislation in its various iterations, repayments of subscribed capital have been excluded from the TIS legislation.

Nonetheless there were some differences between the parties as to the relevance of the legislative history of the transactions in securities legislation and the principles that we should derive from the case law that has considered it.

Mr Sykes KC referred us to the judgment of Lord Diplock in Inland Revenue Commissioners v Joiner [1975] STC 657 at p670 where, in the context of a counteraction notice under section 460 ICTA 1970, Lord Diplock counselled against reference to previous legislation to interpret the meaning of a consolidating statute unless the language of the consolidating statute was itself ambiguous.

Mr Afzal KC referred us to two sections from Bennion.

The first was paragraph 24.5 which concerns the relevance of earlier statutory provisions as an aid to interpretation. It states:

The second was paragraph 24.6 which concerns the judicial interpretation of earlier legislation. It reads as follows:

We have taken these principles into account. We accept Mr Afzal KC’s submission that neither principle depends upon any element of ambiguity in the statutory provision in question. However, the principles have their limits. Paragraph 24.5 concerns reference to prior legislation in order to determine the background against which a proposed legislative provision is being made. As can be seen from the related commentary, the relevance of the legislative history is similar to that of other external aids. Paragraph 24.6, known as the “Barras principle”, concerns the reference to judicial interpretation of a word or phrase in earlier cases to be used as an aid to interpretation of a word or phrase that appears in the relevant statute in appropriate circumstances. But as the commentary in Bennion notes, it is no more than an assumption “the strength of which will vary according to the context”. Prior judicial interpretation should be seen as no more than a starting point.

These principles cannot distract from the fundamental requirement which is to interpret the meaning of the statute before the tribunal – in our case section 685 following the FA 2010 changes – primarily by reference to the statutory context as described by Lord Hodge in R(O) at [29]. In this respect, we are also mindful of the words of Lord Nicholls in R (on the application of Spath Holme Ltd) v Secretary of State for the Environment, Transport and the Regions [2001] 2 AC 349 (“Spath Holme”) which are referred to in the judgment of Lord Hodge in R(O) to which we refer earlier, in relation to the importance of statutory context as the basis of statutory interpretation that (Spath Holme p397):

“Citizens, with the assistance of their advisers, are intended to be able to understand parliamentary enactments, so that they can regulate their conduct accordingly. They should be able to rely upon what they read in an Act of Parliament.”

We also note Lord Nicholls’ advice to courts and tribunals later in the same judgment “to approach the use of external aids with circumspection” (Spath Holme p398).

With those reservations in mind, we turn to the development of the TIS legislation. The legislation has gone through various iterations since it was first enacted in FA 1960. We will focus on the changes that have been made to those aspects of the legislation that are relevant for the purposes of this appeal. The relevant provisions are set out in the Appendix to this decision notice.

Section 28 FA 1960 permitted HMRC to issue a counteraction notice in the various circumstances set out in paragraphs (a) to (d) of subsection (2). The relevant circumstance for our purposes was set out in paragraph (d), but that paragraph drew on drafting that appears in paragraph (c). We will refer to the circumstance which was contained in paragraph (d) and which forms the basis of condition A in section 685(2) throughout its evolution as “circumstance D” in this decision.

Paragraph (d) applied when a person received a consideration as is mentioned in paragraph (c), namely “a consideration which either is, or represents, the value of assets which are (or apart from anything done by the company in question would have been) available for distribution by way of dividend”. This is wording which under the TIS legislation following the FA 2010 changes is found in the definition of “relevant consideration” in section 685(4).

There was an exception from “assets” mentioned in paragraph (c) which is found below paragraph (d) amongst the definitions. It excluded from “assets” mentioned in paragraph (c) any “assets which (while of a description which under the law of the country in which the company is incorporated [are] available for distribution by way of dividend) are shown to represent a return of sums paid by subscribers on the issue of securities”. This is wording which under the TIS legislation following the FA 2010 changes is largely found in section 685(6). However, on the wording of section 685(6), the cross-reference is to the description of the circumstance (in section 685(2)) not to the definition of relevant consideration (in section 685(4)).

The parties referred us to various extracts from the Parliamentary debates relating to the introduction of the TIS legislation in FA 1960. For the most part, these extracts concerned the introduction of an amendment to the legislation which became this exception. In the debates on the Finance Bill (clause 27) for 6 July 1960, Hansard records that the Attorney-General said this in relation to the amendment:

Later in the same debate, there is the following exchange:

The parties disagreed as to the basis on which it is appropriate to refer to these extracts. Mr Sykes KC submitted that the Pepper v Hart criteria were met but that he only need to refer to these extracts by way of confirmation of the conclusions that could be reached from other sources. He referred to these extracts in support of his submissions that the Parliamentary intention of the earlier legislation was that repayments of capital whether by UK incorporated or non-UK incorporated companies would not be caught by the TIS legislation and that was because it was necessary to have regard to the fund out of which a payment was made in determining whether it was an amount that was available for distribution by way of dividend. He referred in particular to the Attorney General’s statement in the first extract above, “It ought therefore to have no application to what is, in effect, a return of subscribed capital” in this respect.

Mr Afzal KC’s starting point was that it is permissible to refer to these extracts to supply context or as evidence of the mischief at which the provisions were aimed. However, if there is any ambiguity, the Pepper v Hart criteria would be met. He referred to these extracts in support of his submissions that the exception (in section 685(6)) was intended to cross-refer to the determination of the consideration (in section 685(4)) and that the exception was limited to companies that could lawfully distribute subscribed capital by way of dividend.

We do not need to spend much time on the form of the TIS legislation in ICTA 1970 and ICTA 1988: the provisions are reorganised but the wording is largely retained. The circumstances are set out in separate subparagraphs of section 461 ICTA 1970 and then section 704 ICTA 1988. The relevant circumstance for our purposes (circumstance D) was in section 461D ICTA 1970 and then section 704D ICTA 1988. Once again, these provisions cross-referred to drafting that appears respectively in section 461C ICTA 1970 and then section 704C ICTA 1988. The wording of the exception which forms the basis of section 685(6) became section 461C(2) ICTA 1970 and then section 704C(2) ICTA 1988 but remained tied to the question of whether assets are available for distribution by way of dividend for the purpose of the definition of the consideration that was subject to circumstance D.

As part of the Tax Law Rewrite project, the TIS legislation was substantially rewritten. The Tax Law Rewrite materials did not, however, identify any intention to make a change in the law.

The relevant circumstances were set out in separate sections without the cross-references. Circumstance D was found in section 689 ITA. As can be seen from the extract that is set out in the Appendix:

Significant changes were made to the TIS legislation by FA 2010.

We have set out the provisions of the legislation following these changes earlier in the decision. The relevant provisions are in the new section 685. The key points to note for the purposes of this appeal are that the exception in section 685(6) cross-refers to the description of the transactions in section 685(2) and not the definition of the consideration (referred to as “relevant consideration”) which is found in section 685(4). Section 685(6) uses the “despite the fact that” wording that first appeared in section 689 ITA when it was first enacted.

The changes made by FA 2010 were the subject of a consultation exercise undertaken by HMRC. The consultation document was published on 31 July 2009 and entitled “Simplifying Transactions in Securities Legislation” (the “2009 Consultation Document”). The proposals outlined in the consultation document were wide ranging. The changes to the legislation are described in the consultation document as “a fundamental and significant change in the approach and application of the TIS legislation” (paragraph 2.4). The proposed measures included:

The reduction in the number of circumstances in which a counteraction notice could be issued left only two circumstances to be reflected in the revised legislation: one based on the former circumstance D (at the time contained in section 689 ITA); and one based on circumstance E (at the time contained in section 690 ITA). These two circumstances were to be amalgamated into a revised provision the aim of which was to “replicate and simplify” those provisions (paragraph 5.3).

The 2009 Consultation Document did not refer to any specific material changes that were to be made to these two circumstances beyond the aim to “replicate and simplify” the legislation. The proposed drafting changes were, however, included in draft clauses set out in Annex C to the 2009 Consultation Document. That Annex included legislation to implement the proposals as a whole by repealing the entirety of sections 682 to 694 ITA (as enacted) and their replacement with entirely redrafted legislation. Amongst the new provisions was a draft of what became section 685, which was enacted in the same form in FA 2010. In particular, that draft included a draft of what became section 685(6) in the same form in which it was enacted in FA 2010 i.e. including the reference to section 685(2)(a) and (b).

As part of their arguments, the parties referred to changes made to the TIS legislation by FA 2016. Those changes only took effect after the transactions that are relevant for the purposes of this appeal, but for the sake of completeness, we will refer to them here.

In FA 2016, various changes were made. Amongst them section 685(6) was repealed. It was replaced by two new subsections: sub-section (7A) and subsection (7B). New section 685(7A) repeats the wording of section 685(6), but with two material changes: the first is to replace the reference to subsection (2)(a) and (b) with a reference to subsection (4)(a)(i) and (ii); and the second is to replace the “despite the fact that” wording with the words “merely because”. The revised legislation is set out in the Appendix to this decision.

As for the reasons for these changes, the Explanatory Notes that accompanied the draft legislation provide no helpful guidance. The Appellants, however, refer to the consultation document issued by HMRC in advance of the changes made by FA 2016. This consultation document was issued on 9 December 2015 and entitled “Company Distributions” (the “2015 Consultation Document”). It included an example in paragraphs 3.11 and 3.12 of the type of transaction at which this change was directed.

The example bears some similarity to the facts of this case. It was as follows:

The comments in the 2015 Consultation Document appear to show that HMRC was aware of arguments that the TIS legislation may not apply to certain repayments of capital. Mr Afzal KC however points out that the consultation document also records in a footnote that the example to which we have referred above “does not reflect HMRC’s view of the correct tax treatment in all circumstances”.

As can be seen from the above history of the legislation relating to circumstance D:

The parties referred us to various authorities decided under earlier versions of the transactions in securities legislation. We will refer to the four main authorities.

We were not referred to any case law authority directly concerning the version of the TIS legislation that was in force at the time of the Capital Reduction, that is, following the changes made by FA 2010 and before the amendments made by FA 2016. The relevance of the authorities is therefore limited to the extent that they assist in understanding the purpose and operation of provisions from which section 685 was derived.

The first authority is Inland Revenue Commissioners v Hague 44 TC 619 (“Hague”). The case concerned a share capital reorganisation, in which additional shares were paid-up out of capital redemption reserve (£60,000) and distributable reserves (£129,490). This was followed by a reduction and repayment of capital in an amount equal to the paid-up capital prior to the reorganisation (£284,235). The issue before the court was whether, and to what extent, the shareholder (Mr Hague) had received consideration representing the value of “assets... available for distribution by way of dividend” (or which would have been so available apart from anything done by the company) within the meaning of section 28(2)(c) FA 1960 (being the predecessor to section 685(4)).

The two significant features of the case for present purposes are that: (i) the repayment was made from an identified fund (the share capital account) containing different constituent elements, including both the original subscribed capital and amounts that had previously formed part of distributable reserves; and (ii) the amount of the distributable reserves of the company prior to the reorganisation significantly exceeded the amount that was repaid to the shareholders (see facts as found by the Commissioners para 4(5) at Hague p621G-H, and the reference to the facts made by Salmon LJ at Hague p639H).

In the High Court, counsel for Mr Hague argued that no part of the repayment of capital was attributable to the value of assets available for distribution by way of dividend (Hague p631E). Counsel for HMRC submitted that, notwithstanding that the payment was made out of share capital account, it was appropriate to attribute the repayment first to the amount in that capital account that represented the distributable reserves that had been capitalised (Hague p631F).

Cross J considered that an apportionment exercise was required, but did not agree with either approach. He said this (at Hague p631G):

The effect of Cross J’s apportionment was therefore to treat the proportion of the amount received by Mr Hague that was attributable to the value of assets available for distribution as being the proportion that the amount of distributable reserves that had been capitalised in the share capital reorganisation bore to the total capital after the reorganisation and prior to the repayment. The basis for this is not expressly stated. Cross J limited his analysis to the share capital account from which the repayment was made on the grounds that the payment “came out of capital of £473,725”. He did not refer to the other reserves that were available. Instead, Cross J treated part of that account as available for distribution, we can only assume – it is not stated – on the basis that that amount represented assets that would have been available apart from something done by the company (the capitalisation).

On appeal, the Court of Appeal adopted HMRC’s proposed method of apportionment. Danckwerts LJ said this (at Hague p637H-638A):

The Court of Appeal’s approach was therefore: first, to identify the fund from which the payment was made; and second, to determine the extent to which a payment from that fund could be represented by assets available for distribution by way of dividend by, in effect, treating the amount of distributable reserves that had been capitalised in the share capital reorganisation as forming the first part of the identified capital that was repaid to the shareholders. This can be seen more clearly from the judgment of Salmon LJ where he said (at Hague p640D-G):

The Appellants place considerable reliance on Hague. They say that the case demonstrates that where a payment can be identified as representing subscribed capital, that element is excluded from the operation of the TIS legislation even if the company retains distributable reserves. HMRC submit that Hague was decided by reference to a different legislative structure and does not determine the proper construction of section 685.

Hague is the only authority to which we were referred in which the court had to address directly a payment made from an identified fund (share capital account) containing elements attributable to both subscribed capital and reserves that would have been distributable but for steps taken by the company. The decision provides some support for the proposition that the source of the payment is relevant to the determination of the consideration that falls within circumstance D, rather than the enquiry under the predecessors of section 685(4) being directed solely to the total amount of distributable reserves available within the company at the relevant time. In that sense, the decision of the Court of Appeal in Hague is not consistent with the “cap” analysis of section 685(4) that Mr Afzal KC propounds and supports Mr Sykes KC’s submission that the fund from which the payment was made must be respected.

We note, however, that the argument was not put to either the High Court or Court of Appeal in that form. HMRC’s case before both Cross J and the Court of Appeal was limited to the argument that part of the consideration received by the shareholders equal to the amount of the capitalised reserves should be regarded as representing the value of assets that were available for distribution by way of dividend (or would have been so available apart from the capitalisation).

The next authority is Inland Revenue Commissioners v Brown, in which the High Court decision is reported at [1971] 1 WLR 11 (“Brown HCT”) and the Court of Appeal decision is reported at [1971] 1 WLR 1495 (“Brown CA”).

In that case, the taxpayer (Mr Brown) and his wife owned shares in six companies. Mr Brown transferred all of his shares in five of the companies to the sixth company in consideration for an amount in cash and loan notes. Payments to Mr Brown by the sixth company were funded by bank borrowing. The case concerned the application of section 28(2)(c) and (d) FA 1960. The principal issue was the meaning of the phrase “assets... available for distribution by way of dividend” in section 28(2)(c) FA 1960.

In the High Court, Megarry J held that “available” in that context meant legally available rather than commercially available. In reaching that conclusion, he referred to the predecessor of what became section 685(6). He regarded the provision as addressing circumstances in which, under the law of the relevant jurisdiction, assets representing subscribed capital were legally available for distribution by way of dividend. The provision therefore supported an interpretation of section 28(2)(c) FA 1960 based on legal availability for distribution.

Megarry J said this (at Brown HCT p26 D-H):

The Court of Appeal affirmed that conclusion (Brown CA per Russell LJ at p499).

HMRC rely on these observations as supporting their interpretation of section 685(6) and, in particular, their submission that the predecessor provision was directed at and limited to companies legally capable of distributing subscribed capital by way of dividend. The Appellants submit that the observations were not directed to the issue now before us, which concerns the effect of the changes made by FA 2010, and should be treated accordingly.

We were also referred to the judgment of Goff J, as he then was, in Addy v IRC 51 TC 71 (“Addy”).

The case concerned a reconstruction and liquidation of a company under which the business and assets were transferred to a new company and the shareholders received shares in the new company and a distribution of cash in an amount that was less than the paid up capital of the original company. HMRC issued a counteraction notice in respect of the cash distribution. Goff J upheld the counteraction notice.

In discussing Hague, and the application of section 28(2)(c) and (d) FA 1960, Goff J observed that apportionment had been required in Hague because the repayment had come from a fund with several constituent elements, including share capital and capitalised reserves. But no such apportionment exercise was required on the facts in Addy. He said this at Addy (p83E-H):

HMRC rely on Addy as supporting their analysis of what became section 685(4) as operating as a “cap” on the amount of relevant consideration. In this respect, they refer, in particular, to Goff J’s acceptance of the argument that no apportionment is required where “the amount distributed was less than the total available for distribution by way of dividend”. On the other hand, the Appellants note that Goff J distinguishes Hague by reference to the nature of the “fund from which the distribution came” and submit that the decision is at least consistent with an approach that requires attention to the source of the payment.

In our view, the conclusions that Mr Afzal KC seeks to draw from this aspect of Addy go too far. When Goff J states that “the amount distributed was less than the total available for distribution by way of dividend”, he is clearly commenting on the case of Brown and the facts of the case before him. In neither case was a distribution made from a fund representing subscribed capital. In Brown, the consideration in question was the proceeds of the sale of shares in the relevant companies, which was funded by bank borrowings. Addy concerned a liquidation distribution, where the distribution was made out of an undifferentiated fund. Neither case involves a distribution, as in Hague, by reference to an identified fund, which included subscribed capital. Goff J was clearly aware of the detail of the decision in Hague; he distinguishes the facts in Hague from those before him. Goff J’s comments contain no suggestion that Hague was wrongly decided. Indeed, his comments towards the end of the passage that we have quoted above suggest support for the analysis of the Court of Appeal in Hague.

The other aspect of Goff J’s judgment in Addy to which we were referred were his comments on the wording in section 28(2) FA 1960 which is found in section 685(6). He said this (at Addy 84C-F):

Addy is therefore also authority for the view that – at least in the context of section 28(2)(c) FA 1960 – the wording that formed the basis of what is now section 685(6) should be regarded as limited to returns of subscribed capital by companies that, under the law of their place of incorporation, are legally able to distribute amounts in respect of share capital and/or premium. Goff J suggests the wording is restricted to foreign companies (and there are similar comments in the judgment of Cross J in Hague (see p631B-C)) but that point is clarified in the next case to which we must refer.

The final case is Bamberg v HMRC [2010] UKFTT 333 TC (“Bamberg”), a decision of Judge Avery Jones.

The facts of Bamberg are complicated, but, in summary, the taxpayer (Mr Bamberg) owned shares in a trading company (referred to in the report as “TTEL”). TTEL had positive distributable reserves. Mr Bamberg acquired shares in another company (“WCL”), which had negative distributable reserves, for a nominal sum. He also acquired loan notes issued by WCL at a substantial discount to their face value. Mr Bamberg transferred the shares in WCL to TTEL. WCL then repaid the loan notes (held by Mr Bamberg) using funds borrowed from TTEL. HMRC issued a counteraction notice under section 703 ICTA 1988 in relation to the repayment of the loan notes by WCL.

One issue before the FTT was the scope of the exception in section 704C(2) ICTA 1988, which broadly reflected that in section 685(6). The FTT clarified the view expressed in the earlier authorities (including Hague, Brown and Addy) that the provision was confined to foreign companies which could distribute capital by way of dividend. The FTT confirmed that its effect was to exclude sums representing subscribed capital that were capable of distribution under the law of the place of incorporation of the relevant company from the calculation of amounts available for distribution in section 704C(1). That could include, for example, subscribed capital of UK incorporated unlimited companies (Bamberg [12]-[14]).

Another issue before the FTT was whether the repayment of the principal amount of the loan notes (representing amounts subscribed for the loan notes) could fall within the TIS legislation. On the wording of section 704C(1) and section 704D ICTA 1988, the FTT concluded that it could. The FTT said this at Bamberg [15]:

HMRC submit that Bamberg supports both their interpretation of the previous provisions and their contention that the legislation which is now reflected in section 685(4) operates as a cap determined by reference to distributable reserves. The effect is that – as in Bamberg – an amount which is in the form of a repayment of capital on shares or the principal amount of securities can be the subject of a counteraction notice to the extent of the company’s distributable reserves.

We take the following points from these cases.

The clearest case in support of that proposition is Bamberg. It is a decision of the FTT and as such it is not authoritative but it is persuasive. Also, like Brown and Addy, it does not address a situation in which the consideration that is received by shareholders is derived from an identified fund (such as share capital account) that comprises, at least in part, amounts that have been subscribed for shares or securities. On the other hand, Hague, a decision of the Court of Appeal, provides some authority, in the context of the FA 1960 legislation, that where a payment was derived from an identified fund that to some extent comprises subscribed capital the enquiry is limited to the constituent elements of that fund and the extent to which those elements are available for distribution by way of dividend (or would have been so available apart from something done by the company).

That feature of Hague was subsequently noted without criticism in Brown and Addy. When asked at the hearing, Mr Afzal KC had no explanation for the decision in Hague consistent with his overall “cap” analysis of section 685(4). In our view, Hague suggests that, at least under the earlier legislation, where the payment is made from a specified fund regard should be had to the constituent elements of that fund in deciding whether the payment represents assets that are available for distribution by way of dividend. For the reasons that we give later in this decision, we do not need to decide how such a conclusion would affect the interpretation of the legislation following FA 2010 for the purposes of this appeal.

Accordingly, whilst the authorities assist in understanding the background to section 685, they do not provide a clear answer to the principal question of construction that arises in this appeal. That question must ultimately be determined by reference to the language and context of section 685 itself.

Having reviewed the background in terms of the development of the TIS legislation and the relevant case law relating to it, we turn to the construction of section 685(6) itself.

As we have mentioned, HMRC submits that the cross-reference to subsection (2)(a) and (b) found in section 685(6) was an error. The cross-reference should have been to subsection (4)(a)(i) and (ii). Furthermore, Mr Afzal KC submits that this tribunal has the power to correct that error as a matter of judicial interpretation of the provision.

Courts and tribunals have the power to correct obvious drafting errors. However, that power is strictly confined to plain cases of drafting mistakes. In Inco Europe, a case concerning amendments made to the Supreme Court Act 1981 by the Arbitration Act 1996, the House of Lords set out the criteria which should be met before a court or tribunal should exercise this power. Lord Nicholls said this at p592E-H:

In the present case, the FTT decided that these criteria were not met. The FTT found that it could not be abundantly sure that by inadvertence the draftsman and Parliament failed to give effect to the intended purpose of section 685(6). The FTT said this at FTT [69]:

As we have described, the FTT identified the purpose of the FA 2010 changes as being to “replicate and simplify” the pre-existing law by reference to the 2009 Consultation Document; and it was not convinced that the changes made by FA 2010 (including the reference to subsection (2)(a) and (b)) were not an attempt at simplification of the existing law.

Before us, neither Mr Afzal KC nor Mr Sykes KC appeared to challenge the FTT’s conclusion that the purpose of the FA 2010 changes was to “replicate and simplify” the TIS legislation in relation to circumstance D. Mr Afzal KC says, however, that it contains a clear drafting error. He points to the history of the legislation which he says demonstrates that the exclusion in what became section 685(6) was taken into account in the determination of the amount of the relevant consideration (to use the terminology of section 685) in every version of the legislation. The only exception was the legislation in force between the changes made by FA 2010 and the amendments to that legislation in the FA 2016.

In support of his interpretation, Mr Afzal KC submits that section 685(4) (the definition of “relevant consideration”) operated, and the previous versions of the legislation operated, as a “cap” under which the consideration for a transaction which fell within the scope of the description in the circumstance D would be treated as subject to counteraction to the extent of the assets of the relevant company that were available for distribution by way of dividend. The predecessors to section 685(6), and section 685(6) itself, were intended to take out of account the value of assets that would be distributable but which relate to subscribed capital in some non-UK incorporated companies and UK incorporated unlimited companies in computing that cap. The assumption was that for other companies – in particular limited companies incorporated in the UK – the value of assets representing subscribed capital would not be regarded as available for distribution by way of dividend for the purpose of section 685(4) and so would be automatically excluded. In this way the legislation created a “level playing field”.

For the reasons that we have given, in our view, the case law is not as clear as Mr Afzal KC suggests in support of his “cap” analysis. We do not need to decide the point for present purposes – and to reiterate, we do not do so – but, for the reasons that we have given, it seems to us that one tenable view of the predecessor legislation and related case law is that when a transaction involved consideration derived from a particular fund, which to some extent comprised subscribed capital, regard should be had to the constituent elements of that fund in determining whether or not the consideration is or represents assets available for distribution by way of dividend. The existence of distributable reserves outside that fund would not be taken into account in determining the consideration.

We do not need to decide that point because the question of the operation of section 685(4) is not before us. Furthermore, to the extent that Mr Afzal KC relies on the point as part of his assertion that Parliament should be presumed to have intended to create consistent treatment between companies that can distribute subscribed capital by way of dividend, we cannot see that it adds very much given that a form of level playing field is also created on the alternative interpretation of the case law that we have described above.

Leaving that point to one side, we agree with the FTT that it is not “abundantly clear” that the reference to subsection (2)(a) and (b) was an inadvertent failure by the draftsman and Parliament to give effect to the purpose of the legislation. We accept Mr Afzal KC’s point that in all previous versions of the predecessor legislation for circumstance D, the exclusion that is contained in section 685(6) operated as part of the determination of the consideration that was subject to counteraction. However, to our minds, it is not an untenable suggestion that as part of a process of intended “simplification” of circumstance D, the reference to subsection (2)(a) and (b) was a deliberate change intended to remove all or a class of repayments of subscribed capital from the scope of the TIS legislation altogether.

As a starting point, we do not accept that the natural reading of the legislation, including the reference to subsection (2)(a) and (b), produces a wholly unreasonable result. Depending upon the scope of the exclusion provided by section 685(6) – to which we will turn shortly – the effect is either to exclude all repayments of subscribed capital (on the Appellants’ argument) or to exclude a class of repayments of capital made by companies that are lawfully able to distribute subscribed capital by way of dividend (on HMRC’s arguments) from the TIS legislation.

Even on HMRC’s case, repayments of capital by companies that cannot distribute subscribed capital by way of dividend will fall to be dealt with by section 685(4). If the “cap” for which Mr Afzal KC argues is the correct analysis of section 685(4), the value of assets representing subscribed capital in such companies will not be taken into account in determining that “cap” and so if there are no other assets available for distribution by way of dividend, there will be no “relevant consideration”. If the correct analysis is that regard must be had to the fund from which the payment is made in calculating the amount of the “relevant consideration” in section 685(4) (see our discussion of Hague and Addy above), there will be no relevant consideration if the fund is comprised of subscribed capital. In both cases, the subscribed capital is left out of account. We accept that this conclusion does not produce the level playing field for which Mr Afzal KC contends, but that is not the test that we have to apply. Our job is to interpret the legislation as it is written not to engage in a search for absolute consistency in the approach to repayments of capital in companies that can and cannot distribute subscribed capital by way of dividend.

We also take into account the following factors in reaching our conclusion.

Although we place no great weight upon it, given that it relates to the legislation that took effect after the FA 2016 changes, we note that the 2015 Consultation Document and the changes that were made by the FA 2016 proceed on the basis that repayments of capital may be excluded from the TIS legislation following the changes made by FA 2010. We accept Mr Afzal KC’s point that the 2015 Consultation Document includes a note to the effect that the tax treatment set out in the consultation document may not be accepted by HMRC. However, the very fact that the published consultation document recognises that this is a possible interpretation of the legislation supports our conclusion that it is not an untenable argument.

For these reasons we reject Mr Afzal KC’s submission. We agree with the FTT that the Inco Europe criteria are not satisfied in this case. This is not, in our view, a plain case of a drafting mistake.

Having concluded that we must treat section 685(6) as meaning what it says when it refers to subsection (2)(a) and (b), we now turn to the scope of section 685(6) in general.

On this question, the FTT decided that the words “despite the fact that” in section 685(6) should be read as meaning “where” and not “even where”. The effect was that section 685(6) was confined to repayments of capital by companies that can distribute subscribed capital by way of dividend under the law of their place of incorporation. It is only such returns of capital that fall outside condition A by virtue of section 685(6) (FTT [60]-[67]). The Appellants contend that the FTT was wrong in reaching that conclusion.

As the UT noted when granting permission to appeal, the Appellants’ five Grounds of Appeal are perhaps better described as reasons for a single ground of appeal that the FTT erred in its construction of section 685(6). Before we turn to those reasons, we should first address a separate reason that Mr Sykes KC raised in support of the Appellants’ appeal.

In summary, Mr Sykes KC says that, on the facts, section 685(6) applies to payments made to the Appellants as part of the Capital Reduction even on the FTT’s more restrictive construction. On this argument, he says that the cash paid to the Appellants as part of the Capital Reduction was an asset that was “available for distribution by way of dividend”. This was because GHL had distributable reserves in excess of the total amount of the payments. On the facts, the cash could have been paid to the Appellants as dividends because GHL had sufficient distributable reserves. The cash was therefore, an asset of a description that under the law of the country in which GHL was incorporated was available for distribution by way of dividend. The “despite the fact that” wording (which Mr Sykes KC referred to as the “tailpiece”) was met. Furthermore, Mr Sykes KC argued, the payment of that cash was also “shown to represent a return of sums paid by subscribers on the issue of securities” because it was paid as a repayment of capital. Section 685(6) was therefore engaged, and the payments were excluded from section 685(2)(a) and (b) by section 685(6).

Mr Afzal KC objected to this argument being raised. He said that it was a new argument that had not been raised before the FTT. We acknowledged Mr Afzal KC’s objections but at the hearing we granted permission for the Appellants to raise the argument. We can deal with the point briefly.

In our view, this interpretation of section 685(6) misreads the tailpiece. It seems to us that, on a natural reading of section 685(6), the reference to “assets of that description” in the tailpiece is a reference to “assets which are shown to represent a return of sums to subscribers” in the first part of section 685(6). It is not, on the facts of the present case, a reference simply to the cash. It is a reference to the cash when it is returned to shareholders by way of repayment of capital. The subsection is asking whether, under the law of the place of incorporation of the company, the company could pay a dividend out of share capital and premium. It is not focussing on the nature of the asset itself. In our view, that is clear on the face of the legislation. That interpretation is also supported by the case law on the previous iterations of this provision to which we have referred above.

Mr Sykes KC’s other arguments before us mirrored the Appellants’ Grounds of Appeal. His first argument was a linguistic one. He says that the words “despite the fact that” are used in a concessive sense and not a conditional one so that the tailpiece reinforces the opening words and does not imply that the words of the tailpiece must always be satisfied. If our conclusion of the drafting error issue is correct, this means that the effect of section 685(6) is that all “assets which are shown to represent a return of sums paid by subscribers on the issue of securities” are excluded from assets within sub-section (2)(a) and (b). It does not matter whether under the law of the country in which the relevant company is incorporated, assets of that description (i.e. those that represent a return of sums paid by subscribers) are available for distribution by way of dividend.

If that were not the case, so the argument goes, assets which represent sums paid by subscribers on the issue of securities, but which could not be distributed by way of dividend, could be taken into account under subsection (4) in the determination of the amount of “relevant consideration”. That would not create a level playing field. He says that the alternative construction is irrational and cannot be one that Parliament would have intended. It results in differential treatment for repayments of capital by companies that can distribute subscribed capital by way of dividend under the law of their place of incorporation (principally certain non-UK companies), which are excluded from counteraction, and repayments of capital by limited companies incorporated in the UK, which would only be excluded from counteraction by virtue of section 685(4) (whether on HMRC’s interpretation or otherwise) if the repayment was not regarded as relevant consideration.

Mr Sykes KC points to circumstances in other statutes in which similar wording to that used in section 685(6) has been used to mean “even where”. He referred us to section 1049(3) of the Corporation Tax Act 2010, section 90 of the Leasehold Reform, Housing and Urban Development Act 1993, and section 23B(11) of the Children Act 1989 by way of example. These are the provisions that are mentioned in the FTT Decision at FTT [60]-[61].

We agree that the words “despite the fact that” can mean “even where” in some circumstances, but whether they do in any given case will depend on the context. The use of those words in different contexts does not provide any material assistance. In the present case, we agree with the FTT’s analysis at FTT [60]-[67] that the natural reading of section 685(6) is not that the “tailpiece” is clarifying the opening words, but rather that the tailpiece is a qualification for the operation of the provision as a whole.

This conclusion is supported by the legislative history. As we have identified, the “despite the fact that” wording was introduced in section 689(5) ITA when it was first enacted. In section 689(5), the “despite the fact that” wording clearly meant “where”. The provision was intended to prevent assets that represented subscribed capital being treated as available for distribution for the purposes of section 689(3) ITA (as enacted) where such assets could be distributed by way of dividend under the law of the country of incorporation of the relevant company. As we have seen from our discussion of the history of the legislation, that was the purpose of the exclusion throughout until the changes that were made by FA 2010. That interpretation is supported by the case law, in particular, Brown, Addy, and Bamberg.

We accept that the cross-reference in section 689(5) ITA as enacted was to sub-section (3) of that section (i.e. the definition of consideration) and not to section 689(2) (the description of transactions which fell into circumstance D). The same was the case in relation to all the predecessor legislation. We cannot discern any intention to change the meaning of the exclusion in the changes made in FA 2010. The wording of section 685(6) is, apart from the reference to subsection (2)(a) and (b), in exactly the same form as that in which it was enacted as section 689(5) ITA.

Mr Sykes KC also relies on the effect of the predecessor legislation, as reflected in the results of the case law. By reference to the case law to which we have referred above (principally Hague), he says that the results of those cases show that where consideration received by the taxpayer represents a repayment of subscribed capital, that amount is excluded from counteraction. He also referred to the extracts from Hansard to which we refer above in support of his argument that this was always the legislative intent.

As we have mentioned, we agree that one view of that case law is that, under the predecessor legislation, consideration was excluded to the extent that it could be demonstrated to be derived from an identified fund that represented subscribed capital (see our earlier analysis of the case law). However, to the extent that they are relevant, those cases concern the determination of the consideration that is relevant for the purposes of circumstance D, which in the form of the TIS legislation before us is found section 685(4). Mr Sykes KC does not rely on any argument that section 685(4) is not satisfied on the facts of this case. In their initial notices of appeal to the FTT, the Appellants gave as one of their grounds of appeal that the consideration represented share capital and not assets available for distribution and so was not relevant consideration within section 685(4). However, that argument was not pursued before the FTT or before us.

We do not agree that the analysis of Mr Sykes KC informs the interpretation of the scope of the exclusion in section 685(6). The purpose of that exclusion in previous versions of the legislation was, as Mr Afzal KC submits, to align repayments of capital by companies that could distribute subscribed capital by way of dividend in accordance with the law of their place of incorporation with the treatment of repayments of capital by limited companies incorporated in UK jurisdictions. That alignment was broken by the changes made in FA 2010 and, in particular, by the reference to subsection 2(a) and (b), but that change, does not, in our view, affect the scope of the exclusion.

Mr Sykes KC also submitted that interpreting section 685(6) as only excluding returns of capital by companies that under their law of incorporation were entitled to return subscribed capital by way of dividend will result in double taxation for the Appellants because both the Capital Reduction itself and any subsequent distribution of the reserves it is treated as representing will be subject to income tax. We do not agree with that submission. The legislation is simply determining the manner in which each receipt is taxed. If the TIS legislation applies, the consideration that is received as part of the Capital Reduction is taxed as income. Any subsequent distribution is then taxed by reference to the legislation that applies to it. That is not double taxation in the ordinary sense of the term. It is the separate taxation of two different transactions. We agree with the analysis of the FTT at FTT [66].

Although our reasoning is rather different, we agree with the conclusions reached by the FTT on both the questions that are before us. We acknowledge that these conclusions do not achieve either of the level playing fields for which the parties argued. However, that is what, in our view, the legislation provided in the period in question. It might be regarded in some quarters as unfortunate and inconsistent, but it is not open to us to ignore the clear words of Parliament to achieve a more coherent result.

We dismiss the Appellants’ appeal. We also reject the arguments raised by HMRC in their Respondents’ Notice that we should correct a drafting error in section 685(6).