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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Sema Group Pension Scheme v Inland Revenue  EWCA Civ 1857 (19 December 2002)
Cite as: 74 TC 593,  STC 95,  STI 27,  Pens LR 29,  EWCA Civ 1857,  BTC 106
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT
CHANCERY DIVISION (Mr Justice Lightman)
London, WC2A 2LL
B e f o r e :
LORD JUSTICE JONATHAN PARKER
MR JUSTICE AIKENS
| The Trustees of the Sema Group Pension Scheme
|- and -
|The Commissioners of Inland Revenue
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Launcelot Henderson QC and Mr Christopher Tidmarsh QC (instructed by The Solicitor of Inland Revenue) for the Respondents
Crown Copyright ©
Lord Justice Jonathan Parker :
THE RELEVANT ANTI-AVOIDANCE PROVISIONS
"703 Cancellation of tax advantage
(a) in any such circumstances as are mentioned in section 704, and
(b) in consequence of a transaction or transactions in securities or of the combined effect of two or more such transactions,
a person is in a position to obtain, or has obtained, a tax advantage, then unless he shows that the transaction of transactions were carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments, and that none of them had as their main object, or one of their main objects, to enable tax advantages to be obtained, this section shall apply to him in respect of that transaction or transactions.
(3) Where this section applies to a person in respect of any transaction or transactions, the tax advantage obtained or obtainable by him in consequence thereof shall be counteracted by such of the following adjustments, that is to say an assessment . on such basis as the Board may specify by notice served on him as being requisite for counteracting the tax advantage so obtained or obtainable.
[(4) to (12) .]
704 The prescribed circumstances
The circumstances mentioned in section 703(1) are
A. That in connection with the distribution of profits of a company . the person in question receives an abnormal amount by way of dividend and the amount so received is taken into account for any of the following purposes
(a) any exemption from tax,
[(b) to (f) .]
709 Meaning of "tax advantage" and other expressions
(1) In this Chapter "tax advantage" means a relief or increased relief from, or repayment or increased repayment of, tax, or the avoidance or reduction of a charge to tax or an assessment to tax or the avoidance of a possible assessment thereto, whether the avoidance or reduction is effected by receipts accruing in such a way that the recipient does not pay or bear tax on them, or by a deduction in computing profits or gains.
(2) In this Chapter
"transaction in securities" includes transactions, of whatever description, relating to securities .
and references to dividends include references to other qualifying distributions .
(3) In section 704
(a) references to profits include references to income, reserves or other assets;
(b) references to distribution include references to transfer
(4) For the purposes of section 704 an amount received by way of dividend shall be treated as abnormal if the Board . are satisfied
(a) .; or
(b) in any case, that it substantially exceeds a normal return on the consideration provided by the recipient for the relevant securities, that is to say, the securities in respect of which the dividend was received .
(6) For the purposes of subsection (4)(b) above
(a) .; and
(b) in determining whether an amount received by way of dividend exceeds a normal return, regard shall be had to the length of time previous to the receipt of that amount that the recipient first acquired any of the relevant securities and to any dividends and other distributions made in respect of them during that time."
1. In relation to the two buybacks in question the circumstances prescribed in s.704A were present, viz: (1) that in connection with the distribution of profits of a company the Scheme 'receive[d] an abnormal amount by way of dividend', and (2) that 'the amount so received [was] taken into account [for the purposes of] any exemption from tax'. It is common ground that circumstance (2) was present. There is, however, an issue (Issue 1) as to whether circumstance (1) was present. The trustees contend on the facts that it was not; the Revenue contend that it was, on the footing that in each case the amount 'received [by the Scheme] by way of dividend' (see s. 704A) 'substantially exceed[ed] a normal return on the consideration provided by the [Scheme] for the relevant securities' (see s.709(4)(b)), and having regard to the matters set out in s.709(6)(b).
2. In consequence of the buybacks the Scheme obtained 'a tax advantage' (see s.703(1)). There is an issue (Issue 2) as to whether this requirement was met. The Revenue contend that the advantage which undoubtedly accrued to the Scheme in consequence of the buybacks by reason of its exemption from income tax falls within the definition of 'tax advantage' in s.709(1); the trustees contend that it does not. And
3. The "escape route" provided by s.703(1) is not available to the trustees; that is to say, the trustees do not succeed in showing (1) that they participated in the two buybacks 'either for bona fide commercial reasons or in the ordinary course of making or managing investments' and (2) that '[neither] of [the buybacks] had as their main object, or one of their main objects, to enable tax advantages to be obtained'. There is no longer an issue as to the first element of the escape route. The Special Commissioners held that in participating in the buybacks the trustees were acting in the ordinary course of managing investments, and there was no appeal against that finding. There is, however, an issue (Issue 3) as to the second element in that the Revenue contend, and the trustees deny, that one of the main objects of the buybacks was to obtain a 'tax advantage'.
The PowerGen bid
"The signalling of the abandonment of the bid . led Mr Mullins to conclude that Powergen was a less attractive investment. However, he did not want to "dump" the PowerGen shares in the market as it was difficult to shift so many shares at once."
" . appreciated that the purchase price announced by Powergen together with the associated tax credit provided an opportunity to achieve a sale of the shares held for the [S]cheme at a price which was considerably in excess of his targets."
"He was aware of the intentions of the Inland Revenue as stated in the [health warning] but he wanted to sell the shares for good investment reasons and considered that the buyback was a good opportunity to do that. Accordingly the [S]cheme participated in the . buyback and tendered the whole of its holding."
".... the [trustees] did not receive an abnormal amount by way of qualifying distribution and that the amount of the qualifying distribution did not exceed a normal return on the consideration provided by the [taxpayers] for the shares having regard to the length of time that the [trustees] held those shares."
".... did obtain a tax advantage within the meaning of s.709(1)."
".... the [buybacks] did have as one of their main objects to enable tax advantages to be obtained within the meaning of s.703(1)."
"[t]he criterion of normality is the normality of return to be expected to be paid on securities of the type in question."
"In this case the securities are ordinary shares in a major limited company. As Mr Henderson [counsel for the Revenue] submitted, the normal dividends on such shares with which investors are familiar are interim or final dividends which have the quality of recurrence and presuppose the continued existence and ownership by the taxpayer of the shares on which the dividends are paid. A dividend paid as part of the consideration on a buy-back cannot qualify as normal; it represents the return to the investor of part of the capital value of his shares; it is a one-off transaction which extinguishes the shares and the taxpayer's ownership of them and depends, not on some right inherent in the shares themselves, but a supervening consensual agreement between the company and the shareholder."
"....the methodology envisaged by Sir John Vinelott in IRC v. Universities Superannuation Scheme Ltd  STC 1 of calculating an average income yield over the period of ownership, and evaluating that return in the light of the degree of risk attaching to the investment, and paying no attention to the fact that the capital value of the shares is lost to the taxpayer on the buy-back."
".... for the purpose of determining the normality of the return the tax credit is to be ignored."
"In the circumstances I do not think it right to say more on this issue than that I hold (following [USS]) that the trustees' exemption is a relief within the section [sc. s.703(1)] and its exploitation by the Trustees brings into play the anti-avoidance provisions."
"It is plain that the Commissioners correctly directed themselves in law in this case and that their decision was one which they could reasonably reach."
THE TRUSTEES' GROUNDS OF APPEAL
1. that the judge was wrong in law in reversing the finding of the Special Commissioners that the trustees did not receive an 'abnormal amount by way of dividend' within section 704A (Issue 1);
2. that the judge was wrong in law in deciding that an entitlement to a tax credit constituted a 'relief from tax' within the meaning of s.709(1) (Issue 2); and
3. that the judge was wrong in law in not reversing the finding of the Special Commissioners that a main object of the trustees was the obtaining of a tax advantage, since on the facts found by the Special Commissioners no such conclusion was open to them as a matter of law (Issue 3).
PERMISSION TO APPEAL
"Issue (3) is a challenge to the Commissioners' finding of fact as to the 'main object' of the transactions. The principle has been established by the House of Lords in IRC v. Brebner  2 AC 18 and is not in doubt. I am not persuaded that the threshold conditions prescribed by CPR 52.13 are satisfied."
THE REVENUE'S RESPONDENT'S NOTICE
It is contended that in assessing the normality or otherwise of an amount received by way of dividend, the fact that the capital value of the shares is reduced (or even eliminated) by the payment of the dividend is a factor which tends to establish the abnormality of the dividend, not the converse; and that the statutory test is concerned with the normality of the dividend as a dividend, and not with the overall economic return to the shareholder. In support of this contention the Revenue points to the approach of the courts to the classic forms of forward dividend stripping which were prevalent when the relevant statutory provisions were first enacted. The Revenue relies in particular on the speech of Lord Reid in Greenberg v. IRC  AC 109 at 135E-136C.
The Revenue rely on the positive case which they advanced to the judge to the effect that the trustees' exemption from income tax under s.592 is a 'relief from tax' within the meaning of the definition of 'tax advantage' in s.709(1).
THE ARGUMENTS ON THIS APPEAL
The general approach
The specific issues
".... presuppose[s] the continued existence and ownership by the taxpayer of the shares on which the dividends are paid."
The general approach
"Upon the enactment of the original section 28 of the Finance Act 1960 it was possible to contend, and it was contended, that this section (and its associated sections) was directed against a particular type of tax avoidance known generally under such descriptions as dividend stripping, asset stripping and bond washing and that the sections and particular expressions used in them, amongst others 'transactions in securities', should be interpreted in the light of this supposed purpose. But this line of argument became unmaintainable after decisions of this House in [Parker] and [Greenberg]. It is clear that all the members of this House who decided those cases were of opinion that a wide interpretation must be given to the sections and to the expressions used in them. More than this, it appeared from the opinion of Lord Reid in [Greenberg] that the sections called for a different method of interpretation from that traditionally used in taxing Acts. For whereas it is generally the rule that clear words are required to impose a tax, so that the taxpayer has the benefit of doubts or ambiguities, Lord Reid made it clear that the scheme of the sections, introducing as they did a wide and general attack on tax avoidance, required that expressions which might otherwise have been cut down in the interest of precision were given the wide meaning evidently intended, even though they led to a conclusion short of which judges would normally desire to stop . If we are to follow this path, and I see no other open to us, we must continue to give to 'transactions in securities' the widest meaning: we can neither confine these expressions to the instances given in section 467(1) [the definition section], nor can we deduce from that enumeration any limitation upon their scope."
"I do not agree that the general mischief which section 28 [of the Finance Act 1960] was designed to hit was dividend stripping . I do not think that one should restrict the general and unambiguous words of the definition in the statute by regard to the mischief which it is thought that the section is aimed at. Nor do I think that it is right to seek to interpret the general words in the light of the particular instances given in the section. It is a familiar device of a draftsman to state expressly that certain matters are to be treated as coming within a definition to avoid argument on whether they did or not."
"I must confess that I do not like being forced step by step to a conclusion of this kind. . We seem to have travelled a long way from the general and salutary rule that the subject is not to be taxed except by plain words. But I must recognise that plain words are seldom adequate to anticipate and forestall the multiplicity of ingenious schemes which are constantly being devised to evade taxation. Parliament is very properly determined to prevent this kind of tax evasion and, if the courts find it impossible to give very wide meanings to general phrases, the only alternative may be for Parliament to do as some other countries have done, and introduce legislation of a more sweeping character which will put the ordinary well-intentioned person at much greater risk than is created by a wide interpretation of such provisions as those which we are now considering."
"I am inclined to think that the real explanation of these verbal difficulties may be that, in legislation of such extreme complexity as we have here, it is not humanly possible for a draftsman to preserve that consistency in the use of language which we look for. Indeed I sometimes suspect that our normal meticulous methods of statutory construction tend to lead us astray by concentrating too much on verbal niceties and paying too little attention to the provisions read as a whole."
The specific issues
"Thus what the [trustees] received was a normal return on the consideration which they provided for the securities."
"Finally, under section 709(6)(b) we have to have regard to the length of time during which the [trustees] held the shares. This was three months for the shares sold in the first buyback and four months for the shares sold in the second buyback. Here it is also relevant that the market price of the shares rose to about £8.60 in April : an increase of 59 per cent or 78 per cent. Thus, having regard to the length of time for which the shares were held, the return did not substantially exceed a normal return."
"At the heart of the dispute is whether in determining the abnormality of the dividend regard may or should be had to the fact that its payment is part of the purchase consideration paid by Powergen for the redemption of the shares" (emphasis added).
"A dividend paid as part of the consideration for a buy-back cannot qualify as normal."
"I agree that the question whether one of the main objects is to obtain a tax advantage is subjective, that is, a matter of the intention of the parties, and, as Lord Greene MR pointed out in Crown Bedding Co Ltd v. IRC, is essentially a task for the Special Commissioners unless the relevant Act has made it objective (and that is not suggested here)."
" . when the question of carrying out a genuine commercial transaction, as this was, is reviewed, the fact that there are two ways of carrying it out one by paying the maximum amount of tax, the other by paying no, or much less, tax it would be quite wrong, as a necessary consequence, to draw the inference that, in adopting the latter course, one of the main objects is, for the purposes of the section, avoidance of tax. No commercial man in his senses is going to carry out a commercial transaction except upon the footing of paying the smallest amount of tax that he can. The question whether in fact one of the main objects was to avoid tax is one for the Special Commissioners to decide upon a consideration of all the relevant evidence before them and the proper inferences to be drawn from that evidence."
" . the sales were made when they were made only because Mr Mullins knew that he would receive the tax credits. When the buy-backs were announced, Mr Mullins appreciated that the purchase price announced by Powergen together with the associated tax credit provided an opportunity to achieve a sale of the shares held for the scheme at a price which was considerably in excess of his targets. The tax credits were crucial. A sale of the shares on the open market at the prevailing price would have resulted in a deficit. It was the tax credits which made the difference between a sale which resulted in a deficit and a sale which resulted in a credit balance."
"However, we remain of the view that the tax credits were crucial to Mr Mullins' decisions to sell into the buy-backs and so one of the main objects of the sales was to enable tax advantages to be obtained."
Mr Justice Aikens :
Lord Justice Aldous :