CORPORATION TAX SELF-ASSESSMENT – whether notice of enquiry in time if given within the period in paragraph 24(2) of Schedule 18 to the Finance Act 1998 although the period in paragraph 24(4) following an amendment has expired – yes – calculation of the first relevant amount in the starting rate of corporation tax when there is an associated company – appeal dismissed

THE SPECIAL COMMISSIONERS

	HALLAMSHIRE ESTATES LIMITED	Appellant

	- and -

	G R WALFORD
	(HM INSPECTOR OF TAXES)	Respondent

		Special Commissioner:	DR JOHN F AVERY JONES CBE

Sitting in public in London on 7 April 2004

Philip Hall for the Appellant

Mike Faulkner, Regional Appeals Unit (Southern England) for the Inspector

© CROWN COPYRIGHT 2004

DECISION

1.	This is an appeal by Hallamshire Estates Limited against an amendment to a self-assessment made on 23 September 2003 increasing the tax payable for the accounting period 31 March 2002 (the 2002 period) to £4,171.77.  The Appellant was represented by Mr Philip Hall, and the Inspector by Mr Mike Faulkner.
2.	There are two issues, a procedural one, whether a notice to enquire into the Appellant’s corporation tax self-assessment return for the 2002 period is in time, and a substantive one about the calculation of the “first relevant amount” in computing the corporation tax starting rate in section 13AA of the Taxes Act 1988.
The procedural aspect
3.	On the procedural issue the following facts are agreed:
(1)	29 April 2002: the corporation tax return for the 2002 period was submitted.
(2)	10 May 2002: the Inspector issued a notice under paragraph 16(2) of Schedule 18 to the Finance Act 1998 correcting the return for the 2002 period to take account of the Appellant having one associated company and increasing the tax payable.
(3)	19 June 2002: the Appellant rejected the amendment and amended the self-assessment back to the original figure.
(4)	21 June 2002: the Inspector acknowledged the amendment and revised the computer record of the tax payable to the Appellant’s figure.
(5)	31 March 2003: filing date for the 2002 period.
(6)	31 July 2003: paragraph 24(4) time limit for enquiring into the return for the 2002 period expired.
(7)	6 August 2003: the Appellant submitted the return for the year ended 31 March 2003.
(8)	14 August 2003: the Inspector issued a notice of enquiry into the 2002 period under paragraph 24(1).
(9)	31 March 2004: expiry of the paragraph 15(4) period for the Appellant to amend its return for the 2002 period, and for making an enquiry into the return for the 2002 period.
(10)	15 August 2003: the Inspector issued a closure notice proposing an increase in the tax payable.
(11)	23 September 2003: the Inspector amended the self-assessment to show the increased tax payable.
(12)	29 September 2003: the Appellant appealed.
4.	Paragraph 24 of Schedule 18 to the Finance Act 1998 is as follows:
(1) The Inland Revenue may enquire into a company tax return if they give notice to the company of their intention to do so (“notice of enquiry”) within the time allowed. 
(2) If the return was delivered on or before the filing date, notice of enquiry may be given at any time up to twelve months from the filing date. 
(3) If the return was delivered after the filing date, notice of enquiry may be given at any time up to and including the 31st January, 30th April, 31st July or 31st October next following the first anniversary of the day on which the return was delivered. 
(4) If the company amends its return, notice of enquiry may be given at any time up to and including the 31st January, 30th April, 31st July or 31st October next following the first anniversary of the day on which the amendment was made. 
(5) A return which has been the subject of one notice of enquiry may not be the subject of another, except one given in consequence of an amendment (or another amendment) by the company of its return.
Paragraph 25 (2) provides:
(2) If the notice of enquiry is given- 
(a)   as a result of an amendment by the company of its return, and 
(b)   at a time when it is no longer possible to give notice of enquiry under paragraph 24(2) or (3), 
the enquiry into the return is limited to matters to which the amendment relates or which are affected by the amendment.
5.	Mr Hall for the Appellant contends that since the Appellant has amended its return paragraph 24(4) is the specific provision laying down the exclusive time limit for opening the enquiry.
6.	Mr Faulkner for the Inspector contends that paragraph 24 refers to an enquiry is into the return without distinguishing between returns and amended returns.  Two time limits apply: under subparagraph (2) (or, as the case may be, (3)) and (4).  The notice, being within the limit in sub-paragraph (2), is valid.  The Appellant’s interpretation would shorten the time limit for starting an enquiry in this case, although the period for the taxpayer to amend the return would run until the same date as the paragraph 24(2) time limit.  There is no logic for this shortening of the period which does not depend on the nature of the amendment.  He apologises on behalf of the Inspector for not informing the taxpayer of the possibility of an enquiry.
Reasons for the decision
7.	Mr Hall’s construction seems to me to read words into paragraph 24 to the effect that only one of sub-paragraphs (2), (3) or (4) can apply.  Clearly only one of sub-paragraphs (2) and (3) can apply, but nothing is said about (4) not applying as well.  If Parliament had intended that only one time limit should apply it could easily have said so but paragraph 24(1) merely refers to the time allowed.  In paragraph 25(2) Parliament assumes that they both can apply because it envisages a situation that the company has amended its return (so that the limit in paragraph 24(4) applies) at a time when it is no longer possible to give a notice under paragraph 24(2) or (3), in which case the enquiry is limited to the amendment.  By implication where the amendment is made at a time when it is possible to give notice under paragraph 24(2) or (3), the Inspector could give notice under that provision and the enquiry is not so limited.  On Mr Hall’s construction this situation never arises.  If the company has made an amendment to the return, paragraph 24(4) is the only time limit that applies; the question of the Inspector being out of time under paragraph 24(2) or (3) does not arise so Parliament need not have dealt with the point (or the result is that in all cases an enquiry after an amendment is limited to the amendment).  Mr Faulkner’s construction involves giving effect to paragraph 24 without implying any words; the result may be that both of sub-paragraphs (2) (or (3)) and (4) apply, which is precisely the situation envisaged by paragraph 25(2).  I therefore prefer Mr Faulkner’s construction and hold that the notice was in time.
The substantive aspect
8.	On the substantive aspect, the issue is the interpretation of section 13AA of the Taxes Act 1988:
“(1) Where in any accounting period the profits of a qualifying company do not exceed the first relevant amount, the company may, instead of making a claim under section 13(1), claim that the corporation tax charged on its basic profits for that period shall be calculated as if the rate of corporation tax were such rate (to be known as the ‘corporation tax starting rate’), lower than the small companies’ rate, as Parliament may from time to time determine. 
(2) Where in any accounting period the profits of a qualifying company exceed the first relevant amount but do not exceed the second relevant amount, the company may, instead of making a claim under section 13(1), claim that the corporation tax charged on its basic profits for that period shall be— 
(a) calculated as if the rate of corporation tax were the small companies’ rate; and 
(b) then reduced by the sum specified in subsection (3) below. 
(3) That sum is the sum equal to such fraction as Parliament may from time to time determine of the following amount— 
  
where— 
	R2 is the second relevant amount; 
P is the amount of the profits; and 
I is the amount of the basic profits. 
(4) The first and second relevant amounts mentioned above shall be determined as follows— 
(a) where the company has no associated company in the accounting period, those amounts are £10,000 and £50,000 respectively; 
(b) where the company has one or more associated companies in the accounting period— 
(i)	the first relevant amount is £10,000 divided by one plus the number of those associated companies, and 
(ii)	the second relevant amount is £50,000 divided by one plus the number of those associated companies….”
9.	It is common ground that the Appellant has one associated company.
10.	Mr Hall contends that the words in subsection (4) “the first relevant amount is £10,000 divided by one plus the number of associated companies” mean that one starts by dividing £10,000 by 1 and then adds 1 to the result, giving £10,001.  This is how a computer and anyone else calculating the formula would work.  There is no mention of associated companies in any of the Budget press releases introducing the corporation tax starting rate.
11.	Mr Faulkner contends that the words are clear and one divides £10,000 by 2 giving £5,000.  Secondly, there is no right to look at pre-Finance Bill press releases.  Thirdly, the Appellant’s step of dividing by one makes the words redundant.  Fourthly, the Appellant’s construction serves no discernible purpose, resulting in a negligible reduction in tax on account of each associated company, whereas his construction prevents groups benefiting from the full starting rate band of £10,000 for each associated company.
Reasons for the decision
12.	Reducing the arguments to a formula, the Appellant contends for (10,000/1)+1=10,001, and the Inspector for 10,000/(1+1)=5,000.  While I accept that Mr Hall is right in saying that if one types 10,000/1+1 into a spreadsheet the answer will come out as 10,001, that is merely because the computer has been programmed to perform division before addition.  My task is not to act in accordance with a program but to construe the words “£10,000 divided by one plus the number of associated companies” in their context in accordance with the intention of Parliament.  Mr Hall’s construction is that Parliament has instructed taxpayers to divide £10,000 by one which is a pointless exercise always resulting in £10,000, and then add the number of resulting in a seemingly pointless increase of the £10,000 by 0.1 per cent for every associated company giving rise to a trivial reduction in tax.  I cannot see any reason why Parliament should have intended to do that.  Mr Faulkner’s construction spreads the £10,000 band equally across the number of associated companies which, although arbitrary, at least prevents obtaining the benefit of the band for every associated company, which is something that Parliament could be expected to want to prevent.  Mr Faulkner’s construction gives a rational result in which effect is given to every word.  I have no doubt that it is correct.
13.	Accordingly, I dismiss the appeal on both grounds and confirm the Inspector’s amendment to the self-assessment showing the tax payable for the 2002 period as £4,171.77.

J F AVERY JONES

SPECIAL COMMISSIONER
SC 3120/03