Case No: 2002/APP/0295

Neutral Citation Number: [2003] EWHC 67 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London,WC2A 2LL

Date: 7th February 2003

Before:

THE HONOURABLE MR JUSTICE ETHERTON
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Between:
Strand Futures and Options Ltd
Appellant
- and -
Peter William Lewis Vojak (HMIT)
Respondent
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Mr Janek Matthews (instructed by Gregory Rowcliffe & Milners) for the Appellant
Mr Christopher Tidmarsh QC (instructed by Solicitor of Inland Revenue)
for the  Claimant

Hearing dates: 15th - 16th January 2003

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Approved Judgment
Mr Justice Etherton:

Introduction

1.	This is an appeal by Strand Futures & Options Limited (“SFOL”) from a decision of the Special Commissioners (Dr John F Avery Jones CBE and Mr Malcolm J F Palmer) given on 13 February 2002 dismissing an appeal by SFOL against a corporation tax notice of assessment for the accounting period ending 31 December 1995.

The relevant facts

2.	On 31 October 1986 SFOL acquired by allotment 29.9% of the issued share capital of City of London Options Limited (“CLO”). By 1995 SFOL held 179,400 shares in CLO, still comprising 29.9% of the issued share capital.

3	In 1995 SFOL proposed to sell half of its shareholding in CLO to Financielle Participaties Amsterdam GV (“FPA”) for £871,630 and, the other half to CLO for a similar amount.

4.	The proposal was duly carried out. On 29 September 1995 CLO purchased 89,700 of its own shares from SFOL for £871,630. FPA purchased SFOL’s remaining 89,700 shares in CLO for £871,630.

5	On 17 January 1997 SFOL’s corporation tax computation for the accounting period ending 31 December 1995 was submitted. It excluded from the capital gains computation the payment received from CLO on the purchase of its shares.

6.	On 3 February 1997 HM Inspector of Taxes informed SFOL’s agents that the payment received from CLO in consideration of the disposal of the shares in CLO should be included in the computation of capital gains for the purposes of the charge to corporation tax.

7.	A corporation tax notice of assessment on SFOL for the accounting period ending 31 December 1995 was issued on 17 September 1997 in an estimated amount of £1.7 million, with net capital gains of £1.6 million. The assessment was made on the basis that the payment received from CLO on its purchase of its shares was to be treated in the manner indicated by the Inspector on 3 February 1997.

8.	By letter dated 29 September 1997, SFOL lodged an appeal against the assessment.

9.	On 13 February 2002, as I have said, the Special Commissioners dismissed SFOL’s appeal, and confirmed the assessment in the agreed figure of £1,431,686.

The issue

10.	The issue in dispute is whether, when SFOL received payment from CLO for CLO’s purchase of its own shares in 1995, that payment had to be included in the consideration for the disposal of those shares for the purposes of the charge to corporation tax on chargeable gains. The Revenue, in line with its Statement of Practice SP 4/89, maintains that the payment should be so included. SFOL contends that no part of that payment should be included.

Representation

11.	Before me, as before the Special Commissioners, Mr Janek Matthews, counsel, appeared for SFOL; and Mr Christopher Tidmarsh Q.C. appeared for the Revenue.

Disposal?

12.	The Revenue’s case is that the purchase by CLO of its shares from SFOL gave rise to a chargeable gain accruing to SFOL. Generally speaking, for there to be a chargeable gain there must be a disposal of assets: Taxation of Chargeable Gains Act 1992 (“TCGA 1992”) s.1. The Revenue’s case is that the sale of the shares constituted a disposal of assets by SFOL. SFOL’s case is that there was no actual disposal on ordinary gains tax principles.

13.	It is common ground that, upon the purchase by CLO of its own shares, the shares had “to be treated” as cancelled: Companies Act 1985 ss. 160(4) and 162(2).

14.	Mr. Matthews submitted that, in those circumstances, the sale of the shares by SFOL did not transfer to CLO any assets, and the true nature of the transaction was that CLO was making a payment for cancellation of non-redeemable shares.

15.	In support of that proposition, Mr. Matthews referred me to the Inland Revenue Capital Gains Manual para. 58601. This states that no chargeable gain or loss can arise to a UK company when it purchases its own shares, because the effect of the Companies Act 1985 s.160(4) is that the shares purchased are to be treated as cancelled, and so the company does not acquire the shares on the purchase and does not dispose of them on cancellation.

16.	Mr. Matthews, drawing a distinction between an actual disposal for gains tax purposes and a deemed disposal, referred me to TCGA 1992 s.22 (which provides that there is a disposal of assets where an owner derives a capital sum from assets notwithstanding that no asset is acquired by the person paying the capital sum), and TCGA s.24 (which provides that there shall be a deemed disposal on the occasion of the entire loss, destruction, dissipation or extinction of an asset).

17.	The Special Commissioners concluded that the sale by SFOL to CLO of the CLO shares constituted an actual disposal for the purposes of tax on chargeable gains. In my judgment, they were plainly right.

18.	For the purposes of the tax on chargeable gains, “disposal” bears its ordinary meaning: Berry v. Warnett [1982] 1 WLR 698, 701 (Lord Wilberforce).

19.	I understand that it is not in dispute that there was a contract between SFOL and CLO for the sale of the shares. On an ordinary use of language, the sale of the shares pursuant to that contract was a disposal of the shares by SFOL. The contract and transaction was one of sale, notwithstanding that, upon completion of the sale, the shares were “to be treated” as cancelled.

20.	I do not consider that para. 58601 of the Inland Revenue’s Capital Gains Manual, or TCGA 1991 ss.22 or 24 establish the contrary. Para. 58601 of the Manual deals only with the tax position of the purchasing company, and not with the tax position of the vendor. It is to be noted that para. 58655 of the same Manual states that: “A company may repay or redeem its share capital. This is not the same procedure as purchasing its own shares. As far as the shareholder is concerned a purchase of its own shares represents a sale of those shares to the company. The sum received from the company is the proceeds of that sale.”

21.	The provisions of TCGA ss. 22 and 24 do not embrace the facts of the present case, which involve an actual sale of shares, pursuant to a contract for sale, and a “deemed” cancellation of the shares upon and following completion of the contract for sale.

22.	Mr. Tidmarsh, in compliance with his duty to bring relevant cases to the attention of the Court, even if possibly adverse to his case, referred me to Powlson v Welbeck Securities Ltd. [1986] 60 TC 269. In that case, the Court of Appeal accepted the Crown’s submission that the release of an option, which was not accompanied by any corresponding acquisition of the right in question, but had the effect of extinguishing it, was not an actual disposal for gains tax purposes. In my judgment, that case is of no assistance in the present proceedings. The transaction with which I am concerned was not one of release or, by analogy, redemption, but one of sale and purchase of shares and deemed cancellation of the shares following completion.

The tax position of an individual receiving a distribution

23.	Both counsel, in advancing their respective arguments in relation to corporation tax, made reference to the tax position of an individual shareholder who receives payment from the company on the purchase of its shares from him. There is no disagreement between the parties as to the tax position of such an individual at the time in question, namely the year to 31 December 1995. Accordingly, it is convenient to consider, at the outset, the tax position of such an individual at that time.

24.	Under s.20(1) of the Income and Corporation Tax Act 1988 (“TA 1988”), income tax under Schedule F is chargeable in respect of dividends and other distributions; and, for the purposes of income tax, all such distributions are to be regarded as income, however they fall to be dealt with in the hands of the recipient. Paragraph 1 of Schedule F is as follows:

“1. Subject to section 95(1)(a), income tax under this Schedule shall be chargeable for any year of assessment in respect of all dividends and other distributions in that year of a company resident in the United Kingdom which are not specially excluded from income tax, and for the purposes of income tax, all such distributions shall be regarded as income however they fall to be dealt with in the hands of the recipient.”

25.	Save for certain specified exclusions, “distributions” encompass all cash and asset transfers by a company to its members, in particular dividends, including capital dividends, and sums received on a redemption, repayment or purchase of the company’s own shares: TA 1988 s.209. Among the specified exclusions is an exclusion of so much of a distribution as represents repayment of capital on shares: s.209(2)(b). Accordingly, in the case of the purchase by CLO of its shares from SFOL, the purchase price of £871,630, less so much of that amount as represented repayment of capital on the shares, was a distribution within TA 1988 s.209.

26.	At the time in question, when a UK resident company made a “qualifying” distribution it was required to pay an amount of corporation tax, called advance corporation tax (“ACT”): TA 1988 s.14. All distributions were “qualifying” distributions, except a distribution which was a distribution only by virtue of TA 1988 s.209(2)(c) (which related to the issue of redeemable share capital or securities otherwise than for new consideration).

27.	At the time in question, when a UK resident company made a qualifying distribution to a UK resident (whether an individual or a company), the recipient of the distribution was entitled to a tax credit equal to such proportion of the amount or value of the distribution as corresponded to the rate of ACT in force for the financial year in which the distribution was made: TA 1988 s.231(1).

28.	Under paragraph 2 of Schedule F, any distribution in respect of which a person was entitled to a tax credit was to be treated as representing income equal to the aggregate of the amount or value of that distribution and the amount of that credit, and income tax under Schedule F was to be charged on that aggregate. In effect, the amount of the distribution was “grossed up” at the ACT rate. Income tax was then chargeable on the gross amount, with credit being given for an amount equal to the ACT.

29.	The ACT procedure, which I have described, replaced the previous obligation of a company to account for income tax at the standard rate on distributions, originally imposed by s.47(3) of the Finance Act 1965 (“FA 1965”). For the sake of completeness, it should be noted that the ACT regime itself ceased to apply in respect of distributions made after 5 April 1999.

30.	An individual liable to income tax under Schedule F on a distribution represented by the purchase price (less the amount representing repayment of capital) paid by a company on the purchase of its shares is not liable, in respect of the same purchase price, for capital gains tax. This is the consequence of TCGA s.37(1) which is as follows:

“37(1) There shall be excluded from the consideration for a disposal of assets taken into account in the computation of the gain any money or money’s worth charged to income tax as income of, or taken into account as a receipt in computing income or profits or gains or losses of, the person making the disposal for the purposes of the Income Tax Acts.”

31.	Accordingly, in summary, if SFOL had been a UK resident individual, it would have been liable to income tax under Schedule F on so much of the purchase price of £871,630 as did not constitute repayment of share capital, income tax being chargeable on such amount “grossed up” at the ACT rate, with credit being given for the ACT. There would have been no liability to capital gains tax in respect of the purchase price.

The rival contentions as to the position of a company recipient

32.	Corporation tax is charged on profits of companies: TA 1988 s.6(1) “Profits” means income and chargeable gains: TA 1988 s.6(4)(a), TCGA 1992 s.1(2). Subject to any exceptions provided for in the relevant legislation, a company is chargeable to corporation tax on all its profits wherever arising.

33.	Except as otherwise provided in the relevant legislation, the amount of any income of a company must, for the purposes of corporation tax, be computed in accordance with income tax principles; income is to be computed, and the assessment made, under the like Schedules and Cases as apply for the purposes of income tax, but aggregated (with chargeable gains) to arrive at the total profits. In other words, there is a single corporation tax assessment on all profits from all sources: TA 1988 s.9(3).

34.	At the heart of the dispute between the parties is TA 1988 s.208, which is as follows:

“208. Except as otherwise provided by the Corporation Tax Acts, corporation tax shall not be chargeable on dividends and other distributions of a company resident in the United Kingdom, nor shall any such dividends or distributions be taken into account in computing income for corporation tax.”

35.	It is common ground that s.208 avoids a corporation “income” tax charge. The approach of the Revenue, which was upheld by the Special Commissioners, and which is set out in the Revenue’s Statement of Practice SP4/89 is that s.208 does not avoid a distribution (arising from a company’s purchase of its own shares) being treated as giving rise to a capital gain and charged to corporation tax as such. SFOL’s case, on the other hand, is that the first limb of s.208 - “corporation tax shall not be chargeable on dividends and other distributions of a company resident in the United Kingdom” - is to be read, at face value, as a general exemption from corporation tax, whether as income or as part of a chargeable gain.

36.	The submissions of each side in support of their respective interpretation were detailed and technical. It is convenient to set out, first, the principal submissions of the Revenue.

37.	Mr Tidmarsh submitted that the first limb of s.208, read literally, is an apt and properly worded exemption from an “income” tax charge “on” dividends and other distributions. In the absence of s.208, there would be an “income” charge on such distributions equivalent to the charge on individuals under Schedule F. He submitted that the wording of the section (“corporation tax shall not be chargeable on … distributions”) is not, however, apt for avoiding a charge on distributions as a component of a calculation which throws up a capital gain.

38.	Mr Tidmarsh submitted that the express reference to “income” in the second limb of s.208 - “nor shall any such dividends or distributions be taken into account in computing income for corporation tax” - reinforces the conclusion that the draftsman intended to limit s.208 to an exemption from a corporation “income” tax charge. The purpose of the second limb of s.208, Mr Tidmarsh submitted, was to avoid an indirect “income” tax charge in the calculation of the profits of a trader under Case 1 of Schedule D.

39.	TA 1988 s.208 derives from FA 1965, which introduced corporation tax and also capital gains tax. FA 1965 s.47(1) is the origin of the provisions to be found in TA 1988 s.208, Mr Tidmarsh submitted that the meaning of TA 1988 s.208 is perfectly clear, and, accordingly, it is not permissible to resort to FA 1965 s.47 as an aid to its interpretation. The parties agree that the principles governing the right to take into account earlier legislation in interpreting later consolidated legislation is set out in the following statement of Lightman J in Padmore v IRC (No2) 2001 STC 280, at p.294:

“The general rule is that it is only permissible to take into account the earlier legislation if the language of the consolidated legislation is ambiguous or obscure or leads to absurdity. In the words of Lord Cooke in R v Secretary of State for the Environment, Transport and the Regions, ex p Spath Holme Ltd [2001] 2 WLR 15 at 40, a provision is ambiguous if reasonably open on orthodox rules of construction to more than one meaning. But there is no absolute rule. (It may be noted that this was held to be the law by the House of Lords in NAP Holdings UK Ltd v Whittles (Inspector of Taxes) [1994] STC 979 at 987, a decision of the House of Lords not cited in Ex p Spath Holme Ltd). As Lord Bingham said in Ex p Spath Holme Ltd in a passage with which Lord Nicholls and Lord Cooke agreed ([2001] 2WLR 15 at 28):
 
“…the overriding aim of the court must always be to give effect to the intention of Parliament as expressed in the words used.  If, even in the absence of overt ambiguity, the court finds itself unable, in construing the later provision in isolation, to place itself in the draftsman’s chair and interpret the provision in the social and factual context which originally led to its enactment, it seems to me legitimate for the court - even, as Lord Simon said, incumbent on it - to consider the earlier, consolidated, provision in its social and factual context for such help as it may give, the assumption, of course, being (in the absence of amendment) that no change in the law was intended”

This echoes the language of Lord Wilberforce in Farrell v Alexander [1977] AC 59 at 72 (cited with approval by Lord Hutton in Ex p Spath Holme Ltd [2001] 2 WLR 15 at 50) at p.50) who permitted recourse to the antecedent law when “there is a real and substantial difficulty ... which classical methods of construction cannot resolve”.”

40.	Mr Tidmarsh submitted that, even if there was recourse to FA 1965, and, in particular, s.47 of that Act, this would merely reinforce the Revenue’s interpretation of TA 1988 s.208. FA 1965 s.47(1) was in the following terms:

“47.(1) Except as otherwise provided by this Part of this Act, corporation tax shall not be chargeable on dividends and other distributions of a company resident in the United Kingdom, nor shall any such dividends or distributions be taken into account in computing income for corporation tax; but income tax for a year of assessment after the year 1965-66 shall be chargeable under a new Schedule F in respect of all dividends and other distributions in that year of a company resident in the United Kingdom which are not chargeable under Schedule D or Schedule E and are not specially exempted from income tax, and for the purposes of income tax all such distributions shall be regarded as income, however they fall to be dealt with in the hands of the recipient.”

41.	Mr Tidmarsh submitted that the whole of FA 1965 s.47(1) was clearly directed at Schedule F income. He emphasised, in this connection, that the exemption from corporation tax on dividends and other distributions appeared in the same sub-section as the imposition of the new charge to income tax under Schedule F. He also emphasised the word “but” (“but income tax ... shall be chargeable under a new Schedule F ..”), which introduced the second part of s.47(1), so linking together the two parts of s.47(1) and indicating that the second part was a continuation and qualification of the theme in the first part of s.47(1). Thirdly, Mr Tidmarsh noted that the draftsman had deliberately referred, in the first part of s.47(1), to the exclusion of corporation tax “on” dividends and other distributions, whereas, in the second part, he had referred to the charge under Schedule F “in respect of” all dividends and other distributions. He submitted that the expression “in respect of” was much wider in ambit than the word “on”, the latter being apposite for a direct charge to tax and the former expression being wide enough to encompass an indirect charge. It was only the narrow reference to the exclusion of corporation tax “on” dividends and other distributions which was carried through to TA 1988 s.208.

42.	I now turn to consider the rival submissions on behalf of SFOL. Mr Matthews’ starting point was that the first limb of TA 1988 s.208, on a natural reading, confers a blanket exemption from corporation tax in respect of distributions, whether treated as income or as giving rise to a chargeable gain. By way of analogy, he relied upon the reasoning of the Court of Appeal and the House of Lords in Hughes v Bank of New Zealand [1937] 1KB 419 (CA), [1938] AC 366 (HL). The relevant facts were that the Bank of New Zealand, which was not resident or ordinarily resident in the United Kingdom, was assessable to income tax under Case 1 of Schedule D on the profits arising from the trade carried on at its London branch. The issue in the case was whether interest on certain holdings of War Loan, India Government Stock and securities of colonial companies were properly included in the Bank’s profits under Case 1 of Schedule D. The Bank was assessed on the basis that such interest was properly included. The Bank appealed against the assessment, and maintained that, under certain statutory exemptions, the interest should be excluded from the account.

43.	The case in relation to the War Loan turned upon the provisions of s.46 of the Income Tax Act 1918, which was as follows:

“46. (1) Where the Treasury have before the commencement of this Act issued or may thereafter issue any securities which they have power to issue for the purpose of raising any money or any loan, with a condition that the interest thereon shall not be liable to tax or super-tax, so long as it is shown, in manner directed by the Treasury, that the securities are in the beneficial ownership of persons who are not ordinarily resident in the United Kingdom, the interest of securities issued with such a condition shall be exempt accordingly.”

44.	The provisions in that section were derived from s.47 of the Finance (No.2) Act 1915, which was in the following terms:

“The Treasury may, if they think fit, during the continuance of the present war and a period of twelve months thereafter, issue any securities which they have the power to issue for the purpose of raising any money or any loan with a condition that neither the capital nor the interest thereof shall be liable to any taxation, present or future, so long as it is shown in manner directed by the Treasury that the securities are in the beneficial ownership of persons who are neither domiciled nor ordinarily resident in the united Kingdom, and securities issued with such a condition shall be exempt accordingly.”

45	The Court of Appeal upheld the Bank’s case in relation to interest on the War Loan, and the Revenue did not maintain an appeal from that decision. In the Court of Appeal, Lord Wright MR (at [1937] 1KB 429, 430) said the following in relation to s.47 of the 1915 Act and s.46 of the 1918 Act:

“Section 46 is in my opinion a perfectly general exemption: the language is unqualified… If, notwithstanding what I regard as the clear language of this Section, it was construed as merely relating to interest as interest, which is the expression used in argument by Mr Hills as defining its meaning, with the consequence that the owner of the securities - in this case the bank - can only escape taxation if the tax is sought to be imposed upon him under Case III of Sch.D and that he is liable to be taxed under the provision of Case I of Sch.D, then it seems to me that a result is being reached which is quite contrary to the apparent meaning of the particular legislation and which, to my mind, involves the very serious frustration of what I imagine the parties taking the securities from time to time might be assumed to have contemplated. The section was put in in 1915, when it was undoubtedly desired to attract subscriptions to loans which were being put forward, as we well remember in those critical years of the war. It seems to me that it would be rather deplorable if, notwithstanding what I regard as the clear language of s.46, the owner, not being ordinarily resident in the United Kingdom, was still taxed on the interest as part of his trading profits, and in my view that is not the true construction of the section. It is not introduced in respect of any particular Schedule; it is quite general, and that it is quite general is made even more apparent when reference is made to s.47 of the Finance (No.2) Act, 1915. I see no ground at all consistent with ordinary principles of construction for cutting down its meaning and treating it as only applicable to Case III of Sch. D, the Case under which, by Section 49, War Loan Securities were taxable if they were taxable at all. If they are not taxable at all, then obviously they can neither be charged under Case III of Sch.D nor under any Case of Sch.D at all.”

46.	In the House of Lords, Lord Thankerton (with whom the other members agreed) said, with regard to the War Loan, as follows (at [1938] AC p.374):

“As regards the War Loan, the Crown did not maintain their appeal. In this I think that the Crown were well advised, for I agree with the learned Master of the Rolls that their contention is contrary to the apparent meaning of the statutory provisions, originally contained in s. 47 of the Finance (No.2) Act, 1915, and would involve the very serious frustration of what the parties, taking the securities from time to time, might be assumed to have contemplated.”

47.	In relation to the India Government Stock, the case turned upon the provisions of Rule 2(d) of the General Rules applicable to Schedule C, which provided

“No tax shall be chargeable in respect of … (d) The interest or dividends on any securities of a foreign State or a British possession which are payable in the United Kingdom, where it is proved to the satisfaction of the Commissioners of Inland Revenue that the person owning the securities and entitled to the interest or dividends is not resident in the United Kingdom, but, save as provided by this Act, no allowance shall be given or repayment be made in respect of the tax on the interest or dividends on the securities of any foreign State or any British possession which are payable in the United Kingdom…”

48.	As regards the interest on the securities of the colonial companies, the Bank maintained that Rule 2(d) of the General Rules applicable to Schedule C, which I have cited above, was also applicable to the interest on these stocks by virtue of Rule 7 of the Miscellaneous Rules of Schedule D.

49.	In the House of Lords, Lord Thankerton, having referred to the Crown’s abandonment of its appeal on the War Loan, continued as follows at p.374:

“But it is necessary to notice here an argument which the Crown put forward as applicable to all the four credit items in dispute - namely, that the provisions of s. 46, sub-s.1, of the Income Tax Act, and Rule 2 (d) of the General Rules applicable to Sch. C merely exempted certain interest paid to persons not resident or not ordinarily resident in the United Kingdom from charge under Sch. C, or Case III. of Sch. D, qua interest, and did not operate to exclude any trading receipts of a trade exercised in the United Kingdom from the computation of the profits of the trade for the purposes of assessment under Case I. of Sch. D. This appears to have been the only argument submitted by the Crown as to the War Loan, but, despite their abandonment of it as regards the War Loan, they still maintained it as regards the remaining items before your Lordships.

My Lords, I have no difficulty in rejecting this contention; I agree with the Courts below that whether as interest or as a component part of the profits of a trade, the exemptions must equally apply.”

50.	Mr Matthews submitted that there is no material distinction between the width of the exemption in TA 1988 s.208 (“corporation tax shall not be chargeable on … distributions of a company”) and the width of the exemptions in Hughes (“neither the capital nor the interest thereof shall be liable to any taxation” - s.47 of the 1915 Act; “the interest thereon shall not be liable to tax or super-tax” - s.46 of the 1918 Act; “No tax shall be chargeable in respect of….” - Rule 2(d) of the General Rules applicable to Schedule C). Accordingly, in reliance on the analysis of Lord Wright MR and Lord Thankerton in Hughes, Mr Matthews submitted that the exemption in s.208 of TA 1988 was apt to cover distributions both as income and as an ingredient in the calculation of a capital gain.

51.	In support of that conclusion, Mr Matthews submitted that the draftsman was, in any event, using language flexibly, and strictly speaking inaccurately, in exempting corporation tax “on” dividends and other distributions. Mr Matthews contended that corporation tax is, properly speaking, chargeable on profits, and not on distributions, which are merely a component part of profits. Accordingly, giving due recognition to that flexibility of language, he submitted that there is no difficulty in reading the exemption in s.208 as extending to the capital gains element of profits.

52.	So far as concerns the second limb of TA 1988 s.208, Mr Matthews rejected the explanation proffered by Mr Tidmarsh for that part of the section. He submitted that, by analogy with Hughes the general exemption to corporation tax in the first part of s.208 would automatically extend to the inclusion of dividends and other distributions as part of the calculation of the profits of a corporate trader under Case 1 of Schedule D.

53.	Mr Matthews submitted that the correct explanation for the second limb of s.208 is the exclusion of dividends and distributions in the application of, for example, the loss relief provisions in TA 1988 ss.393 and 393A, and in the application of TA 1988 ss.75 and 76 in computing the profits of a company carrying on life assurance business.

54.	Mr Matthews, referring to a statement of Sir Richard Scott V-C in Bibby v Prudential Assurance Co Ltd [2000] STC 459 at p.475, submitted that the purchase price paid by a company purchasing its own shares represents, in part, a return of capital to the vendor shareholder and, in part, a distribution of profits; and, accordingly, in broad terms it would be right to interpret the legislation so that capital distributions are taxed in the same way as distributions of profits.

55.	Mr Matthews also relied upon the following passage in the speech of Lord Keith in Bird v IRC [1989] AC 300 (at p.325):

“In general, I am of opinion that it is not open to the revenue to subject a taxpayer to two different charges to tax in respect of the same receipts. Thus in Inland Revenue Commissioners v. Garvin [1981] 1 W.L.R. 793 I consider the correct view on the hypothetical question there discussed to be that it was necessary for the revenue to elect between raising a charge under section 460 on the basis that the sums in question were received as income and raising a charge under the capital gains tax legislation on the basis that these sums were received as capital. It seems to me that this result follows from a straightforward application of principle. The two claims are incompatible ...”

56.	Mr Matthews submitted that the effect of the Revenue’s approach to TA 1988 s.208 is that SFOL is subjected to two different charges to tax in respect of the purchase price paid by CLO: the ACT, for which CLO was liable and accounted to the Revenue on paying the purchase price, and also corporation tax on the capital gain to which the purchase price gave rise.

57.	Mr Matthews also relied upon TA 1988 s.438, prior to its amendment, and, in particular, s.438(3) which was in the following terms:

“(3) Subject to subsection (6) below, the exclusion by section 208 from the charge to corporation tax of franked investment income shall not prevent such income being taken into account as part of the profits in computing under section 436 income from pension business.”

58.	He submitted the wording of that provision shows that the statutory draftsman considered that the first limb of TA 1988 s.208 took out of the charge to corporation tax all distributions as a component part of profits.

59.	Mr Matthews further submitted that, if the Revenue’s interpretation was correct, there would be a major anomaly in the operation of the provisions of s.13 of TA 1988 in relation to the right of small companies to the lower rate of corporation tax specified in that section. The lower rate is payable by a company whose “profits” do not exceed the relevant maximum amounts specified in the section. For the purpose of that computation, the “profits” of a company are to be distinguished from its “basic profits”. The “basic profits” of a company for an accounting period are the amount of its profits for that period on which corporation tax finally falls to be borne: s.13(8). For the purpose of ascertaining whether a company is entitled to the small companies rate, however, the profits of a company for an accounting period “shall be taken to be the amount of its profits for that period on which corporation tax falls finally to be borne, with the addition of franked investment income ...”: s.l3(7). Mr Matthews submitted that these provisions plainly show that the draftsman of TA 1988 assumed that franked investment income was not included in the basic profits of a company chargeable to corporation tax, whether as income or as chargeable gains.

60.	In the light of all these matters, Mr Matthews submitted (as had Mr Tidmarsh in relation to the case of the Revenue) that SFOL’s interpretation of s.208 is so obviously correct that there is no need, and indeed no right, to refer to the earlier provisions of FA 1965 in order to assist the interpretation of s.208. He submitted that, if, however, reference is made to FA 1965, the relevant provisions there give, at worst, no clear guidance on the meaning of s.208 and, at best, support the case of SFOL. Positive indications in favour of SFOL’s interpretation of s.208 are the fact that FA 1965 s.47 did not deal just with Schedule F and income distributions, but with all distributions; also, the operation of the regime under the 1965 Act for the deduction of income tax at the standard rate by the company making the distribution (whether of an income or capital nature and whether to an individual or a company) (FA 1965 s.47(2)(3)(4)); and, further, the provisions relating to the calculation of profits of close companies in FA 1965 s.74(1). The latter restricted the deduction for remuneration of certain directors of close companies, in computing profits for corporation tax, to 15% of the company’s profits “computed before making any deduction for that remuneration or for investment allowances, and with the addition of franked investment income from companies not within its group (if it has one)”. Mr Matthews submitted that FA 1965 s.74(i), like s. 13 of TA 1988, appears to assume that franked investment income would not be included in the computation of the close company’s profits for corporation tax, whether as income or as chargeable gains.

Analysis of TA 1988 s.208

61.	The Special Commissioners said that they found the interpretation of s.208 “a difficult question”. I agree.

62.	It is possible to deal with certain of the submissions of the parties with relative ease. In my judgment, Mr Tidmarsh is correct to say that the word “on” in the phrase “corporation tax shall not be chargeable on dividends and other distributions” in the first limb of s.208 is a linguistically apt way of avoiding a corporation “income” tax charge. Mr Matthews is not correct to state that this is a strictly inaccurate use of language by the draftsman since corporation tax is chargeable on profits. As Mr Tidmarsh observed, under TA 1988 s.6 corporation tax is charged on profits of companies, but profits are defined to mean “income and chargeable gains”.

63.	Mr Matthews’ reliance on TA 1988 s.438(3) is, in my judgment, plainly misplaced. That sub-section was concerned to exclude, from the exemption to corporation tax under TA 1988 s.208, income from pension business in computing the profits of an insurance company. The sub-section was not concerned with, and said nothing about, capital gains, and can throw no light on whether s.208 was intended to exclude liability to corporation tax in respect of capital distributions giving rise to a capital gain.

64.	I do not consider that Bibby v Prudential Assurance Co Ltd provides any sound basis for the general proposition that Parliament intended that distributions, in the form of the purchase price (less the amount representing re-payment of capital) paid for shares by the company that issued them, would be treated, for corporation tax purposes, in the same way as distributions of profit. It is clear that some companies are authorised to redeem or purchase their own shares out of capital: Companies Act 1985 s.171. The judgment of Sir Richard Scott V-C in Bibby was not concerned in any way with the intention of the draftsman as to the effect of TA 1988 s.208, and it is impossible to use the language of that judgment to support an argument as to that section’s proper interpretation.

65.	Nor can any assistance be gained from the statement of Lord Keith in Bird v IRC, on which Mr Matthews relied. Lord Keith was there referring to the necessity for the Revenue to elect between raising a charge to income tax and a charge under the capital gains tax legislation. There is no question of an election by the Revenue in the present case. The legislation imposed the requirement to make a payment of ACT on the making of a qualifying distribution. It was not an option, giving the Revenue a choice or election. Furthermore, as Mr Matthews accepted, under the ACT tax regime introduced in 1973, ACT was not strictly tax payable at source on the distribution. It was a payment by the paying company on account of its own liability to corporation tax. The payee company obtained a tax credit (which could, for example, be used to frank its own distributions or for set off against losses, and which the payee company might even be entitled to have paid to it in certain circumstances), but not, in strict theory, on the basis that ACT was corporation tax paid on its behalf.

66.	I now turn to matters of greater difficulty.

67.	Mr Tidmarsh submitted that Mr Matthews’ submissions on the analogy of Hughes can be dismissed simply on the basis that the relevant statutory provisions in that case were markedly different from TA 1982 s.208. He emphasised that s.47 of the Finance (No2) Act 1915 and s.46 of the Income Tax Act 1918 expressly excluded liability “to any taxation” and “to tax or super-tax” respectively. Furthermore, Rule 2(d) of the General Rules applicable to Schedule C stated that no tax shall be chargeable “in respect of” the relevant interest or dividends.

68.	I tend to agree with Mr Matthews that the difference between the wording of s.47 of the 1915 Act and s.46 of the 1918 Act, on the one hand, and the words “corporation tax shall not be chargeable on …” in s.208 of TA 1988, on the other hand, is not so material in substance as Mr Tidmarsh contends, bearing in mind that, whichever interpretation of s.208 is correct, the only relevant tax for the exemption in s.208 is corporation tax.

69.	On the other hand, the Court’s interpretation of completely different tax statutes, relating to different subject matter and dating from a completely different era, can only be, at best, of marginal assistance in the interpretation of TA 1988 s.208. This is reinforced by the special factual background to s.47 of the 1915 Act, to which Lord Wright MR referred in the passage in his judgment which I have cited above; that is to say, the circumstances of the Great War, and the expectation of the parties taking the relevant securities from time to time.

70.	What one can say in relation to the first limb of s.208, which was effectively what the Court said in Hughes, is that the exemption from tax in the first part of s.208 is expressed in very general terms. If it had been intended by the draftsman to limit the exemption merely to income distributions, it would have been better practice to have made that quite clear.

71.	I agree with Mr. Tidmarsh that, on a literal reading of TA 1988 s.208, an important pointer in favour of the Revenue’s interpretation is the fact that, in the second limb of the section, the draftsman has expressly excluded dividends and distributions of a company from the computation of its “income” for corporation tax, and has not mentioned chargeable gains or profits generally. On the other hand, Mr. Matthews has presented some examples, albeit highly technical, in which the second limb would still have been necessary or prudent, as regards the computation of income, even on SFOL’s case that the first limb provided a blanket exception from corporation tax either direct or indirect on distributions. No similar examples were given to me by Mr. Tidmarsh to support the necessity or prudence of referring to capital gains or profits generally in the second limb, if the first limb of TA 1988 s.208 provided the blanket exception for which SFOL contended.

72.	Mr Tidmarsh drew my attention to TA 1988 s.321(1) which provides that “Income arising from any office or employment to which this section applies shall be exempt from income tax ..”“, and TA 1988, s.331(1) which provides that “Income arising from a scholarship held by a person receiving full-time instruction at a university, college, school or other education establishment shall be exempt from income tax…”. Both s.321(1) and s.331(1) continue “and no account shall be taken of any such income in estimating the amount of income for any income tax purposes.” Mr Tidmarsh noted that the structure of ss.321(1) and 331(1) is similar to the two limbed structure of s.208, but he emphasised the difference in language in the first limb, and, in particular, the expression “shall be exempt from income tax”. I do not find this distinction in the statutory language a helpful pointer in favour of either interpretation. The wording of the first limb of s.208 derives from FA 1965 s.47(1), so explaining the difference in language between s.208 and ss.321(1) and 331(1). Even without resorting to FA 1965 s.47, however, as an explanation for the wording of s.208, I do not consider that the different language in s.321(1) and s.331(1) indicates a clear legislative intent as to the meaning and extent of the exemption in the first part of s.208.

73.	Mr Tidmarsh accepted that, on the Revenue’s interpretation of TA 1988 s.208, Mr Matthews is correct in saying that there would be an anomaly in the application of TA 1988 s.13. It is, accordingly, common ground that the assumption of the legislative draftsman of s.13 was that franked investment income would not form part of a company’s profits on which corporation tax falls finally to be borne. Taking s.13 at face value, the Revenue’s interpretation of s.208 would mean that, in determining whether the profits of a company are such as to attract the small companies’ rate, a distribution forming part of a calculation leading to a capital gain would be included twice: first, as an ingredient of the company’s basic profits, and, secondly, by the addition, under s.13(7), of franked investment income to the basic profits.

74.	Mr Tidmarsh argued that this anomaly should not undermine what, he submitted, was the plain meaning of TA 1988 s.208. He submitted that it is not surprising that, in legislation as complicated as that which is relevant to the issue in the present case, there are anomalies. He referred, in this context, to the following statement of Viscount Dilhorne in Pearson v IRC [1981] AC 753, at p.775:

“Each side contended that the case put forward by the other side would give rise in a number of instances to anomalies and injustice. Time was spent in examining whether or not the alleged anomaly would in fact arise. I did not find this helpful for, as Buckley L.J. said [1980] Ch.l, 24D, in the course of his judgment in this case: “The ingenuity of counsel can almost always produce possible anomalies in either direction, and that has been the case here”.”

75.	Mr Tidmarsh submitted that it would be possible to overcome the anomaly by a purposive construction of TA 1988 s.l3, so that, for example, in calculating the profits of a company for the purpose of seeing whether the small companies’ rate applies, the basic profits of the company would not be topped-up by the addition of franked investment income already included in the basic profits as part of a capital gain.

76.	I do not accept that the anomaly in TA 1988 s.13 thrown up by the Revenue’s interpretation of s.208 can be dismissed as easily as Mr Tidmarsh submitted. In my judgment, the anomaly is a significant one. I am very doubtful whether it can be eliminated by a purposive interpretation and application of s.13(7) in the manner suggested by Mr Tidmarsh. His solution would involve ignoring the plain and unambiguous terms of s.13(7).

77.	In the light of all the matters which I have mentioned in this section of my judgment, I consider that it is appropriate to refer to the original enactment of what is now TA 1988 s.208, namely FA 1965 s.47(1), in order to see whether the original enactment and its context can assist the interpretation of TA 1988 s.208. There is, in my judgment, a real and substantial difficulty in interpreting s.208 by reference merely to the language of the later statute.

78.	In my judgment, the provisions of FA 1965 point in favour of SFOL’s interpretation of TA 1988 s.208. Against the textual analysis of s.47(1) of FA 1965 advanced by Mr Tidmarsh, and to which I have referred earlier in this judgment, must be set the important consideration that, under the regime imposed by FA 1965, income tax under Schedule F was deducted at the standard rate on all distributions, whether made to individuals or to companies. If s.47(1) of FA 1965 bore the meaning for which the Revenue contends, company recipients of distributions which were of a capital nature, but nevertheless also included amounts within the extensive definition of “distribution” for Schedule F, would have been potentially liable to bear both a charge to income tax on the distribution under the deduction of tax at source provisions, and also corporation tax on the distribution as giving rise to a capital gain. That seems to me a highly anomalous and unlikely consequence.

79.	Mr Tidmarsh submitted, in his written skeleton argument, that there is “only an appearance of double taxation” in the years between 1965 and 1973. He pointed out, that before 1973, a company that received franked investment income could not recover the tax deducted, but that tax could be set-off against tax for which the recipient was liable to account to the Revenue in respect of its own onward distributions (FA 1965 s.48(1)), and any surplus franked investment income could be set-off against charges, management expenses, capital allowances and losses under FA 1965 s.62.

80.	Notwithstanding those provisions enabling a company recipient of franked investment income before 1973 to set-off the tax in the various ways which I have mentioned, there could be no certainty that all companies would be able to utilise in that way all the tax deducted from distributions. The fact remains, and is indeed a fact upon which Mr Tidmarsh himself laid weight in contrasting the subsequent ACT regime, that the provisions of FA 1965 s.47 imposed a deduction of tax at source regime, under which distributions to companies and individuals were paid net of standard rate tax, and so imposed a charge to income tax on those distributions. In my judgment, it would require the clearest words to expose a recipient of such distributions to a potential double charge to tax, that is to say both as income and as a component of a capital gain.

81.	As I have said, Mr Tidmarsh emphasised that, after the ACT regime was introduced in 1973, tax was not deducted at source. Strictly, the paying company was liable to pay ACT as an advance payment of its own liability for corporation tax (which it could set-off against its own mainstream corporation tax) and the recipient company received a tax credit. Although that credit was often the same amount as the ACT, that has not always been the case. The ACT regime gave the recipient company a tax credit, and not an allowance in respect of tax paid on its account. In my judgment, the position following the introduction of the ACT regime does not, however, assist the Revenue on this part of the analysis. The question is whether the original enactment of TA 1988 s.208, which is to be found in FA 1965 s.47, can assist the interpretation of TA 1988 s.208. Accordingly, in this part of the analysis, what is to be ascertained is the intention of the draftsman in enacting the first part of FA 1965 s.47(1). There is no reason to believe that the identical words in FA 1965 s.47(1) and in TA 1988 s.208 were intended to bear a different meaning in a critical respect.

82.	Further, I agree with Mr Matthews that FA 1965 s.74(1) clearly indicates that the draftsman considered that franked investment income would not be included in the computation of the profits of a company for corporation tax.

83.	In seeking to elicit the meaning and effect of that part of FA 1965 s. 47(1) now contained in TA 1988 s. 208, it is appropriate at this point to refer to paragraph 2 of Schedule 6 to FA 1965, which contained the predecessor provisions of TA 1988 s.37, to which I have referred earlier in this judgment. Paragraph 2(1) was in the following terms.

“2.(1) There shall be excluded from the consideration for a disposal of assets taken into account in the computation under this Schedule of the gain accruing on that disposal any money or money’s worth charged to income tax as income of, or taken into account as a receipt in computing income or profits or gains or losses of, the person making the disposal for the purposes of the Income Tax Acts.”

84.	That provision plainly reflected a policy that the consideration for a disposal of assets should not give rise to a liability both to income tax and to tax on a chargeable gain.

85.	Neither Mr Matthews nor Mr Tidmarsh referred me to paragraph 2 of Schedule 6 to FA 1965. It seems clear, however, from the submissions of Mr Tidmarsh that the Revenue does not accept that paragraph 2 of Schedule 6 to FA 1965 excluded liability to corporation tax on a distribution as a component of a capital gain, even when standard rate income tax was deducted from such a distribution. It is certainly not the Revenue’s position in relation to the almost identical wording of TA 1988 s.37, albeit that the ACT regime had replaced the income tax at source regime in 1973.

86.	Interpreting FA 1965 s. 47(1) as conferring a blanket exemption from corporation tax, and so avoiding the potential double charge to tax to which I have referred, would give effect to the plain policy consideration reflected in paragraph 2 of Schedule 6 to FA 1965.

87.	Further, I agree with Mr Matthews that it is of some significance that FA 1965 s.47 was not restricted to dealing only with the new Schedule F or “income” distributions. It related to distributions generally, and whether to individuals or companies. In short, the draftsman’s attention was concentrated on all distributions, including capital distributions to companies. In those circumstances, if the draftsman had contemplated or intended that distributions could give rise to liability for corporation tax on chargeable gains, the broad wording of the exemption in the first part of s.47(1), without any express saving for chargeable gains, would seem to be particularly poor drafting. 

88.	The researches of both parties have failed to identify any statement in Parliament or by a Minister prior to enactment of FA 1965 and TA 1988 which throws light upon the intended meaning and effect of the first limb of FA 1965 s.47(1) and TA 1988 s.208.

89.	Drawing together the various threads, I conclude that TA 1988 s.208, on its proper interpretation, and save where otherwise expressly provided by the Tax Acts, exempts from corporation tax all distributions of a company, whether as income or as giving rise to a capital gain. The broad language used in the first limb of s.208, the anomalous position under TA 1988 s.13 on the Revenue’s interpretation of s.208, the identical language in the first limb of FA 1965 s.47(1), the deduction of standard rate tax at source under FA 1965 s.47, the policy principle embodied in paragraph 2 of Schedule 6 to FA 1965, and the apparent assumption of the draftsman of FA 1965 s.74(1) that there was a general exemption from corporation tax on distributions, whether as income or as giving rise to a capital gain, provide a compelling case for that interpretation. The significance of those factors outweigh the contrary indications relied upon by the Revenue.

90.	This interpretation gives TA 1988 s.208 a sensible meaning and effect. It achieves corporation tax neutrality for distributions between companies. The Revenue accepts that such tax neutrality was an objective behind TA 1988 s.208, but merely disputes the intended extent of such tax neutrality.

91.	It follows that the sale by SFOL to CLO of its shares in CLO in 1995 did not give rise to liability to corporation tax in respect of any capital gain.

Other arguments

92.	Mr Matthews advanced a number of subsidiary, alternative arguments in support of SFOL’s appeal, including arguments on the proper meaning and application of TCGA 1992 ss.37 and 122. In view of my decision on the proper meaning and effect of TA 1988 s.208, it is not necessary for me to deliver a judgment on those arguments.

Decision

93.	For the reasons I have given in this judgment, I allow the appeal of SFOL.