Noved Investment Co v Revenue and Customs [2005] UKSPC SPC00521 (23 January 2006)

SPC00521

CORPORATION TAX – deductions – charges on income – qualifying donations – distributions - articles of association of company provided that the holders of the A shares could by ordinary resolution require the company to make gifts to any charity –  the A shares were transferred to a charitable foundation which resolved that the company should make gifts to the charitable foundation – whether the payments were distributions “in respect of shares” within the meaning of section 209(2)(b)  – yes – whether section 209(4) applied to the gifts – yes – appeal allowed – ICTA 1988 Ss 209,  254, 338 and 339 

THE SPECIAL COMMISSIONERS

NOVED INVESTMENT COMPANY
Appellant

- and -

THE COMMISSIONERS OF HER MAJESTY’S
REVENUE AND CUSTOMS
Respondents

Special Commissioners : DR A N BRICE
CHARLES HELLIER

Sitting in public in London on 5 September 2005 and 7 November 2005 

Richard Bramwell QC, instructed by Messrs Withers Solicitors, for the Appellant

David Ewart of Counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION
The appeal
1.	Noved Investment Company (the Appellant) appeals against adjustments to its corporation tax returns for the accounting periods ending on 31 December 2000 and 31 December 2001. In computing its total profits the Appellant had sought to deduct payments made by it as gifts to the Foyle Foundation (the Foundation) which is a charity. The Respondents dis-allowed the deductions and made the appropriate adjustments to the Appellant’s returns.

2.	We were asked to give a decision in principle in respect of the accounting period ending on 31 December 2001 because of a concurrent appeal to the Lands Tribunal.

The legislation
3.	Part VIII of the Income and Corporation Taxes Act 1988 (the 1988 Act) (sections 337 to 347) contains the provisions about the taxation of income and chargeable gains of companies. Section 338(1) provides that, subject to certain exceptions, in computing the corporation tax chargeable for any accounting period of a company, any charges on income paid by the company shall be allowed as deductions from the total profits for the period. Section 338(2)(b) provides that the phrase “charges on income” means payments which are qualifying donations within the meaning of section 339. Section 339 provides that a qualifying donation is a payment of a sum of money by a company to a charity other than a payment which, by reason of any provision of the Taxes Acts (except section 209(4)), is to be regarded as a distribution. 

4.	Part VI of the 1998 Act (sections 207A to 255) contains the provisions about company distributions. Section 209 defines the meaning of “distribution”. The relevant parts of section 209(2) provide;

“(2) In the Corporation Tax Acts “distribution” in relation to any company means -
(a) any dividend paid by the company, including a capital dividend;
(b) subject to subsections (5) and (6) below, any other distribution out of the assets of the company (whether in cash or otherwise) in respect of shares in the company, except so much of the distribution, if any, as represents repayment of capital on the shares or is, when it is made, equal in amount or value to any new consideration received by the company for the distribution.” 
Thus, the opening words of section 209(2) indicate that anything which falls within the following paragraphs will be  a distribution for the purposes of the Corporation Tax Acts. Section 209(2)(b) also uses the word distribution. Thus the term of art - the term distribution for the purposes of the Corporation Tax Acts - is defined in at least one of its limbs by reference to the same word whose meaning is not specifically defined. We attempt in this decision to distinguish the two by using “distribution for the purposes of the Corporation Tax Acts” as the term defined by section 209.
5.	Section 254 is the interpretation section for Part VI and section 254(1), (9) and (12) provide:
“(1)… “share” includes stock, and any other interest of a member in a company. 

(9)	A distribution shall be treated under this Part as made … out of assets of a company if the cost falls on the company.

(12)	For the purposes of this Part a thing is to be regarded as done in respect of a share if it is done to a person as being the holder of the share, or as having at a particular time been the holder, or is done in pursuance of a right granted or offer made in respect of a share … .” .     

6.	As mentioned above, section 339 provides that a qualifying donation is a payment of a sum of money by a company to a charity other than a payment which is to be regarded as a distribution unless the payment is to be regarded as a distribution by reason of section 209(4). Section 209(4) and (5) provide:

“(4)	Where on a transfer of assets or liabilities by a company to its members or to a company by its members, the amount or value of the benefit received by the member (taken according to its market value) exceeds the amount or value (so taken) of any new consideration given by him, the company shall, subject to subsections (5) and (6) below be treated as making a distribution to him of an amount equal to the difference.   

(5)	Subsection (4) above shall not apply where the company and the member receiving the benefit are both resident in the United Kingdom and either the former is a subsidiary of the latter or both are subsidiaries of a third company also so resident; and any amount which would apart from this subsection be a distribution shall not constitute a distribution by virtue of subsection (2)(b) above”.

The issues
7.	The Respondents dis-allowed the deductions because they were of the view that the payments made by the Appellant as gifts to the Foundation were distributions in respect of shares within the meaning of section 209(2)(b). The Appellant argued that the gifts were not distributions in respect of shares and so should be deductible. Alternatively the Appellant argued that, even if the gifts were distributions in respect of shares within section 209(2)(b), they were also distributions within section 209(4) from which it followed that the exemption in section 209(5) applied (because both the Appellant company and the member (the Foundation) were resident in the United Kingdom and the Appellant company was a subsidiary of the Foundation).    

8.	Thus the issues for determination in the appeal were:

(1)	whether the gifts to the Foundation were distributions in respect of shares within the meaning of section 209(2(b) and, if they were:

(2)	whether they were also distributions within the meaning of section 209(4).  

The evidence
9.	A bundle of documents was produced by the Appellant. There was no dispute about the facts.

The facts
10.	From the evidence before us we find the following facts.

The Appellant and its shares 
11.	The Appellant was incorporated with limited liability in 1919 by two members of the Foyle family and carried on the business of selling books. The Appellant was then re-registered as an unlimited company with a share capital and in 1969 the business of selling books was transferred to another company. The Appellant is now an investment company. 

12.	The shares in the Appellant devolved upon members of the Foyle family including Mrs Christina Batty, formerly Miss Christina Foyle (Miss Foyle). Miss Foyle died on 8 June 1999 on which date she held 7,213 of the £1 issued shares of the Appellant; there were altogether 12,007 issued shares and so, at the date of her death,  Miss Foyle held about 60% of the total number of shares. As at 8 June 1999 the assets of the Appellant comprised portfolios of commercial and residential property, cash, investments and the Foyle Library (the Library). The Library was a collection of manuscripts, first editions, some paintings and some furniture. The net assets of the Appellant were then worth in the region of £60m. 

13.	By her Will Miss Foyle left her residuary estate (including her shares in the Appellant) on general charitable trusts. Her executors gave effect to her bequest by establishing the Foundation as a charitable foundation. It was proposed that the shares in the Appellant which were owned by the executors of Miss Foyle should be given to the Foundation and that the Appellant should then be partitioned so that the shares  given to the Foundation became A shares and the remainder of the shares, which belonged to other members of the Foyle family, became B shares. The A shares were to be interested in defined assets (the A assets) representing 60 per cent of the total assets of the Appellant and the B shares were to be interested in the remainder of the assets of the Appellant (the B assets). The Foundation, as the A shareholder, was to be entitled to pass resolutions to require the making of gifts by the Appellant to any charity 

14.	In July 2000 the bulk of the Library was sold by the Appellant and the proceeds of sale exceeded £11M. On 28 July 2000 the Foundation was registered as a charity.

December 2000 – the shareholders’ agreement 
15.	On 14 December 2000 the executors of Miss Foyle, the other shareholders in the Appellant, the Foundation and the Appellant entered into an agreement for the partition of the shares and assets of the Appellant. Under the agreement the parties agreed to the immediate transfer of the shares belonging to Miss Foyle by her executors to the Foundation and to partition the Appellant by passing certain specified resolutions. The shareholders agreement provided: for the change in the Memorandum of the company to permit gifts to charity; that no gifts should be made by the company other than those provided for in the Agreement (cl 5.1.6); that the Foundation should be the company’s attorney for the purpose of effecting any gift to the Foundation (cl 10); that the resolution requiring the company to make the specified gifts to the Foundation should be passed; and for amendment to the company’s Articles to be made which permitted the A Shareholder to require the company to make gifts of A assets to any charity.

16.	On the same day (14 December 2000) the shares held by the executors of Miss Foyle were transferred to the Foundation and the Appellant passed two resolutions. The first resolution (the partition resolution) was a special resolution passed by all the shareholders with a right to vote at general meetings. This resolution converted the 7,213 shares then registered in the name of the Foundation into A shares and converted all the remaining shares into B shares, each class of shares was to have the rights set out in the articles of association as amended by the same resolution. Amended article 6.4 provided that the A shares should have attached to them certain stated rights and privileges. One such right concerned the A assets. The Foundation assets (defined as properties, shares and such amount of cash as to amount in aggregate to 60% of the company’s net assets) were to be deemed to be attributable to the A shares. Another such right concerned the A reserves. At the end of each financial period the auditors were to determine the profit or loss attributable to the A assets and such profit or loss was to be credited or debited against reserves known as the A reserves which should be deemed to be attributable only to the A shares to the exclusion of any other class of shares. A third such right was set out in amended article 6(vi) which was headed “donations to charity” and the relevant parts of which provided:

“For the avoidance of doubt the holders for the time being of the A shares may by ordinary resolution of the Company require the Company to make gifts of cash or other property out of the A assets to any body registered as a charity in England and Wales … and the resolution may provide for the manner in which the said gifts are to be constituted.” 

17.	The second resolution passed by the Appellant on 14 December 2000 was a resolution to make gifts. This resolution was passed by the A shareholder (the Foundation). It resolved that the holder of the A shares required the company to make gifts out of the A assets to the Foundation such gifts being all the freehold and leasehold properties comprised in the A assets; all the shares and securities comprised in the A assets; and the cash sum of £9M.  

The Appellant’s tax position for 2000
18.	In the Appellant’s corporation tax return for the period ending on 31 December 2000 profits of £7,220,762 were reduced by charges on income of the same amount. These charges on income included £1,870,445 in respect of certain qualifying investments transferred to the Foundation under the resolution for gifts dated 14 December 2000. These charges on income have been allowed (they fell within a separate relieving provision: section 587B). However, the Respondents dis-allowed the balance of the charges on income of £5,350,317 represented by the cash payment of £9M. 

The Appellant’s tax position for 2001
19.	In the accounting period ending on 31 December 2000 the auditors established the A reserves as £7,084,740. Of this, £4.2M was represented by a loan to the Foundation and the balance of £2,884,740 was paid by the Appellant to the Foundation on 1 May 2001 pursuant to a decision of the directors of the Appellant recorded in a minute dated 27 April 2001.

20.	In the Appellant’s corporation tax return for the period ending on 31 December 2001 profits of £1,874,884 were reduced by charges on income of the same amount. These charges on income were represented by the cash payment of £2,884,740 paid on 1 May 2001. However, the Respondents dis-allowed the deduction of this charge on income. 

21.	We consider now separately each of the issues for determination in the appeal.

Reasons for decision - issue (1) 
22.	The first issue in the appeal is whether the gifts to the Foundation were distributions in respect of shares within the meaning of section 209(2)(b). We remind ourselves that section 209(2)(b) provides that the word distribution for Corporation Tax Act purposes means;

“… any other distribution out of the assets of the company (whether in cash or otherwise) in respect of shares in the company, except so much of the distribution, if any, as represents repayment of capital on the shares or is, when it is made, equal in amount or value to any new consideration received by the company for the distribution.” 
23.	We also remind ourselves that section 254 is the interpretation section for Part VI and section 254(1), (9) and (12) provide:
“(1) In this part, except where the context otherwise requires -… 

“share” includes stock and any other interest of a member in a company;

(9)	A distribution shall be treated under this Part as made … out of assets of a company if the cost falls on the company.

(12)	For the purposes of this Part a thing is to be regarded as done in respect of a share if it is done to a person as being the holder of the share, or as having at a particular time been the holder, or is done in pursuance of a right granted or offer made in respect of a share … .” .     

24.	In considering the arguments of the parties we first consider the meaning of the word “distribution” and then the meaning of the phrase “in respect of shares”. We then apply those words, with the meanings which we have identified, to the facts of the present appeal looking first at the first gift (of 14 December 2002) and then at the second gift (of 27 April 2001)  We then reach our conclusions on the first issue. 

The meaning of  the word “distribution”
25.	The arguments of the parties on the meaning of the word “distribution” centred round the question as to whether the meaning in the 1988 Act was the same as that in company law. For the Appellant Mr Bramwell argued that the word distribution was not used in section 209(2)(b) in its company law meaning. In company law, distributions were made out of profits but section 209(2)(b) referred to distributions out of assets. Many of the other transactions mentioned in section 209(2) were not distributions under company law.   

26.	Mr Ewart for the Respondents argued that the word had its company law meaning. What was now section 209(2)(b) was first enacted in paragraph 1 of Schedule 11 of the Finance Act 1965 when the new tax legislation dealing with companies was introduced. The word was used in the Companies Act 1985 and it was natural that it should have the same meaning in tax legislation. Mr Ewart referred to Palmer’s Company Law Volume 2 at paragraph 9.705 which stated the principle that no dividend must be paid otherwise than out of profits legally available for distribution to the shareholders. The same paragraph went on to say that a distribution was the transfer of funds or assets without consideration. In support of the latter statement Palmer referred to Clydebank Football Club Limited  v Steedman [2000] ScotCS 250 (29 September 2000). Mr Ewart relied upon the same authority for the principle that a distribution was limited to a wholly gratuitous transfer or a sale at a gross undervalue. From this he argued that section 209(2)(b) applied if there was either a wholly gratuitous transfer or a transfer for a consideration which was manifestly an undervalue. He accepted that  the principle established in 2000 in Clydebank could not have been known in 1965 when the tax legislation was enacted but he argued that in 1965 there would have been an awareness of the uncertainties which are resolved by the decision in Clydebank..

27.	In Clydebank one issue was whether the disposals of two properties constituted a distribution for company law purposes within the meaning of section 263 of the Companies Act 1985. At [53] Lord Hamilton referred to section 263 which provides that a company shall not make a distribution except out of profits available for the purpose and defines the meaning of distribution for this purpose. At [56] he stated 

 “It is accepted by the defenders that an unlawful distribution may be constituted not only by a wholly gratuitous transfer but also by [a] sale which was known and intended to be at an undervalue at least in circumstances where the undervalue was gross.”
		
28.	At [75] he found that the object of the statutory provisions was to prohibit the gratuitous return to shareholders of subscribed capital and assets representing capital. However, a transfer involving the passing of some consideration might also, in certain circumstances, give rise to a distribution if it was, in substance, a gift of capital to the transferee. At [77] he found that the value of the properties transferred was £765,000 and that the value given was £620,000 and concluded that that was not a sale at a “gross undervalue” and so was not a distribution within the meaning of section 263. 
	
29.	We first note that the company law meaning of the word distribution relates to a transfer out of profits whereas section 209(2)(b) refers to a distribution out of assets. This indicates that the company law meaning of the word distribution may not be appropriate in section 209(2). Further in section 209(2)(b) the additional words “out of the assets of the company” which are defined in section 254(9) as “if the cost falls on the company” indicate that the meaning of the word distribution for tax purposes is wider than the meaning for the purposes of company law because they restrict what would otherwise be a Corporation Tax distribution in a way which would not be necessary if the meaning of distribution were already restricted, as it appears to be in company law, to gratuitous transfers or transfers at a manifest undervalue.
30.	Clydebank v Steedman was decided in 2000 when the relevant legislation was section 263 of the Companies ct 1985. That Act consolidated earlier Acts and section 263 contained the provisions previously found in sections 39(1) and 45(2) of the Companies Act 1980 (implementing the Second Company Law Directive 1977/91). Before 1980 the rules relating to the payment of dividends were largely found in the common law restrictions on an illegal return of capital to members.
31.	There is also a difference in the ways in which tax law on the one hand and company law on the other deal with amounts received by the company. Section 209(2)(b) excepts from the meaning of the word distribution so much of it as is equal to new consideration received. The Companies Act definition in section 263 contains no such words. In the company law context this was addressed in Clydebank v Steedman where, for the purposes of section 263, Lord Hamilton viewed the distribution as a net transfer of value from the company and viewed a transaction as being a net transfer of value only if it took the form of a single gratuitous transfer or a transaction at a gross undervalue. This can be contrasted with the provisions of section 209(2)(b) where the implication is that the word distribution means the gross amount moving from the company from which repayment of capital or new consideration received may be deducted.

32.	We are also of the view that, if Mr Ewart were right, then emanations of value from the company in respect of shares could be distributions within section 209(2)(b) only if they were gratuitous or manifestly at an undervalue and we cannot understand why that should be so. Again the use of the words “other distribution out of the assets of the company” in connection with payments of interest in respect of securities in section 209(2)(d) and (2)(e) is difficult to read as applying only to transfers at a manifest undervalue, particularly in section 209(2)(d) where there is excepted any  amount of a distribution which represents a reasonable commercial return. Further, the suggestion in section 209(2)(d) is that the term distribution may include the payment of interest on a security, because the final part of the subsection uses the words “except so much … of any such distribution as represents principal”. This indicates that in tax law a distribution includes interest but that would be inconsistent with the limited construction of the word distribution in company law as meaning gratuitous transfers or only transfers at a manifest undervalue.
	
33.	The Companies Act definition of distribution specifically excludes a “distribution by way of -

(a)	an issue of shares as fully or partly paid bonus shares,
(b)	the redemption or purchase of any of the company’s own shares out of capital (including the proceeds of any fresh issue of shares) or out of unrealised profits in accordance with Chapter VII of Part V,
(c)	the reduction of share capital by extinguishing or reducing the liability of any of the members on any of the company’s shares in respect of share capital not paid up, or paying off paid-up share capital, and
(d)	a distribution of assets to members of the company on its winding up.”…
Some of these exclusions parallel exclusions in section 209, although the parallels are not exact. Thus: paragraph (b) above excludes a distribution by way of redemption of the company’s own shares out of capital, while section 209(2)(b) (subject to the effect of section 211) excludes from the amount of a distribution a repayment of capital; and paragraph (d) excludes a distribution to members in a winding-up, while section 209(1) provides that references to distributions shall not apply to distributions in respect of share capital in a winding-up. At the very least this shows that even if parliament, in the 1965 Act could have anticipated the 1980 Companies Act, the meaning of distribution in section 209(2)(b) is not the defined Companies Act term. However it does suggest that there is at least some overlap or similarity between the ambit of the undefined word distribution in section 263 of the Companies Act, and the similarly undefined word in section 209(2)(b). However, the approach adopted in Clydebank to the meaning of that undefined word can be seen to be in the context of determining whether a transaction is a dressed up return of capital: a concern which is of particular importance to limited companies. That concern is not of the same importance in the context of the Tax Acts and given that the Tax Acts used the word first it does not seem to us that those particularly important company law concerns should colour the meaning of the word in section 209(2)(b).

34.	Another difference between the defined company law meaning of distribution and the undefined term in section 209(2)(b) can be seen in section 213 of the 1988 Act which excludes from the meaning of distributions for Corporation Tax Act purposes certain distributions made in connection with a demerger. In particular section 213(3) permits the exclusion of: 

“(b) 	a distribution consisting of the transfer by a company (“the distributing company”) to one or more other companies (the transferee company or companies) of::
(i)	a trade or trades; or
(ii)	shares in one or more companies which are 75 per cent subsidiaries of the distributing company;
and the issue of the shares by the transferee company or companies to all or any of the members of the distributing company …”
			
35.	The Companies Act definition of distribution in section 263(2) relates to the “distribution of the company’s assets to its members”. The distribution envisaged by section 213 of the 1988 Act is a transfer of assets to companies which are not members of the distributing company in circumstances where members of that company obtain the benefit of that distribution or transfer by receiving shares issued by the transferee company. The words of section 213(2)(b) of the 1988 Act specifically contemplate that the “distribution” consists of “the transfer … and the issue of shares”. That is not the kind of distribution clearly contemplated by section 263 of the Companies Act. 

36.	We are therefore of the view that the word distribution where it is used in section 209(2), is not a term of art with a meaning restricted to the company law or the Companies Act meaning. It means instead the effect (or the act or process) of distributing. The characterisation of that distributing which make it a distribution for Corporation Tax Acts purposes are provided for expressly in sub-section 209(2). That subsection provides that the distributing has to be “out of the assets of the company” and, under section 254(9), that means that the cost of the distributing must fall on the company: (so that, for example, a distributing by the company of another person’s assets would not be a concern of the legislation as the cost of doing it would not fall on the company). Section 209(2)(b) also provides that the distribution has to be in respect of shares in the company (as clarified by section 254(12)) to which we now turn. 

The meaning of “in respect of shares”
37.	To fall within section 209(2)(b) a distribution must be in respect of shares. Section 254(12) provides 

(12)	For the purposes of this Part a thing is to be regarded as done in respect of a share if it is done to a person as being the holder of the share, or as having at a particular time been the holder, or is done in pursuance of a right granted or offer made in respect of a share … .” .     

38.	For the Appellant Mr Bramwell first argued that the gifts had not been given to the Foundation “as being the holder of the shares” because there had been no formal resolution to make a transfer to a shareholder in his capacity as such; the gifts were made to the Foundation as a charity rather than as a shareholder or “as being a shareholder”. Secondly, he argued that nothing had been done “in pursuance of a right granted .. in respect of a share” The important words were “right granted”. There had to be a right and it had to be granted. A grant suggested a grantor and a grantee. The words were not apt to describe a right inherent in a share. It was necessary to distinguish between rights inherent in a share and rights collateral to it. Examples of rights inherent in shares were a right to vote or a right to a dividend, as these were mere incidents of ownerships not rights granted in respect of a share. Distributions in respect of such rights would be to persons as the holders of the shares in pursuance of those rights. An example of a right collateral to shares was a right to an allotment of shares or securities to the shareholders. This could be a right which the shareholders were given on top of the rights they had as shareholder.

38.	For the Revenue Mr Ewart argued that the Appellant company had made the gifts to the Foundation ”in pursuance of a right granted in respect of a share” He did not agree with the distinctions drawn by Mr Bramwell. If the Articles of a company gave a shareholder rights then those were a fortiori rights in respect of shares and were granted by the Articles. A construction which required such rights to be collateral was unnaturally narrow. He went on to argue that the scheme of the legislation excluded distributions from being deductible as qualifying donations. Distributions were defined to include distributions out of the assets of the company in respect of shares in the company. A thing was done in respect of a share if it was done to a person as being the holder of a share or in pursuance of a right granted or offer made in respect of a share. The Foundation, as the A shareholder, was entitled to compel the Appellant to make cash payments to it. The Foundation exercised that right. The Appellant therefore paid the cash sums to the Foundation in pursuance of a right granted in respect of  the shares in the Appellant which were held by the Foundation within  the meaning of section 254(12). It followed that the cash payments paid by the Appellant to the Foundation were received by the Foundation in respect of its shares in the Appellant. Accordingly, the payments were distributions within the meaning of section 209(2)(b) and so were not qualifying donations to charity. 

40.	On the meaning of the words  “in pursuance of a right granted .. in respect of a share” in section 254(12) we prefer Mr Bramwell’s view. Something done to a person because of a right in a share seems to fall squarely within the first part of the definition as being done to a person as being the holder of a share. That does not mean it should fall outside the phrase “in pursuance of a right granted .. in respect of a share”  but it is an indication that the main thrust of that phrase is to deal with something different. Also, the words “in pursuance of a right granted .. in respect of a share”   describe something different in terms which give the impression that there is an existing bundle of rights, namely the share, and that what is done is done in pursuance of an additional (collateral) right which is granted in respect of that existing bundle of rights.

41.	That preference, however, leaves one difficult issue to be resolved. It is this. If, as in the Articles in this case, the right in the share permits the shareholder to direct that another person should benefit from a distribution, and in pursuance of that right the company distributes assets to that person, is that a payment within 209(2)(b)? It is clearly not done to the third party as being the holder of a share, neither, if it is a gift to that third party, is its receipt in pursuance of any right other than the right of the shareholder in the Articles. If this is correct such Articles would permit distributions (other than dividends – because they are covered by section 209(2)(a)) to be paid to, for example, a shareholder’s husband or wife in a form which was not a distribution which, had they been directly distributed to the shareholder, would be a distribution. Mr Ewart appeared to accept this oddity however because, in his discussion of the issue as to whether the payment in the facts of this case fell within section 209(2)(b) he drew a distinction between the right he said had been granted to the Foundation and the position of an ordinary gift to charity which would not be in pursuance of a right granted to that charity. 

42.	This difficulty, however, is capable of resolution if the words of section 254(12) are treated as imposing sufficient but not necessary conditions for something to be treated as done in respect of shares. Subsection (12) merely says that something is done in respect of shares “if” conditions are satisfied. It does not say “only if”, or “if and only if”. Elsewhere in the Taxes Acts, if “if and only if” is meant it is often stated (see for example sections 11(1), 221(4), and 415(3) TA 1988, the last of which by using “if”, in section 415(1) shows clearly the different use of “if” and of “only if” and section 752C where the restriction “and only if” is used four times.. If subsection (12) imposes only a sufficient but not necessary condition then a wider enquiry is permissible as to whether, on the ordinary meaning of the words, something has been done in respect of shares. It seems to us clear that the exercise by a shareholder of a right to require a payment to a third party, and the subsequent payment out of the assets of the company to the third party would be a payment in respect of a share even though it is not made to the holder.

Application of the legislation to the facts 
43.	Having reached that position on the meaning of the word distribution and of the phrase “in respect of shares” we turn to apply the legislation to the facts of the present appeal. The shareholders agreement provides: for the change in the Memorandum of the Appellant company to permit gifts to charity; for the amendment to the company’s Articles to be made which permitted the A Shareholder to require the company to make gifts of A assets to any charity.; that no gifts should be made by the Appellant company other than those provided for in the Agreement (cl 5.1.6); that the Foundation should be the company’s attorney for the purpose of effecting any gift to the Foundation (cl 10); and that the resolution requiring the company to make the specified gifts to the Foundation should be passed; 

44.	We regard it as relevant that: the Foundation and the Company were parties to the Agreement and bound by it and could enforce it; that although the Articles and Memorandum permit the making of a gift to any charity, the effect of the Agreement was that the company could only make gifts to the Foundation and would be compelled to make those gifts; and that the making of the Agreement was a part of a composite transaction which included the change to the Articles and the giving of the right to the Foundation, as holder of the A shares, to make the gifts to the Foundation.

The first gift
45.	We first consider the first gift, namely the resolution passed on 14 December 2000 by the Appellant, through the A shareholder, resolving that the A shareholder required to Appellant company to make gifts to the Foundation. 

46.	For the Appellant Mr Bramwell argued that the first gift was not a distribution in respect of shares because it was not done to the Foundation as being the holder of a share (within the meaning of the first part of section 254(12)), or done in pursuance of a right granted in respect of shares (within the meaning of the second part of section 254(12)). He accepted that the Foundation would not have received the gift unless it held the shares but argued that the making of the gift was not done to it as holder of the shares but was done to it in pursuance of the right it had under the Articles. 

47.	Mr Bramwell went on the argue that the first gift was not done in pursuance of any right granted in respect of shares because there was no collateral right (within the meaning of the second part of section 254(12)) granted to the Foundation. Neither the Agreement nor the subsequent action under it conferred any “right” upon the Foundation. In support of these arguments he mentioned that the Agreement was a precursor to the gift and the power of attorney given by clause 10 was evidence of that. Because a gift was not enforceable (was not a right) until it was completely constituted, and because clause 10 enabled the gift to be so constituted clause 10  supported the view that there was no right. Further the change in the Memorandum and Articles did not confer a “right” to any transfer or payment and the declaration of trust in schedule 8 to the Agreement emphasised that there was nothing enforceable, and so no right, until the gift was completed. From all this it followed that the agreement was merely the precursor to the gift and did not itself confer a right and it was not possible to read the Agreement and the exercise of the shareholder right contemplated by it together for the purposes of determining whether section 254(12) applied.

48.	For the Revenue Mr Ewart argued that the amendment to the Articles gave the A shareholder (the Foundation) the right to compel the gift and that right was exercised by the Foundation by the resolution. Accordingly, it was a transfer in respect of shares within the meaning of section 254(12). The rights given in the Articles could have been enforced against the company if the gifts had not been completed. He contrasted that position with the normal resolution to make a gift which did not give the donee an enforceable right. Even a resolution of the shareholders would not give a normal donee a right. However, the payment in this appeal was not really a “gift” but something done in pursuance of a right to get it. It was a gift in the sense that no consideration was given for it, but not in the sense that it was freely made. It was given but it was not a gift which was given.

49.	We are of the view that the shareholders’ agreement provided an enforceable mechanism for the making of the first gift. The shareholders’ agreement, the shareholders resolution to change the Articles, and the A shareholders’ resolution to make the gift were completed as one transaction. It seems to us that the question whether there was a payment in respect of shares must be arrived by reference to that composite transaction, not by reference only to parts of it. That transaction conferred on the Foundation a right to the gift in the sense that it could enforce its payment. The payment was made in pursuance of that right because it was made in recognition of the fact that the Foundation could enforce the payment. That right in turn was a right which derived from the shareholdings in the Company. It was a right which was granted under the Agreement to the Foundation in respect of the shares to be transferred to the Foundation. It was not only by reason of that shareholding that the right was granted but also in respect of those shares because it was effectually generated by the value attached to the property of the company which those shares represented. The transfer of the property was therefore in pursuance of a right granted in respect of shares – and that right was a collateral right within the meaning of the second part of section 254(12).

50.	However, even if we are wrong, and the right was not a collateral right, or not granted in respect of shares, then it seems to us that the transfer was made to the Foundation as being the A shareholder. That was the intention and effect of the shareholders’ agreement, namely, that because the Foundation held the A shares it, and only it, should get the transfer of the A assets. The Foundation was, on a proper construction of the shareholders’ agreement, and notwithstanding the slightly broader language of the Memorandum and Articles, the only person who would receive the transfer and it received that transfer because it was the A shareholder.

51.	Again, even if we are wrong about that, it seems to us that this transfer was, in the normal usage of the words and in the context of the shareholder’s agreement, a distribution in respect of shares. It was linked and by reference to the A assets which represented the A shares. In these circumstances we are of the view that section 254(12) does not impose restrictions on the meaning of the words “in respect of shares”; indeed the use of “if” rather than “only if” suggests an extension rather than restriction.

52.	We conclude that the first gift to the Foundation was a  distribution in respect of shares within the meaning of section 209(2(b).

The Second Gift
53.	The second gift was the payment made to the Foundation on 1 May 2001 pursuant to a resolution of the directors of the Appellant recorded in the minute of 27 April 2001. We record that the evidence we received about this second gift was limited and that neither party put forward arguments about the second gift which were not the same a those for the first gift. We therefore conclude that the second gift was also a distribution in respect of shares. 

Conclusion on the first issue
54.	Our conclusion on the first issue in the appeal is that the first and second gifts to the Foundation were distributions in respect of shares within the meaning of section 209(2)(b).

55.	We should add that we do not think that this conclusion means that a gift by a trading company to a charity by which the company is owned is always a distribution within section 209(2)(b). It would only be such if it was made in respect of shares, and it seems to us that it will be possible for such gifts to be made otherwise than pursuant to a collateral right, or to the charity in its capacity as shareholder, and otherwise than in such a way that the distribution generally is in respect of the shareholding. In the case of the Company the gifts were compelled by an Agreement which related to shares and the rights and interests of the A shareholder; a voluntary gift need not be in respect of a shareholding even though it may be to a member (and that may be why section 209(4) is expressly carved out of section 339(1)(a)).

Reasons for decision – issue (2) 
56.	The second issue in the appeal is whether the gifts to the Foundation were also distributions within the meaning of section 209(4). If they were, section 209(5) would have the effect not only of dis-applying section 209(4) but also of dis-applying section 209(2)(b).  We recall that section 209(4) and (5) provide:

“(4)	Where on a transfer of assets or liabilities by a company to its members or to a company by its members, the amount or value of the benefit received by the member (taken according to its market value) exceeds the amount or value (so taken) of any new consideration given by him, the company shall, subject to subsections (5) and (6) below be treated as making a distribution to him of an amount equal to the difference. 

“(5) 	Subsection (4) above shall not apply where the company and the member receiving the benefit are both resident in the United Kingdom and either the former is a subsidiary of the latter or both are subsidiaries of a third company also so resident; and any mount which would apart from this subsection be a distribution shall not constitute a distribution by virtue of subsection (2)(b) above.”  

Before turning to the arguments put to us on this issue we record that, even though the matter was not argued before us, section 209(5) can remove the gifts from distribution treatment only if the Foundation and the Company satisfied the UK Group Condition at the relevant time and we satisfied ourselves that they did. Our reasons are now set out..

57.	It is accepted that the Foundation is a UK resident company, and that the Company is also UK resident. The UK Group Condition is therefore satisfied if the Company was a subsidiary of the Foundation. “Subsidiary” is defined by subsection (7) to mean 51% subsidiary. It was not contended that any of the exclusions in section 209(7) applied and there was no evidence that they did. A is a 51% subsidiary of B when (see section 838(1)) more than 50% of A’s ordinary share capital is owned by B. The Foundation held 60%, of the share capital of the Company. Its shareholding was of ordinary shares as defined by section 832(1). Prima facie therefore, it satisfied this condition. But section 838(3) provides that “ownership” means beneficial ownership. The Foundation was a charitable institution and so we asked ourselves whether that fact prevented it from being the beneficial owner of its shares in the Company.

58.	Liverpool and District Hospital for Diseases of the Heart v Attorney – General [1981] Ch. 198 concerned the distribution of the assets of a company (which was the appellant in that case) in its winding up. That company was a company limited by guarantee with a main object of providing a hospital for the treatment of, and promoting research into Heart Diseases. The Memorandum of association provided that on its winding up its assets should not be distributed to its members but transferred to a similar institution. On behalf of the members Mary Arden had argued that the Companies Acts compelled the distribution of its assets to its members rather than in accordance with its Memorandum. Slade J said (at page 205):

“…Faced with these submissions on behalf of members, Mr Mummery, on behalf of the Attorney-General, submitted one proposition which at first sight I found as startling as the contrary submission founded on section 265. This was to the effect that the statutory provisions for the application of a company’s assets on winding up do not apply at all in relation to any assets held by a charitable company, on the grounds that all such assets whatsoever are ex hypothesis held by the company solely as trustee and not beneficially. I must deal with this submission, before turning to the other points on which Mr Mummery affirmatively bases his case…”

59.	He then reviewed the case law and at p. 204 said:

“…The expressions “trust” and “trust property” may be, and indeed have been, used by the court in rather different senses in different contexts. Examples of cases where the court has used the expression otherwise than in their strict traditional sense are to be found in Lord Diplock’s review of certain earlier authorities in Ayerst v C. & K. (Construction) Ltd. [1976] A.C. 167, 179 – 180. In a broad sense a corporate body may no doubt aptly be said to hold its assets as a “trustee” for charitable purposes in any case where the terms of its constitution place a legally binding restriction upon it which obliges it to apply its assets for exclusively charitable purposes. In a broad sense it may even be said, in such a case, that the company is not the “beneficial owner” of its assets. In my judgment, however, none of the authorities on which Mr Mummery has relied, including the decision in Construction Industry Training Board v Attorney-General [1973] Ch. 173, establish that a company formed under the Companies Act 1948 for charitable purposes is a trustee in the strict sense of its corporate assets, so that on winding up these assets do not fall to be dealt with in accordance with the provisions of section 157 et seq. of that Act. They do, in my opinion, clearly establish that such a company is in a position analogous to that of a trustee in relation to its corporate assets, such as ordinarily to give rise to the jurisdiction of the court to intervene in its affairs; but that is quite a different matter. The conclusion that a company incorporated for charitable purposes is not a trustee in the strict sense of its corporate assets, in my judgment, derives strong support from the following considerations.”

	He then set out those considerations.

60.	It seems to us that this is sufficient authority for the proposition that if the Foundation’s Memorandum and Articles were similar to those of the company in that case, it beneficially owned the shares in the Appellant Company for the purposes of section 838.
Regulation 8 of the Company’s Memorandum contains provisions similar to those of the Liverpool and District Hospital for Diseases of the Heart company. We therefore conclude that the UK Group Condition was satisfied.

The arguments
61.	For the Appellant Mr Bramwell argued that the gifts to the Foundation came within section 209(4) and, in particular, because section 209(4) was not limited to  bilateral transactions. The words of section 209(4) were clear and plain and that we must give effect to those plain words. There was no limitation in section 209(4) and we should not impose one. If a transaction fell within those plain words it fell within the section. In the context of the distribution legislation there was no obvious intention of the legislation which would be defeated by reading the section literally and no anomaly that resulted from so doing. The literal interpretation created neither injustice nor absurdity and was a wholly reasonable construction. 
.	
62.	For the Revenue Mr Ewart argued that section 209(4) was limited to bilateral transactions in which assets passed both to and from the company. The simplest example of such a transaction would be the sale by the company of an asset at an undervalue to a member of the company, with the company transferring the asset to the member and the member transferring cash to the company. The subsection did not encompass the mere transfer of cash to a member by a company with no reciprocal transfer from the member. 

63.	Mr Ewart argued that the natural way to read section 209 was to start at the beginning and proceed to the end. The normal place to find a general rule was at the beginning and what followed would be supplementary. Section 209(2)(b) plainly covered transfers of the company’s assets (in cash or otherwise) to its members where there was no consideration from the member and there was no need for section 209(4) to  cover the same ground. In support of his argument he called in aid his view that the word distribution in section 209(2)(b) had a company law meaning and therefore included undervalue transfers to members only if they were at a gross undervalue. That meant that there was a need to make other undervalue transfers distributions for tax purposes and section 209(4) fulfilled that need. The general impression obtained from section 209(4) was that it was designed to deal with bilateral transactions only. In particular the use of the words “(taken according to its market value)” suggested the transfer of something other than, or at least as well as, simple cash. Further, section 209(4) was not a wide sweeping up provision encompassing all the specific examples preceding it: it did not encompass the specific cases in 209(2)(c) – (e) which dealt with interest on securities. It should not therefore be construed widely. Mr Ewart denied that he was arguing that his construction was better because it avoided redundancy. He accepted that on a wide construction of section 209(4) there would be a considerable overlap with section 209(2)(b) so that it was possible that section 209(2)(b) or section 209(4) could be largely redundant, but was of the view that this was not persuasive; what was persuasive was the structure and content, and therefore the purpose, of the provisions.

Our views
64.	In considering the arguments of the parties we first set out our general impressions. We then deal with the argument that section 209(4) is a sweeping up provision. We then consider three other questions raised about the subsection, namely, whether a transfer of assets includes cash; whether the provisions of section 339 are relevant to a construction of section 209(4); and whether the terms of the exemption in sections 209(5) and (6) are relevant to a construction of section 209(4). We then reach our conclusions on this issue. 

General impressions 
65.	We agree that the natural way to read a section is to start at the beginning and to assume that earlier subsections set out the general principle and that later paragraphs or subsections clarify what is to be done in cases which do not fall within  the general principles. Also we assume that later subsections are not intended wholly to replicate or subsume earlier subsections unless the later sections are general sweep-up clauses. That presumption, however, is subject to the nature of the drafting of the sections.

66.	We also agree that section 209(2)(b) covers cash transfers to members and that therefore there is no need for section 209(4) to cover the same ground. But that is not the same as saying that it should not be construed as covering the same ground. As Mr Ewart accepted, the argument for redundancy is not a strong one (see Centaur). It may, however, predispose the reader to a construction which does not cover the same ground. 

67.	 Section 209(2)(b) provides that “distribution” for Corporation Tax Act purposes means any distribution out of the assets of a company in respect of shares “except so much of the distribution, if any, as represents repayment of capital on the shares or is, when it is made equal in amount or value to any new consideration received…”. This part of the definition does not provide that a repayment of capital or the receipt of new consideration mean that there is no distribution, but instead it reduces the amount of the distribution by “so much” of it as either “represents repayment of capital” or “is … equal to new consideration received”. Omitting the repayment of capital limb it reads “except so much of the distribution, if any, as… is, when it is made, equal… to any new consideration received by the company for the distribution”. The words “except so much” indicate that it encompasses the situation in which an asset is distributed by the company and the company receives consideration for the distribution of the asset, and in that situation provides for the amount of the distribution for Corporation Tax Act purposes to be the distribution reduced by the consideration received. Thus a distributing of the company’s assets to shareholders in respect of their shares which is done at an undervalue - i.e. for a consideration of less than the value of the assets transferred - is made a distribution for Corporation Tax Act purposes, and its amount is equal to the difference between the value of the asset distributed and the amount (if any) paid by the shareholder to the company as new consideration. (But where the value of the consideration received equals the value of the asset distributed there is no distribution). Thus the transfer of an asset at an undervalue - whether manifest or not - is capable of falling within section 209(2)(b), and will fall within it if it is a distribution of the asset in respect of shares where the cost falls on the company. Accordingly we conclude that section 209(2)(b) covers transfers at undervalue to members whether or not at a manifest undervalue. Subsection (2)(b) therefore covers the following where they take place in respect of shares for the company:

(a)	a transfer of assets to a shareholder for a consideration in assets of value less than the value of the assets transferred to the company;
(b)	any transfer of assets to a shareholder for a cash consideration less than their value;
(c)	any transfer of assets to a company by a shareholder for a cash consideration paid by the company of more than the value of the assets moving to the company.

Therefore bilateral transactions are firmly already within the ambit of section 209(2)(b). Thus the structure of section 209 is not that unilateral transactions fall within paragraph (2)(a) or (b) and bilateral transactions are relegated to paragraph (2)(f) (which brings in section 209(b)), because bilateral transactions are clearly dealt with already in paragraph (2)(b). Thus it provides no indication that section 209(4) should be confined to bilateral transactions only; indeed to the contrary, it may provide an indication that the legislature may have intended an overlap between these provisions.

68.	Mr Bramwell pointed out, that section 209(4) requires the deduction of “any” new consideration given by member, not “the” new consideration given. If it had said “the” there would have been an express requirement that there be some quid pro quo before 209(4) could operate; and the use of “any” suggests that there is no such requirement: in other words that the subsection is intended to embrace unilateral as well as bilateral transactions. However it seems to us that this may not be conclusive because in this context the use of the word “any” may simply indicate that the new consideration is not limited  to cash but extends to any other asset.  

69.	Likewise, the opening words of section 209(4): “Where on a transfer of assets or liabilities by a company to its members or to a company by its members” do not immediately suggest a requirement that there be both a transfer by the company and to the company.  On the other hand, the initial impression given by the structure of subsection (4) is that its main concern is with transfers at an undervalue, as the subsection only applies “[if and] where the amount or value of the benefit received by the member exceeds the amount or value of any new consideration given by him”. This may indicate that section 209(4) applies only where there is a transfer at an undervalue and not a transfer for no consideration at all. 

70.	We do not consider that the words “taken according to its market value” are decisive. Those words apply to “benefit” which  could include assets as well as cash.  

71.	We note that section 209(4) also deals with the transfer of liabilities (presumably by novation) to a company by its members. If it were the case that section 209(4) were limited to bilateral transactions such a transfer would be a distribution within section 209(4) only if there was some other transfer by the company to the member. In other words the simple transfer of a liability to a company by a member would not be a distribution within section 209(4). We can see no sense in such a requirement in this context.

72.	Our conclusion is that section 209(2)(b) does not indicate that section 209(4) should be confined to bilateral transactions and that there is nothing in the words of section 209(4) which compels that conclusion. The plain words of section 209(4) permit the conclusion that it applies to unilateral transactions - when the amount or value of the consideration given by the member is nil. Although the initial impression is that the section is principally concerned with bilateral transactions a construction which limited its operation to such transactions would remove from its ambit simple transfers of liabilities to the company for no consideration. The express inclusion of transfers of liabilities within the section indicates that that construction would not be in accordance with its purpose.

Is section 209(4) a sweeping up provision?
73.	In considering whether section 209(4) is simply a sweeping up provision we note that it does a number of things which are not dealt with in section 209(2)(b). It  deals with the case where a shareholder transfers liabilities to a company as well as the distribution of assets by it. And its application in not limited to transactions in respect of shares whereas section 209(2)(b) is so limited. . Furthermore, it does not sweep up anything relating to paragraphs (2)(c) – (e). Lastly, the express inclusion in paragraph (f) of section 209(2) of amounts within sub-section (4) does not have the drafting style of a sweeping up provision. (It is paragraph (f) which expressly brings section 209(4) distributions into the meaning of distribution for Corporation Tax purposes).

74.	Overall, therefore, it does not seem that section 209(4) can be regarded as a sweeping up provision.

Does a transfer of assets include cash?
75.	We now turn to the question as to whether or not a transfer of assets could include a transfer of cash, and the relevance in this regard of the words “amount or value” in section 209(4).

76.	For the Appellant Mr Bramwell contended that the phrase a “transfer of assets” in section 209(4) could include a transfer of cash He argued that a transfer of assets naturally included a transfer of cash which was an asset. He cited Thomas v Marshall  34 TC 178 where the transfer of assets in the definition of settlement was held to cover a cash gift and IRC v Cleary [1966] Ch 365 where Thomas v Marshall was followed in relation to cash consideration.  

77.	In Thomas v Marshall the issue was whether certain gifts of money constituted “settlements” within the meaning of section 21 of the Finance Act 1936. “Settlement” was defined to include, inter alia, “Any… transfer of assets.”. The House of Lords held that the gifts were settlements. The principle issue in that case was not whether a cash gift could be a transfer of assets, (it was conceded that given its ordinary meaning the phrase could cover a cash gift – see p555), but whether the use of the word “settlement” so dominated the definition that, because a cash gift was not “something in the nature of a settlement”, it should not be included. Lord Morton gave the leading judgment with which the other members of the Committee agreed. After considering the opinion of Lord Simonds in St Aubyn v Attorney-General 1952 AC 15, in which Lord Normond had held that a cash subscription for shares in a company was not a “transfer of property” within the meaning of section 46 FA 40, he said:

“The observations of Lord Simonds were clearly directed only to the section then under consideration and to the meaning of the words “transfer of any property” in the context wherein they then appeared. In my view they do not assist the Appellant in the present case. On the contrary, I think that the transaction in the present case is one which the phrase “transfer of assets” in the section now under consideration “fairly and squarely hits.””.

78.	And later Lord Morton, after considering a number of cases on the meaning of “settlement” for the purposes of section 47 of the Bankruptcy Act 1883 in which the courts had held that a transfer of cash was not a settlement even though the definition of settlement included the “transfer of property”, said:

“The court (in those cases), however, felt able to put some restriction upon the ordinary meaning of the words “transfer of property” by reason of the fact that the whole object of the section, as appears from its terms, was to make certain transactions void as against the trustee in bankruptcy; and it was thought that a transfer of money, which was to be at once expended and could not be traced, was not within the intendment of the section. I can find no words in section 21 of the Finance Act, 1936, which should lead your Lordships to put a limited meaning upon the words “transfer of assets,” and if and so far as one can gather the intendment of section 21 from its wording, I think it was intended to throw the net as widely as possible, and to sweep in all kinds of transactions which would not ordinarily be regarded as settlements, provided only that “by virtue or in consequence” thereof any income is paid to or for the benefit of a child of the settlor.”

79.	In IRC v Cleary the Inland Revenue sought to apply what is now section 703 of the 1988 Act to a transaction under which the Cleary sisters had received cash from one company they owned in return for the transfer to it of shares they owned in another company. One question which arose was whether the payment of the cash was a “transfer of assets” for the purposes of that provision. Lord Denning MR said:

“I think that if these sums were received by the sisters “In connection with the transfer of assets,” that is enough. The commissioners thought there was no transfer of assets here, relying on St Aubyn v Attorney-General.  Pennycuick J. thought there was a transfer of assets, relying on Thomas v Marshall, I agree with Pennycuick J. on this point. I think the payment of these two sums of £60,500 was a “transfer of assets” by the company. True the transfer was the purchase price of shares: but it was a transfer of assets all the same. The sums were received by the sisters “in connection with the transfer of assets,” and were, therefore, “in connection with the distribution of profits” within sub-section (2)(d).”

80.	In other words, there was nothing in the context of sections 703 to 709 which operated to restrict the wider meaning of “transfer of assets”. 

81.	Mr Bramwell went on to argue that where, in the context of section 209,  the draftsman did not want the word “assets” to include cash then he said so expressly. Thus section 209(6) provided that “No transfer of assets (other than cash) shall …”. Here the word “assets” was used but, because the draftsman assumed that “assets” included cash, he specifically excluded cash. Thus the use of “assets” in the section by the draftsman evinced an intention within the section that it should include cash. He noted that section 209(2)(b), which referred to “any distribution out of assets of the company (whether in cash or otherwise)” might suggest a contrary assumption, but argued that the words “cash or otherwise” referred to the “distribution” not  “assets”. In section 209(2)(b) the context required cash specifically to be included because the subsection dealt with “any other distribution” i.e. distribution other than dividends within 209(2)(a) which are naturally cash transactions. Without those words there could be a concern that a cash distribution would be taken out of section 209(2)(b). It was Mr Bramwell’s argument that where there could be any doubt cash was specifically included, but in the case of “assets” there was no doubt that cash was included.  

82.	Mr Bramwell went on to argue that, in the context of a sweeping up provision, “assets” would naturally include cash. He accepted that the main indication against assets including cash was the parenthetical words in section 209(4) “(taken according to its market value)” but those words referred to the value of a “benefit” which could include – but need not include – cash. There was no reason why the draftsman should have said instead: “taken according to its market value, if the benefit was not cash, and at its cash amount if it was cash” because the market value of cash was its face amount. (We note that the market value of cash in a foreign currency would be its sterling value).

83.	Finally Mr Bramwell pointed out that the word “amount” was used three times in section 209(4). First in the phrase “the amount or value of the benefit received”, then in the phrase “the amount or value of the new consideration”, and lastly in the phrase “amount equal to the difference”. “Amount” generally referred to cash and “value” to money’s worth. To give “amount or value” full meaning meant recognising that the assets could be cash. The later phrase “amount or value (so taken)” should not as a matter of syntax disturb that conclusion because “amount” could only refer to cash.

84.	For the Revenue Mr Ewart accepted that a transfer of assets could include a transfer of cash, but he said that for a transaction to fall within section 209(4) there had to be not just a transfer of cash, also a transfer of a non-cash asset (although he contended that a cash payment of $ by the company to a member in return for a cash sum of Yen paid by the shareholder to the company would fall within the section where the value of the $ exceeded the value of the Yen). That transfer could be in return for a cash asset or a non-cash asset, but there had to be a bilateral transaction.

85.	In considering the arguments of the parties we first note that the word “assets” normally includes cash. One would need good arguments to say that the context of a provision dictated that it did not include cash.

86.	The best argument against the word “assets” including cash in section 209(4) is the phrase “(taken according to its market value)”. But although a clumsy phrase when applied to cash it does not clearly show a legislative intention that assets do not include cash. Moreover that phrase is applied to the amount or value of the benefit received by the member. If the benefit received by the member could not be cash, then in a case where the member transfers an asset to a company in return for a price in cash paid by the company to the member which exceeds the value of the asset, the section could not apply. In other words, section 209(4)  would – contrary to the impression given by its opening words – be limited to undervalue transfers of assets  by the company and would not include the purchase of an asset by the company from a shareholder at an inflated price - where the member clearly receives a benefit - but a cash benefit. That, as a matter of the sensible divination of parliamentary intention, does not make sense. Accordingly, we do not attach great weight to that argument. 

87.	Further, the indication in section 209(6): “no transfer of assets (other than cash)” is in our view strong. The legislation attaches the words “other than cash” to “assets” and that indicates that the word assets could include cash.  It is true that the subsection is dealing with both section 209(2)(b), which might involve cash, and section 209(4), which might not; but it is dealing principally with the concept of a transfer of assets, and it is in that context that it specifically excludes cash.

88.	We conclude that a transfer of assets for the purposes of section 209(4) could include a transfer of cash - whether the transfer is by the company or by the member. 

The relevance of section 339 
89.	The second question raised by the arguments of the parties is whether the provisions of section 339 of the 1988 Act (which appear to assume that a payment of cash can fall within section 209(4)) is relevant to the construction of section 209(4). We remind ourselves that section 339, as amended by FA 2000, provides:

“(1)	a qualifying donation is a payment [of a sum of money] made by a company to a charity, other than –
[a payment which, by reason of any provision of the Taxes Acts … except section 209(4), is to be regarded as a distribution]” 

90.	The words in parenthesis “of a sum of money” were inserted by section 26(2) of the Finance Act 1990  Thus section 339(1)  assumes that a payment of money can be a distribution within section 209(4). The assumption also appears to be that a unilateral transfer of cash without consideration moving from the company is within section 209(4); that is because it refers simply to the payment and not to the net benefit which section 209(4) makes a distribution for Corporation Tax Act purposes.

91.	For the Appellant Mr Bramwell argued that the assumption made in section 339 is at the very least an indication that the legislature thought that (unilateral) cash payments were capable of falling within s209(4). He went on to argue that it was a proper exercise of statutory construction to use section 339 to dispel any doubts which arose out of section 209(4). He cited Lord Millett’s speech in Laird (see below) and also argued that although the section was introduced by a later Act (FA 2000) its use to dispel an ambiguity was permissible.

92.	For the Revenue Mr Ewart agreed that a cash payment could form part of a section 209(4) distribution – but only if it was part of a bilateral transaction. In his view the use of later legislation to construe earlier legislation was not permissible and he cited Kirkness . He went on to argue that although, if he were right, it would mean that parts of section 339(1) would be largely redundant, the argument from redundancy, especially in a taxing provision, was not often compelling and he cited Centaur.

93.	In IRC v Laird Group 2003 STC 1349 Lord Millett (with whom all the other members of the House of Lords agreed) said:-

[18] “I need set out only one further provision which has a bearing on the present issue, viz section 703(2) of the 1988 Act. This was first introduced by the Finance Act 1962 and is in the following terms: [he set out its provisions which affected the operation of the earlier 1960 provisions].

This assumes that, whatever else “a transaction in securities” may mean, it does not include the liquidation of a company, for if it did the sub-section would be pointless…. Section 703(2) is directed at the perceived lacuna which would otherwise arise where the tax advantage was obtained, not in consequence of two or more transactions in securities, but in consequence of a transaction in securities and a liquidation and would not have been obtained but for the liquidation.”
94.	And in paragraph [23] after considering statements made in earlier cases which appeared to contradict his overall conclusion, he said:

“Moreover, the dicta in Parker and Greenberg must be treated with caution, as both cases were decided on the Finance Act 1960 as it stood before the introduction of what has become section 703(2)…

“[28] I think that there are two indications of the kind of relationship that Parliament had in mind. One is the width of the word “securities”. The other is in section 703(2), which shows that Parliament did not regard the liquidation of a company in itself as a transaction relating to its shares.”

95.	It is clear that Lord Millett viewed the amendment which resulted in section 703(2) as being very important to the proper construction of s703.

96.	In addition Mr Bramwell says the statement made in paragraph 23 of Lord Millett’s opinion is an indication that the use of subsequent legislation to construe earlier legislation is not limited to provisions which have been consolidated because that paragraph shows that his reasoning is not based upon a consolidation Act. Mr Bramwell accepted, however, that the greater the distance in the legislation between the subsequent legislation and the earlier legislation, the less impact it would have on the construction of the earlier legislation. Thus a later provision inserting a sub-paragraph or sub-section into an existing section would be more relevant to the construction of that section, than the later addition (as in this case) of a related but not integrated provision.

97.	In Kirkness v John Hudson 1955 AC 696 Viscount Simonds said in relation to the use of later legislation to construe earlier legislation:

“…In the first place, I will quote a passage from Lord Buckmaster’s speech. He cites the following words from the judgment of Lord Sterndale in Cape Brandy Syndicate v Inland Revenue Commissioners. “I think it is clearly established in Attorney-General v Clarkson that subsequent legislation on the same subject may be looked to in order to see what is the proper construction to be put upon an earlier Act where that earlier Act is ambiguous. I quite agree that subsequent legislation, if it proceed upon an erroneous construction of previous legislation, cannot alter that previous legislation; but if there be any ambiguity in the earlier legislation, then the subsequent legislation may fix the proper interpretation which is to be put upon the earlier.” “This” said Lord Buckmaster, “is, in my opinion, an accurate expression of the law, if by “an ambiguity” is meant a phrase fairly and equally open to divers meanings,…

“…My Lords, I think that the question is easily answered. In the first place, if the earlier Act contains such an ambiguity as I have described, then the proposition can be accepted in its widest sense and recourse can be had to the later to explain the earlier Act. But, secondly, if there is no ambiguity in the earlier Act, then the proposition must have a more limited meaning, and it will be the earlier Act to which recourse may be had to explain a provision of the later Act…”.

And Lord Reid said:

“…My Lords, this decision of this House appears to me to afford conclusive and binding authority for the proposition that, in construing a provision of an earlier Act, the provisions of a later Act cannot be taken into account except in a limited class of case, and that that rule applies although the later Act contains a provision that it is to be read as one with the earlier Act. Of course, that does not apply where the later Act amends [which we understand to mean amendment of particular provisions expressly to change their meaning] the earlier Act or purports to declare its meaning: in such cases the later Act operates directly by its own force. But where the provisions of the later Act could only operate indirectly as an aid to the construction of words in the earlier Act those provisions can only be used for that purpose if certain conditions apply to the earlier Act when it is considered by itself.

“…A provision is not ambiguous merely because it contains a word which in different contexts is capable of different meanings. It would be hard to find anywhere a sentence of any length which does not contain such a word. A provision is, in my judgment, ambiguous only if it contains a word or phrase which in that particular context is capable of having more than one meaning…”.

In Walker v Centaur 2000 1 WLR 799, Lord Hoffman said:

“My Lords, I seldom think that an argument from redundancy carries great weight, even in a Finance Act. It is not unusual for Parliament to say expressly what the courts would have inferred anyway.”

98.	It is plain that Lord Millett used a later Act to help in the construction of an earlier Act. Although not made express in his opinion we take it that he did so because there was ambiguity in the earlier Act in the sense described by Lord Reid and Viscount Simonds - namely that it was capable in its context of fairly being open to divers meanings.

99.	There is some overlap between construction based on an argument from redundancy and an argument based on the assumptions made in other provisions, but if section 209(4) is in its context fairly open to divers meanings than it seems to us that it would be open to us to have regard to the provisions of section 339 in deciding between the possible meanings: not because the selection of one meaning rather than another might make part of section 339 redundant but because of the view expressed in section 339 as to the meaning of section 209(4). In other words we would take section 339 in such circumstances as adding weight to an argument that section 209(4) encompassed unilateral transfers of cash.

100.	We therefore conclude that, if section 209(4) is open to more than one meaning, then the provisions of section 399 would confirm our view that section 209(4) included unilateral transfers of cash. If, however, section 209(4) is not open to more than one meaning, then we could not permit section 339 to be used in its interpretation.

The relevance of section 209(5) and 209(6)
101.	The third question raised by the arguments of the parties is whether the terms of the exemptions in section 209(5) and 209(6) are relevant to the construction of section 209(4). We remind ourselves of the provisions of these subsections:

“Subsection (4) above shall not apply where the company and the member receiving the benefit are both resident in the United Kingdom and either the former is a subsidiary of the latter or both are subsidiaries of a third company also so resident; and any mount which would apart from this subsection be a distribution shall not constitute a distribution by virtue of subsection (2)(b) above.

No transfer of assets (other than cash) or of liabilities between one company and another shall constitute, or be treated as giving rise to, a distribution by virtue of subsection (2)(b) or (4) above if they are companies:

(a)	both of which are resident in the United Kingdom and neither of which is a 51 per cent subsidiary of a company not so resident; and

(b)	which, neither at the time of the transfer nor as a result of it, are under common control.

For the purposes of this subsection two companies are under common control if they are under the control of the same person or persons, and for this purpose “control” shall be construed in accordance with section 416.”

102.	Those familiar with Venn Diagrams will recognise the following:

C

B

209(4)

209(2)(b)

A

103.	‘A’ represents those transactions within 209(2)(b) and not within s209(4). ‘B’ represents those transactions within both section 209(2)(b) and section 209(4). And  ‘C’ represents those which are within section 209(4) only.

104.	We have already concluded that the gifts to the Foundation were distributions in respect of shares within the meaning of section 209(2)(b). Mr Bramwell’s argument was that section 209(4) also applied to unilateral distributions of cash. If he is right then most Corporation tax Act distributions which take the form of the transfer of assets to shareholders (whether or not for consideration moving from the shareholder) will fall within ‘B’. There will, however, be some transactions which fall within ‘A’ or ‘C’. Within ‘A’ will be distributions to former shareholders, distributions in respect of offers made in respect of a share (perhaps e.g. a share option) to persons who are not members, and distributions in respect of rights granted in respect of shares where the shares and the rights are not at the time of transfer held by members. Within ‘C’ will fall transactions involving the transfer of liabilities to the extent that such transactions cannot be construed as distributions out of the assets of the company, and perhaps (see (c) below) transactions which are dispositions of value to persons who happen to be members but are not in respect of their shares.

105.	To this construction has to be added the effect of  section 209(5) which exempts from distribution treatment, the transfer of assets or liabilities, where the company and the member receiving the benefit are UK resident companies within the same 51% group (the UK group condition). The final words of that section have the effect of removing from section 209(2)(b) anything which is removed from 209(4) by the UK group condition. Now the diagram looks more conventional:

ac

bc

b

209(4)

209(2)(b)

  a

         
ab

       abc

c

106.	The shaded area (being abc and bc) represents the transactions removed from distribution treatment within either subsection 209(2)(b) or subsection 209(4) by the UK group exemption. The effect of the closing words of section 209(5) is to ensure that the area “abc” remains excluded from the distribution treatment of section 209(2)(b). The words at the end of section 209(5) (namely “and any amount which would, apart from this section, be a distribution shall not constitute a distribution by virtue of s209(2)(b) above”), mean anything which is within “abc” because it is in section 209(4) and also within section 209(2)(b) is taken out by section 209(5). In other words, it does not fall back into distribution treatment merely because it also falls within 209(2)(b).

107.	What section 209(5) makes clear is that the legislature thought it was at the very least possible that there were transactions within abc – and thus that the area B on the previous diagram was not empty. That impression is made clearer still by the repetition of the exclusion created by section 209(5) in relation to section 209(2)(b) by the opening words of paragraph (2)(b): “subject to sub-section (5)…”. In other words the legislature contemplated an overlap between those provisions. That indicates that we should not strive to construe section 209(4) so that there is no overlap with section 209(2)(b).

Other Issues

108.	We note a distinction between section 209(2)(b) and section 209(4) in the difference between something done “in respect of shares” in section 209(2)(b) and something transferred “to … or by …members” in section 209(4). The question thus arises as to whether the structure of the section (namely the precedence of section 209(2)(b)) means that we should construe 209(4) as excluding transactions that were “to … or by members” but were also in respect of shares. This would be to adopt Mr Ewart’s approach to the unilateral/bilateral divide and to argue that the confinement of section 209(2)(b) to transactions “in respect of shares”, meant that section 209(4) should be construed so as to exclude any such transaction. 

109.	This issue was not argued before us. It seems to us that there are a number of  arguments against it. First, there is nothing in the plain words of section 209(4) requiring it, and; in relation to the distribution provisions in sections 209 – 254 no injustice or absurdity would be remedied by the adoption of this approach. On the other hand the use of the words “in respect of shares” in section 209(2)(b) has to be given its statutory meaning, namely that the thing done has to be done to a person as being a holder of a share. As those words do not appear in section 209(4) the implication may be that the thing done in section 209(4) is not done by the member “as being the holder of a  share” but in another capacity - although the extension of the meaning of share in section 254(1) to include “any other interest of a member in a company” dilutes this distinction to some extent.

110.	Secondly, if section 209(4) is construed so as to exclude anything within section 209(2)(b) then the closing words of section 209(5) would be of limited import. As we have noted above section 209(5) excludes from section 209(4) transactions within a United Kingdom group of companies. The closing words provide that if a transaction is excluded from 209(4) by 209(5) then it shall also be excluded from section 209(2)(b). If section 209(4) was construed to exclude anything in section 209(2)(b) these words would be of no effect. 

107.	Thirdly, not only would the words be of no effect. The result would be that UK group transactions which fell within section 209(4) would not be distributions whereas UK group transactions which were within section 209(2)(b) would always be distributions. This seems to us to be anomalous. If a transaction were of a type which would fall within section 209(4) but for the fact that it did not include transactions in respect of shares, why should that fact remove that transaction from the exemption in section 209(5) particularly where the legislation appears to want to ensure that transactions of the type evinced in section 209(4) should be exempt. We can understand a legislative intent under which dividends paid within a United Kingdom group remain distributions (because even if they were within section 209(4) and taken out by section 209(5), they would remain within section 209(2)(a) which is unaffected by section 209(5)). However, to exclude certain transactions involving the transfer of assets between UK group members on the basis that they involve members but are not in respect of shares  but to include those which are in respect of shares  is more  difficult to comprehend.

111.	For these reasons we would not construe section 209(4) as carrying an implicit limitation of the transactions to which it applied to those which are not in respect of shares. 

112.	Before we leave this issue we record that we do not consider that the reference in section 209(4) to “members” rather than to “a member” is relevant.  In this appeal the gifts were paid to a single member. However, section 209(4) applies “on a transfer of assets… to its members”. “Members” is in the plural. However, section 6(b) of the Interpretation Act 1978 provides that unless a contrary interpretation appears, words in the plural include the singular. Mr Ewart did not  contend before us that any contrary intention appeared. And we can see none in the section. Indeed the later reference to the “benefit received by a member” – in the singular – suggests strongly that the singular is included. In our view section 209(4) applies when the transfer is only to one member.

Our conclusions
114.	The real issue between the parties on section 209(4) was whether it applied to a transaction under which an asset (or a liability) was transferred without any quid pro quo moving to the company as well as to a bilateral transaction in which there is a transfer to, as well as by the company. 

115.	Although one’s initial impression of section 209(4) is that it is limited to bilateral transfers its words do not compel that conclusion. The sub-section does not however appear to be a sweeping up provision and should not therefore on that account be construed broadly.

116.	Because section 209(2)(b) embraces both unilateral and bilateral transactions (whether or not at a manifest undervalue) we see nothing in the structure of section 209(2) which compels or leads to a conclusion that section 209(4) is limited to bilateral transactions.

117.	The provisions of section 209(5) indicate that the legislature assumed an overlap between section 209(2)(b) and section 209(5). That suggests that we should not seek to construe section 209(4) to exclude some, or all, of the transactions within section 209(2)(b). 

118.	The structure of this group of provisions therefore does not require or lead to a confinement of section 209(4) to bilateral transactions. Despite the initial impression of its words, they do not themselves limit the transactions to which they apply to bilateral transactions. The literal meaning of the words would embrace bilateral transactions, and there are some indications that anomalies would arise if they were construed otherwise.

119.	We therefore conclude that the words of section 209(4) encompass the unilateral transfer of an asset to a member (or of a liability by a member to a company).

120.	The word “assets” would normally include cash, and only if there is something in the context of the provision which dictates otherwise should we hold that it does not. We find nothing in the context which so dictates and indeed an intention appears that it does include cash.

121.	We therefore find that a transfer of cash to a member falls within section 209(4).

122.	Having therefore found that section 209(4) is not fairly open to divers meanings in its context, we find no help in section 339.

A final point: to a member
123.	The transfer must, in order to fall within section 209(4), be by or to a member. A transfer to a past member, or to a person who is not a member but at the direction of a member, is not covered: “to a member” does not benefit from the words of extension in section 254(12). In this respect as we noted earlier there is an area which is covered by section 209(2)(b) and is omitted from section 209(4). For example, a transfer of a liability to a previous member because she was a shareholder will not fall within section 209(4) and would fall within section 209(2)(b) only if the assumption of the liability can properly be called a distribution whose cost falls on the company- which generally seems unlikely.

124.	There is another issue relating to the words “to a member”. That is whether the transfer needs to be to the member in its capacity as such rather than to a person who happens to be a member. This is relevant for the gift to the Foundation. If the section requires the transfer to be received  qua member then it is only if the Foundation received the gifts in that capacity that the gift falls within the ambit of the section. If the section merely requires that the person who received the gift be a member then the gift to the Foundation falls within its ambit no matter the capacity in which the transfer was received.

125.	In relation to section 209(2)(b) Mr Bramwell argued that the gift was not made to the Foundation as being a shareholder. It seems to us that, since by section 254(1) “share” includes interest of a member in a company, this is equivalent to an argument that the gift was not made to the Foundation as a member. Accordingly, if section 209(4) required the member to receive qua member Mr Bramwell’s argument would have meant that section 209(4) did not apply. Mr Ewart however argued to the contrary and in the discussion above on this point we accepted Mr Ewart’s arguments. Accordingly, it seems to us that even if “member” in section 209(4) means “a member in its capacity as member”, the transfer to the Foundation was within section 209(4).

Decision

126.	Our decisions on the issues for determination in the appeal are:

(1)	that the gifts to the Foundation were distributions in respect of shares within the meaning of section 209(2(b) and:

(2)	that they were also  distributions within the meaning of section 209(4).  

127.	That means that the appeal is allowed.

NUALA BRICE

CHARLES HELLIER

SPECIAL COMMISSIONERS

RELEASE DATE:

23 January 2006

SC 3081/2005
17.01.06