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Cite as: [2012] EWCA Civ 278, [2012] WLR(D) 73

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Neutral Citation Number: [2012] EWCA Civ 278
Case No: A3/2011/1713

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
TAX AND CHANCERY CHAMBER
Mr Justice Warren, President and Judge Edward Sadler
[2011] UKUT 174 (TCC)

Royal Courts of Justice
Strand, London, WC2A 2LL
13/03/2012

B e f o r e :

LORD JUSTICE RIX
LORD JUSTICE MOSES
and
MR JUSTICE BRIGGS

____________________

Between:
Her Majesty's Commissioners for Revenue & Customs
Appellant
- and -

First Nationwide
Respondent

____________________

Mr Malcolm Gammie QC (instructed by HMRC Solicitor) for the Appellant
Mr John Gardiner QC and Mr Philip Walford (instructed by Slaughter and May) for the Respondent
Hearing dates: 17th-19th January 2012

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    Lord Justice Moses:

  1. First Nationwide, a UK resident unlimited company, is a wholly-owned investment company subsidiary of the Nationwide Building Society. It sought, in the second half of 2003, to raise funds from Anglo Irish Bank for the use of the Nationwide Building Society. The structured finance transaction by which it sought to raise those funds was a combination of a stock loan agreement and what HMRC (the Revenue) contended to be a sale of the loaned securities by First Nationwide to Anglo Irish Bank and a re-purchase of similar securities by way of subscription (a repo).
  2. Blueborder Cayman Ltd (Blueborder) raised £51.1m by issuing two classes of shares, Ordinary and First Issued Preference Shares, to be used for the purposes of the financing transaction. Blauwzoom (Netherlands Antilles), Blueborder's parent, subscribed for, and Blueborder issued, 1,050 Ordinary Shares with a nominal value of £1 each at a premium of £999 per Ordinary Share and 50,050 non-voting redeemable First Issued Preference Shares with a nominal value of £1 each at a premium of £999 per Preference Share. Thus Blueborder raised £51,048,900 on share premium account. The First Issued Preference Shares were then, for the purposes of the financing transaction, lent under a stock loan agreement to ABN AMRO (London branch) and, under a further stock loan agreement, ABN AMRO (London branch) subsequently lent them to First Nationwide. Those 50,050 First Issued Preference Shares were, it is agreed, overseas securities within the meaning of paragraph 1(1) Schedule 23A, Income and Corporation Taxes Act 1988 ("ICTA"). First Nationwide then sold the 50,050 First Issued Preference Shares to Anglo Irish Bank for the sum of £50,314,975. Anglo Irish Bank was to obtain reimbursement through the payment of two dividends by virtue of dividend rights attaching to the First Issued Preference Shares under Blueborder's Articles of Association. The First Issued Preference Shares carried a right to a dividend on 29 December 2003 of £25,500,000, but, it is important to record, this was a right to payment of dividends exclusively out of share premium. The Second Preference Dividend was payable, similarly, exclusively out of share premium in the sum of £25,500,000 in total on 29 March 2004. By that means, Anglo Irish Bank obtained a repayment to which was added the right to redeem the First Issued Preference Shares, exercisable by both Anglo Irish Bank and Blueborder for the sum of £1m.
  3. First Nationwide then had to satisfy its obligation in relation to the First Issued Preference Shares, the subject of the stock loan agreement with ABN AMRO. It satisfied that obligation by subscribing, pursuant to an agreement between First Nationwide and Blueborder, for 50,050 Second Issued Preference Shares.
  4. Pursuant to the stock loan agreement First Nationwide was obliged to pay to ABN AMRO, in respect of each dividend paid on the First Issued and Second Issued Preference Shares, a manufactured dividend equal to the amount of the First Preference Dividend and the Second Preference Dividend. In its self-assessment to corporation tax for the accounting period ending 31 March 2004, First Nationwide deducted the £51m, paid as manufactured dividends to ABN AMRO pursuant to the stock lending agreement, as expenses of management. Such a deduction was only permissible if the dividends were payments of an income nature, charged to tax under Case V of Schedule D, being "income arising from possessions out of the United Kingdom". If those manufactured dividends were of an income nature they were deductible by virtue of Regulation 4(1)(c) of the Income Tax (Manufactured Overseas Dividends) Regulations 1993. The definition of a manufactured overseas dividend is contained within paragraph 4(1) Schedule 23A ICTA 1988: an overseas dividend is defined as "any interest dividend or other annual payment payable in respect of any overseas securities" (paragraph 1 of Schedule 23A). Regulation 2(1) of the 1993 Regulations adopts the definitions within Schedule 23A.
  5. The efficiency of the structured finance transaction into which First Nationwide entered depends upon the deductibility of those dividends: such a deduction produces an income rather than a capital loss. It is in that context that the first issue in this appeal arises: were the payments of an income nature? The Revenue contends that since the dividends were paid out of the share premium account of Blueborder they constituted capital payments and were, accordingly, not deductible.
  6. The second issue relates to the subscription by First Nationwide of the Second Issued Preference Shares for £1m. The Revenue contends that the subscription constitutes the buying of similar securities for the purposes of the repo legislation (s.737A and 730A ICTA). If the Revenue is correct then the effect of those statutory provisions is to deem an income payment (a deemed manufactured dividend representative of the preference dividends of £51m) to First Nationwide. That deemed manufactured payment would be taxable income of First Nationwide, offsetting the claimed deduction of the manufactured dividends paid by First Nationwide to ABN AMRO. Judge Berner, as he then was, in the First-Tier Tribunal (Tax) [2010] SFTD 408, upheld First Nationwide's appeal against the Revenue's amendment of its self-assessment on both issues. The Upper Tribunal [2011] STC 1540 dismissed the Revenue's appeals. The Revenue, by way of appeal, now seeks to overturn the conclusions of both Tribunals. Both the Tribunals set out the facts in detail. Most of the facts were agreed save for a dispute between experts on Cayman Islands law. The facts have now been set out twice in both decisions and I incorporate them into this judgment by way of Annex 1.
  7. Dividends: Capital or Income?

  8. The essential question, in relation to the first issue, is whether the Preference Dividends, payable as they were exclusively out of share premium, were income payments or were, as the Revenue contended, payments of capital. There was no dispute between the experts that, for the purposes of Cayman Islands company law, the Preference Dividends constituted dividends (First-Tier Tribunal [8]). But that is not determinative of the answer, as a matter of United Kingdom tax law, (see Upjohn LJ in Rae v Lazard Investment Co Ltd [1963] 41 TC 1, 20). The taxpayer contended that the distinction between capital and income turned on the legal machinery employed to make the two distributions of £25,500,000. The Revenue argued that Blueborder's Articles of Association engrafted the share premium onto the corpus of the shares and that corpus was diminished on payment of the First and Second Preference Dividends. The distributions, in short, amounted to return of the share premium as capital forming the body of the foreign possession.
  9. The starting point must be the legal mechanism by which the First and Second Issues Preference Dividends were paid. They were dividends paid out of the share premium account. That, contends First Nationwide, is not merely the starting point; it is the finishing point. The mechanism by which the payments of £51m were made, namely the payment of dividends, determines the character of the payments. They were, as dividends, necessarily income payments.
  10. This simple and clear proposition rests on two foundations: the treatment of share premium in United Kingdom jurisprudence and its treatment under Cayman Islands' Companies Law.
  11. The jurisprudence is well-established. Payments made by a company in respect of shares are either income payments, or, if the company is not in liquidation, by way of an authorised reduction of capital. The courts have recognised no more than that dichotomy. The distinction has depended upon the mechanics of distribution. If the payments are made by deploying the mechanisms appropriate for reduction of capital, then they are payments of capital. Such mechanisms can be readily identified as designed to protect the capital of a company. If the payments are not made by such mechanisms but are made by way of dividend, they are income payments. In R.A. Hill v Permanent Trustee Co of New South Wales Ltd [1930] AC 720, trustees sought a ruling whether a payment of a dividend out of the proceeds of the sale of breeding stock was income belonging to those beneficially entitled to the income of the trust estate. The Board's opinion, expressed by Lord Russell, is authority for the proposition that the form which the distribution takes determines whether it is a capital or income distribution:-
  12. " …moneys paid in respect of shares in a limited company may be income or corpus of a settled share according to the procedure adopted, i.e. according as the moneys are paid by way of dividend before liquidation or are paid by way of surplus assets in a winding-up". (page 729)…
    "(2) A limited company not in liquidation can make no payment by way of return of capital to its shareholders except as a step in an authorized reduction of capital. Any other payment made by it by means of which it parts with moneys to its shareholders must and can only be made by dividing profits. Whether the payment is called "dividend" or "bonus", or any other name, it still must remain a payment on division of profits". (page 731)
  13. In the United Kingdom, prior to 1948, share premium was freely distributable as 'profits'. It was not assimilated to paid-up share capital. It did not fall within the scope of rules designed to protect against reduction of capital. In Drown v Gaumont-British Picture Corporation Limited [1937] 2 All ER 609 a shareholder failed to prevent a company from paying a dividend out of share premium; the premium was additional to and was not part of the capital subscribed on the shares. Subject to any inhibition in the articles of association, there was nothing to prevent a company dividing amongst its shareholders the premium obtained on the issue of the shares (617 A-B). It should be noted that, in that case, the premium was carried to a reserve account, to which the premiums made the major contribution (614H and 616H).
  14. By s.56 Companies Act 1948 share premium was assimilated to a company's subscribed capital and protected as if it were the paid-up capital of the company. The contrasting effect on the categorisation of payments out of share premium, before and after 1948, was clearly identified by both Harman J and the Court of Appeal in Re Duff's Settlement [1951] Ch 721 and 923. The importance of that decision, which concerned the question whether payments out of share premium account should be treated as income or capital, lies in the emphasis the courts placed upon the mechanism of payment in order to draw the distinction between capital and income. By virtue of s.56 of the Companies Act 1948, the repayment of share premium, in that case, was made by order of the court on a petition under that section. It followed, the courts agreed, that in contrast to the position before the 1948 Act, as explained in Drown, the payments out of share premium account were payments of capital and not income.
  15. In giving the judgment of the court, Jenkins LJ described s.56 as the essential provision on which the distinction between share capital and divisible profit depends (928).
  16. "….."the mechanics" are, in our judgment, an essential factor in determining the character as between capital and income of the sum distributed. A company, having (sic) an artificial person, can (as it has been laid down) make a distribution amongst its members (otherwise than in a winding-up) in one of two ways - but only in one of two ways: that is by a distribution of divisible profit, that is, by way of dividend; and by way of a return of capital pursuant to an order of the court upon a petition for reduction of capital in accordance with the Act." (930).
  17. The court continued by reflecting upon the nature of share premium. It recognised that it was essentially capital profit and not income (931). But,
  18. "if distributed in cash before s.56 came into operation (it) would…have been income in the hands of the shareholders, notwithstanding its capital character when considered as a receipt of the company " (932).
  19. Harman J's judgment is to like effect. It is of note that he "ranked" the share premium as profits available for distribution (724) because it represented a profit in the sense that the company got more for its shares than the nominal value (727).
  20. The principle that the form of the distribution dictates its character is expressed in two speeches of Lord Reid, 14 years apart. In Reid's Trustee v IRC [1949] AC 361, the capital profits realized on the sale of properties were distributed to shareholders by way of dividend; this was crucial to the identification of the payments as income. Lord Reid said:
  21. "…if a foreign company chooses to distribute its surplus profits as dividend, the nature and origin of those profits does not and cannot be made to affect the quality of the receipt for the purposes of income tax" (386).

    All depended upon the method adopted by the company for dealing with its surplus assets; it could create new capital assets or distribute those assets as income (386).

  22. Lord Reid adhered to that view in Rae v Lazard Investment Co Ltd [1963] 1 WLR 555 and (1963) 41 TC 1. A Maryland company had hived off part of its business by a process, unknown to English company law, of partial liquidation; shares in a new company to which the hived off business was sold were distributed to an English investment company which held shares in the Maryland company. The Court of Appeal and the House of Lords concluded that shares which the English company shareholders received on the partial liquidation were capital and not, as the Revenue contended, income. That conclusion was dictated by the machinery by which the shares were distributed. Lord Reid said:
  23. "In deciding whether a shareholder receives a distribution as capital or income our law goes by the form in which the distribution is made rather than by the substance of the transaction. Capital in the hands of the company becomes income in the hands of the shareholders if distributed as a dividend, while accumulated income in the hands of the company becomes capital in the hands of the shareholders if distributed in a liquidation " (567).

    By the law of Maryland, which recognised the transaction as a partial liquidation, the shares distributed were capital. Both Lord Guest (570) and Lord Pearce (572) reiterated that it was the machinery by which assets were distributed which determined the question whether the assets were received as capital or income.

  24. The principle that it is the machinery by which the assets are distributed which determines whether they are capital or income finds expression, yet again, in Courtaulds Investments Ltd. v Fleming [1969] 1 WLR 1683, (1969) 46 TC 111. Italian law identified the distribution from a share premium reserve as a distribution of capital. It brought share premium within the scope of the rules for protection of capital in a manner similar to s.56 Companies Act 1948. Share premium could not be distributed while the legal reserve fell below 20% of the company's capital. Italian law introduced a new tax on the payment of dividends. To avoid that tax, the Italian company transferred profits of the year, which would have been distributed as dividends, to the legal reserve and thereby freed the share premium for distribution to shareholders. Such a distribution was, under Italian law, a distribution of capital free from the new imposta cedolare. (The Weekly Law Report's head note incorrectly describes the distribution as a dividend (1684 B), the description in the Tax Cases head note, a withdrawal from share premium reserve, is correct.) Buckley J rejected the Revenue's contention that once the share premium was freely distributable it was, as in the United Kingdom before 1948, income. Italian law regarded the distribution as capital, and grafted the share premium onto the paid-up capital of the company (126H), (127B-C).
  25. Cayman Island Companies Law has followed the reverse route to that adopted under United Kingdom company law. Prior to 1989, the law protected share premium as if it were paid-up share capital, in the same way as it was protected after s.56 of the Companies Act 1948 was introduced in the United Kingdom. But by amendment in 1989, share premium was distributable by dividend. The relevant provisions of s.34 of the Cayman Islands Companies Law (2003) read:-
  26. "34(1) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the value of the premiums on those shares shall be transferred to an account called 'the share premium account'. Where a company issues shares without nominal or par value, the consideration shall be paid up share capital of the company.
    (2) The share premium account may be applied by the company subject to the provisions, if any, of its memorandum or articles of association in such manner as the company may, from time to time, determine including, but without limitation –
    (a) paying distributions or dividends to members …
    Provided that no distribution or dividend may be paid to members out of the share premium account unless, immediately following the date on which the distribution or dividend is proposed to be paid, the company shall be able to pay its debts as they fall due in the ordinary course of business; and the company and any director or manager thereof who knowingly and wilfully authorises or permits any distribution or dividend to be paid in contravention of the foregoing provision is guilty of an offence and liable on summary conviction to a fine of fifteen thousand dollars and to imprisonment for five years."
  27. If, as is clear, prior to 1948 share premium was distributable by way of dividend as income in the United Kingdom, it seems equally plain that it was distributable as income in the Cayman Islands following the freedom from restriction in 1989.
  28. Not so, says Mr Gammie QC, for the Revenue. There were two important features of the share premium account which, so he contends, demonstrate that the share premium was assimilated to the paid-up capital in Blueborder. The first and most important feature is to be found in the detail of the Articles of Association and their characterisation of the capital rights attached to the First and Second Issued Preference shares. Under the Articles, dividends in respect of preference shares could only be paid out of the share premium account and any other dividend or distribution in respect of any other class of share could not be paid out of share premium account (Art 128). The only substantive rights attached to the preference shares were rights to the amount which had been contributed to the company on issue of its shares. Those rights are described as "Capital" (Article 5.2 (b)). On "a return of capital on a winding-up or otherwise", the owners of the preference shares are entitled to what is described as the "Preference Share Return Amount", an amount defined by reference to a formula which has the effect that where, as occurred, the dividends were paid (whether early or late), the amount payable on a subsequent return of capital was abated pro tanto. Accordingly, the value of the capital rights attached to the preference shares depended entirely on the extent to which the share premium contributed on issue had been returned by the payment of First and Second Preference Dividends. As it turned out, since the dividends were paid on the due dates, the capital rights were almost altogether abated.
  29. The Articles, accordingly, demonstrate that the share premium was part of the capital corpus of the company; that corpus was not left intact, the value of the capital rights were reduced, after the Second Preference Dividend had been paid by the full amount of the First and Second Preference dividends, £51.1m.
  30. The second feature relates to the legislative treatment of share premium account under Cayman Islands Companies Law. By s.34 (1) of that law, a company is required to transfer the value of the premiums to a "share premium account". Moreover, the proviso to s.34 (2) (cited [19]) prohibits a distribution in circumstances where debts cannot be paid, on pain of criminal sanctions, affording greater protection to the separate share premium account than that afforded by ordinary duties imposed on directors before distributing the profits of a company by way of dividend.
  31. Both those features, in combination, submits the Revenue, demonstrate that the corpus of the company was not left intact on payment of the dividends out of the share premium account. Share premium is, they suggest, not part of the profits as they would ordinarily be understood but sui generis. It should be recognised as a third category, neither income nor capital, but distributable as dividend subject to satisfying a statutory cash flow solvency test. It is not comparable to share premium prior to 1948 in the United Kingdom.
  32. I am unable to recognise such a third category. The character of the payment in the hands of First Nationwide is a matter for United Kingdom law, the law of the Cayman Islands being relevant, not determinative, (Upjohn LJ in Rae, (q.v. supra [7]). United Kingdom law recognises only two species of payment in respect of shares: capital or income payments. Further, the jurisprudence establishes that it is the form by which the payments are made which determines their character. It is true that, under Blueborder's Articles of Association (Art.5.2(b)), had the First and Second Preference Dividends not been paid, the share premium would have been returned as capital on a winding-up or on a redemption. It is also true that, since those dividends were paid, the value of the capital rights which remained, on a winding-up or otherwise, was drastically diminished to £1m. But those features tell one nothing other than, had the mechanism or machinery adopted for distribution of the share premium account been a return of capital on a winding-up or otherwise, the payments would have been capital. Since the payments were made adopting the mechanism of distribution by way of dividend, (Art.5.2(a)), that mechanism dictates the conclusion that the payments were income and not capital. Under the Articles, the owner of the Preference Shares has rights to income, if the premium is distributed as dividends and, if the premium is not distributed as dividends, equivalent capital rights on a winding-up.
  33. It is correct that, as Mr Gammie emphasised, judges have, from time to time, said that dividends are prima facie income, suggesting circumstances in which they will not be income (see e.g. Lord Normand (374,375) and Lord Morton (380) Reid's Trustees). There are cases, where, on a true analysis of the facts, it is possible to identify a declaration of a dividend as being other than a payment of income. In Sinclair v Lee [1993] Ch 497, the declaration of a dividend by ICI by the allotment of fully paid-up shares in the new company Zeneca was no more than part of a company reconstruction by way of de-merger, whereby a single company was replaced by two head companies and the trading entity divided into two smaller trading entities (513D).
  34. But no such analysis is possible on the facts of the instant case. Nothing can be discerned by invoking examples of cases where capital has been returned (as in Courtaulds, under the Italian view of share premium, or in Lazard, a partial liquidation under Maryland law). Nor does the possibility of tearing away a "colourable label" to see the reality assist the Revenue (see the obiter dicta of Lord Pearce in Lazard (p.573)). The reality was the distribution of share premium as dividends, as Blueborder was free to do under Cayman Islands Companies Law. That mechanism establishes that the payments were income. The correct identification of the dividends as income, notwithstanding that they were paid out of share premium account, mirrors the situation in United Kingdom company law prior to 1948, as explained in Drown. For that reason, which is no more than an echo of the decisions of the First-Tier and the Upper Tribunals, I would dismiss the appeal on this point.
  35. The Repo Issue

  36. The Revenue seeks to apply the provisions of Section 737A and 730A ICTA 1988 so as to create deemed manufactured dividends which will increase the re-purchase price of £1m by £51m. The effect is to deem First Nationwide to pay interest of £1.7m on a deemed loan from Anglo Irish bank of £50.3m (subscription price of £1m + Preference Dividends of £51m – sale price of £50.3 = £1.7m). This effect accords, so the Revenue assert, with the economic reality that First Nationwide borrowed £50.3m from Anglo Irish for 6 months at an interest cost of £1.7m.
  37. But the legislation cannot be applied unless First Nationwide's subscription for and Blueborder's issue of the Second Issued Preference Shares constituted a "buying back" within the meaning of sections 737A and 730A. (The provisions are set out in full in Annex 2.)
  38. "737A. Sale and repurchase of securities: deemed manufactured payments.
    (1) This section applies where on or after the appointed day a person (the transferor) [scilicet First Nationwide] agrees to sell any securities, and the transferor or a person connected with him--
    (a) is required to buy them back in pursuance of an obligation imposed by, or in consequence of the exercise of an option acquired under, that agreement or any related agreement, or
    (b) acquires an option to buy them back under that agreement or any related agreement which he subsequently exercises;
    but this section does not apply unless either the conditions set out in subsection (2) below or the conditions set out in subsection (2A) below are fulfilled.
    737B. Interpretation of section 737A
    (5) In section 737A and subsection (4) above references to buying back securities include references to buying similar securities.
    730A. Treatment of price differential on sale and repurchase of securities
    (1) Subject to subsection (8) below, this section applies where--
    (a) a person ('the original owner') has transferred any securities to another person ('the interim holder') [scilicet Anglo Irish Bank] under an agreement to sell them;
    (b) the original owner or a person connected with him--
    (i) is required to buy them back in pursuance of an obligation imposed by, or in consequence of the exercise of an option acquired under, that agreement or any related agreement, or
    (ii) acquires an option to buy them back under that agreement or any related agreement which he subsequently exercises; and
    (c) the sale price and the repurchase price are different.'
    730B. Interpretation of section 730A
    (1) For the purposes of section 730A agreements are related if they are entered into in pursuance of the same arrangement (regardless of the date on which either agreement is entered into).
    (2) References in section 730A to buying back securities--
    (a) shall include references to buying similar securities; and
    (b) in relation to a person connected with the original owner, shall include references to buying securities sold by the original owner or similar securities,
    notwithstanding (in each case) that the securities bought have not previously been held by the purchaser; and references in that section to repurchase or to a repurchaser shall be construed accordingly." (My underlining)
  39. These carefully articulated provisions do not admit of a construction which elides the buying of similar securities (the Second Issued Preference Shares in Blueborder) with the subscription and issue of those shares. The provisions relate to the purchase of shares, the transfer of a chose in action and not to the creation of a chose in action which is not in issue at the time of subscription and which only comes into existence following subscription on the issue of the shares by Blueborder. If Parliament had meant to include within the scope of the provisions a subscription for shares it would have said so.
  40. There was ample statutory and jurisprudential precedent to deploy if there had been any intention to include a subscription for shares. The draftsman knew how to draw the distinction between acquisition (by subscription) and purchase. Section 12 Finance Act 1937 became s.729 ICTA 1988, in force until ss.730A and 737A were introduced. It drew a clear distinction between buying and acquiring and buying back and re-acquiring. The relevant part reads:
  41. "12. (1) Where the owner of any securities….agrees to sell or transfer those securities, and by the same or a collateral agreement-
    (a) agrees to buy back or re-acquire the securities….
    (2) The references in the last forgoing subsection to buying back or re-acquiring similar securities shall be deemed to include references to buying or acquiring similar securities…."
  42. Nor could the draftsman have been unaware of the judgment of Lord Greene MR in Re VGM Holdings [1942] 1 Ch 235, 241
  43. "It seems to me that the word "purchase" cannot with propriety be applied to the legal transaction under which a person, by the machinery of application and allotment, becomes a shareholder in the company. He does not purchase anything when he does that. Mr Wynn Parry endeavoured heroically to establish the proposition that a share before issue was an existing article of property, that it was an existing bundle of rights which a shareholder could properly be said to be purchasing when he acquired it by subscription in the usual way. I am unable to accept that view. A share is a chose in action. A chose in action implies the existence of some person entitled to the rights which are rights in action as distinct from rights in possession, and, until the share is issued, no such person exists. Putting it in a nutshell, the difference between the issue of a share to a subscriber and the purchase of a share from an existing shareholder is the difference between the creation and the transfer of a chose in action. The two legal transactions of the creation of a chose in action and the purchase of a chose in action are quite different in conception and in result."
  44. Both the First-Tier and Upper Tribunals said the same thing. First Nationwide did not buy similar securities. I would dismiss the Revenue's appeal also on this ground.
  45. Mr Justice Briggs:

  46. I agree.
  47. Lord Justice Rix:

  48. I also agree.
  49. BR>

    Annex 1

    [5] Blueborder was a company incorporated and resident in the Cayman Islands. On 24 September 2003 Blueborder's authorised share capital was increased to £110,101, divided into 10,001 ordinary shares of a nominal value of £1 each and 100,100 redeemable preference shares with a nominal value of £1 each ('RPS'). On the same date it issued to its parent company, Blauwzoom nv ('Blauwzoom'), 1,050 ordinary shares and 50,050 RPS (the 'first issued preference shares') in each case at a premium of £999 each (ie an issue price of £1,000 per share). Blueborder accordingly raised £51,100,000 for the issue of its shares of which £51,100 represented the nominal value of the shares and £51,048,900 was share premium. The first issued preference shares were overseas securities as defined by para 1(1) of Sch 23A to the ICTA.

    [6] The dividend rights attaching to the first issued preference shares under Blueborder's articles, were:

    (a) The right to a dividend out of share premium of £509.49051 per share (£25,500,000 in total) on 29 December 2003 (the 'first preference dividend');

    (b) The right to a dividend out of share premium of £509.49051 per RPS (£25,500,000 in total) on 29 March 2004 (the 'second preference dividend' which together with the first preference dividend we refer to as 'the preference dividends');

    (c) Thereafter, the right to an annual dividend out of share premium of 1% of the paid up nominal amount per share accruing daily.

    [7] The redemption rights attaching to the first issued preference shares under Blueborder's articles, were:

    (a) The right to £1,022.8459 per share (£51,193,437 in total) plus an interest-based amount, if the first and second preference dividends had not been paid;

    (b) The right to £524.1996 per share (£26,236,189 in total) plus an interest-based amount, if the first preference dividend but not the second preference dividend had been paid;

    (c) The right to £19.98 per share (£999,999 in total) plus an interest-based amount, if both the first and the second preference dividends had been paid.

    [8] The rights to return of capital on a winding-up or otherwise attaching to the first issued preference shares (in priority to those attaching to the ordinary shares or any other class of shares), under Blueborder's articles, were the same in quantum as the redemption rights at [7], above.

    [9] The first issued preference shares were then used as follows:

    (a) On 24 September 2003 Blauwzoom lent the first issued preference shares to ABN AMRO under a stock lending agreement;

    (b) On 25 September 2003 ABN AMRO lent the first issued preference shares to First Nationwide under a stock lending agreement. First Nationwide paid to ABN AMRO a stock lending fee of £325,000. First Nationwide became the legal and beneficial owner of the first issued preference shares. But under the stock lending agreement, it was obliged to deliver shares of an identical type to ABN AMRO on 24 March 2004. It was also obliged, in relation to each dividend paid on the first issued preference shares, to pay a manufactured dividend to ABN AMRO;

    (c) On 29 September 2003 First Nationwide sold the first issued preference shares to Anglo Irish Bank for £50.3m, paid immediately to First Nationwide in cash;

    (d) On 29 December 2003 Blueborder duly paid the first preference dividend of £25,500,000 to Anglo Irish Bank, the then owner of the first issued preference shares (and the redemption rights and the rights to return of capital attaching to the first issued preference shares were reduced as described in [7](b), above);

    (e) Also on 29 December 2003, pursuant to its obligations under the stock lending agreement referred to at sub-para (b) above, First Nationwide paid to ABN AMRO a 'Manufactured Dividend' (as defined in the stock lending agreement) equal to the amount of the first preference dividend (£25,500,000);

    (f) On 29 March 2004 Blueborder duly paid the second preference dividend of £25,500,000 to Anglo Irish Bank (and the redemption rights and the rights to return of capital attaching to the first issued preference shares were reduced as described in [7](c), above); and

    (g) Also on 29 March 2004, pursuant to its obligations under the stock lending agreement referred to at sub-para (b) above, First Nationwide paid to ABN AMRO a 'Manufactured Dividend' (as defined in the stock lending agreement) equal to the amount of the second preference dividend (£25,500,000).

    [10] On 25 September 2003 First Nationwide and Blueborder entered into a subscription agreement requiring First Nationwide to subscribe by 29 March 2004 at latest for the unissued balance of 50,050 RPS (the 'second issued preference shares') created on 24 September 2003 (see [5], above), the subscription price being set by reference to a formula explained in the decision.

    [11] On 29 March 2004 First Nationwide subscribed for the second issued preference shares at the price of £1m under the agreement referred to at [10], above, and used them to repay to ABN AMRO the stock loan of the first issued preference shares by ABN AMRO (see [9](b), above).

    [12] At all material times, all of the issued ordinary shares in Blueborder were owned by Blauwzoom which was itself a subsidiary of ABN AMRO.

    [13] It was common ground that the legal mechanism of the payment of the first and second preference dividends took the form of payments which were dividends for the purposes of Cayman company law and that these dividends were declared and paid out of Blueborder's share premium account. Although HMRC did not (and does not) agree that this determines the nature of the payments for the purposes of the United Kingdom tax legislation, there was no dispute between the experts in Cayman law instructed by the respective parties that, as a matter of Cayman law, the payments were dividends: see [2010] SFTD 408 at [8].

    BR

    Annex 2

    730A(2)-(9)

    (2) The difference between the sale price and the repurchase price shall be treated for the purposes of the Tax Acts--

    (a) where the repurchase price is more than the sale price, as a payment of interest made by the repurchaser on a deemed loan from the interim holder of an amount equal to the sale price; and

    (b) where the sale price is more than the repurchase price, as a payment of interest made by the interim holder on a deemed loan from the repurchaser of an amount equal to the repurchase price.

    (3) Where any amount is deemed under subsection (2) above to be a payment of interest, that payment shall be deemed for the purposes of the Tax Acts to be one that becomes due at the time when the repurchase price becomes due and, accordingly, is treated as paid when that price is paid.

    (4) Where any amount is deemed under subsection (2) above to be a payment of interest, the repurchase price shall be treated for the purposes of the Tax Acts (other than the excepted provisions specified in subsection (4A) below) and (in cases where section 263A of the 1992 Act does not apply) for the purposes of the 1992 Act--

    (a) in a case falling within paragraph (a) of that subsection, as reduced by the amount of the deemed payment; and

    (b) in a case falling within paragraph (b) of that subsection, as increased by the amount of the deemed payment.

    This subsection is subject to subsection (4B) below.

    (4A) The exception provisions are--

    (a) this section,

    (b) section 730BB, apart from subsection (7),

    (c) section 737A; and

    (d) section 737C.

    (4) Where section 730BB(7) has effect (repurchase price to be treated as increased or reduced for certain purposes), subsection (4) above does not have effect for any purpose other than that of determining the amount that falls to be increased or reduced under section 730BB(7).

    (5) For the purposes of section 209(2)(d) and (da) any amount which is deemed under subsection (2)(a) above to be a payment of interest shall be deemed to be interest in respect of securities issued by the repurchaser and held by the interim holder.

    (5A) For the purposes of the Corporation Tax Acts, a company has a relationship to which this section applies in any case where--

    (a) the circumstances are set out in subsection (1) above; and

    (b) interest on a deemed loan is deemed by virtue of subsection (2) above to be paid by or to the company;

    and references to a relationship to which this section applies, and to a company's being party to such a relationship, shall be construed accordingly.

    (6) Where a company has a relationship to which this section applies--

    (a) Chapter 2 of Part 4 of the Finance Act 1996 (loan relationships) shall, as respects that company, have effect in relation to the interest deemed by virtue of subsection (2) above to be paid or received by the company under that relationship as it would have effect if it were interest under a loan relationship to which the company is a party,

    (b) the debits and credits falling to be brought into account for the purposes of that Chapter so far as they relate to the deemed interest shall be those given by the use in relation to the deemed interest of an authorised accruals basis of accounting, and

    (c) the only debits and credits to be brought into account for the purposes of that Chapter by virtue of this subsection in respect of a relationship are those relating to that deemed interest,

    and, subject to paragraphs (b) and (c) above, references in the Corporation Tax Acts to a loan relationship accordingly include a reference to a relationship to which this section applies.

    (6A) Any question whether debits or credits brought into account in accordance with subsection (6) above in relation to any company--

    (a) are to be brought into account under section 82(2) of the Finance Act 1996 (trading loan relationships), or

    (b) are to be treated as non-trading debits or credits,

    shall be determined (subject to Schedule 11 of that Act (insurance companies) according to the extent (if any) to which the company is party to the repurchase in the course of activities forming an integral part of a trade carried on by the company.

    (6B) To the extent that debits or credits fall to be brought into account by a company under section 82(2) of the Finance Act 1996 in the case of a relationship to which this section applies, the company shall be regarded for the purposes of Chapter 2 of Part 4 of that Act as being party to the relationship for the purposes of a trade carried on by the company.

    (7) The treasury may be regulations provide for any amount which is deemed under subsection (2) above to be received as a payment of interest to be treated, in such circumstances and to such extent as may be described in the regulations, as comprised in income that is eligible for relief from tax by virtue of section 438, 592(2), 608(2)(a), 613(4), 614(2), (3) or (4), 620(6) or 643(2).

    (8) Except where regulations under s737E otherwise provide, this section does not apply if-

    (a) the agreement or agreements under which provision is made for the sale and repurchase are not such as would be entered into by person dealing with each other at arm's length; or

    (b) all of the benefits and risks arising from fluctuations, before the repurchase takes place, in the market value of the securities sold accrue to, or fall on, the interim holder.

    (8A) In this section references to the sale price are to be construed--

    (a) in a case where the securities are brought back by the transferor or a person connected with him in compliance with a requirement imposed in consequence of the exercise of an option acquired under the agreement to sell the securities or any related agreement, as references to what would otherwise be the sale price plus the amount of any consideration given for the option, and

    (b) in case where the securities are so bought back in the exercise of an option so acquired, as references to what would otherwise be the sale price less the amount of any consideration so given,

    unless the consideration is brought into account under Schedule 26 to the Finance Act 2002 (derivative contracts).

    (9) In this section references to the repurchase price are to be construed--

    (a) in cases where section 737A applies, and

    (b) in cases where section 737A would apply if it were in force in relation to the securities in question,

    as references to the repurchase price which is or, as the case may be, would be applicable by virtue of section 737C(3)(b), (9) or (11)(c).

    730B(3)-(5)

    (3) In section 730A and this section 'securities' has the same meaning as in section 737A.

    (4) For the purposes of this section securities are similar if they entitle their holders--

    (a) to the same rights against the same persons as to capital, interest and dividends, and

    (b) to the same remedies for the enforcement of those rights,

    notwithstanding any difference in the total nominal amounts of the respective securities or in the form in which they are held or the manner in which they can be transferred.

    (5) Section 839 (connected persons) applies for the purposes of section 730A.

    737A. Sale and repurchase of securities: deemed manufactured payments.

    (1) This section applies where on or after the appointed day a person (the transferor) agrees to sell any securities, and the transferor or a person connected with him-

    (a) is required to buy them back in pursuance of an obligation imposed by, or in consequence of the exercise of an option acquired under, that agreement or any related agreement, or

    (b) acquires an option to buy them back under that agreement or any related agreement which he subsequently exercises;

    but this section does not apply unless either the conditions set out in subsection (2) below or the conditions set out in subsection (2A) below are fulfilled.

    (2) The first set of conditions referred to in subsection (1) above are that--

    (a) as a result of the transaction, a dividend which becomes payable in respect of the securities is receivable otherwise than by the transferor ...

    (c) there is no requirement under any agreement mentioned in subsection (1) above for a person to pay to the transferor on or before the relevant date an amount representative of the dividend, and

    (d) it is reasonable to assume that, in arriving at the repurchase price of the securities, account was taken of the fact that the dividend is receivable otherwise than by the transferor.

    (2A) The second set of conditions referred to in subsection (1) above are that-

    (a) a dividend which becomes payable in respect of the securities is receivable otherwise than by the transferor,

    (b) the transferor or a person connected with him is required under any agreement mentioned in subsection (1) above to make a payment representative of the dividend,

    (c) there is no requirement under any such agreement for a person to pay to the transferor on or before the relevant date an amount representative of the dividend, and

    (d) it is reasonable to assume that, in arriving at the repurchase price of the securities, account is taken of the circumstances referred to in paragraphs (a) to (c).

    (3) For the purposes of subsections (2) and (2A) above the relevant date is the date when the repurchase price of the securities becomes due.

    (4) Where it is a person connected with the transferor who is required to buy back the securities, or who acquires the option to buy them back, references in the following provisions of this section to the transferor shall be construed as references to the connected person.

    (5) Where this section applies...Schedule 23A and dividend manufacturing regulations shall apply as if-

    (a) the relevant person were required, under the arrangements for the transfer of the securities, to pay to the transferor an amount representative of the dividend mentioned in subsection (2)(a) or (2A)(a) above,

    (b) a payment were made by that person to the transferor in discharge of that requirement, and

    (c) the payment were made on the date when the repurchase price of the securities becomes due.

    (6) In subsection (5) above "the relevant person" means-

    (a) where subsection (1)(a) above applies, the person from whom the transferor is required to buy back the securities;

    (b) where subsection (1)(b) above applies, the person from whom the transferor has the right to buy back the securities;

    and in that subsection "dividend manufacturing regulations" means regulations under Schedule 23A (whenever made).'

    737B. Interpretation of section 737A

    (1) In section 737A and this section "securities" means United Kingdom equities, United Kingdom securities or overseas securities; and-

    (a) where the securities mentioned in section 737A(1) are United Kingdom securities, references in section 737A to a dividend shall be construed as references to a periodical payment of interest;

    (b) where the securities mentioned in section 737A(1) are overseas securities, references in section 737A to a dividend shall be construed as references to an overseas dividend.

    (2) In this section "United Kingdom equities", "United Kingdom securities", "overseas securities" and "overseas dividend" have the meanings given by paragraph 1(1) of Schedule 23A.

    (3) For the purposes of section 737A agreements are related if each is entered into in pursuance of the same arrangement (regardless of the date on which either agreement is entered into).

    (4) In section 737A "the repurchase price of the securities" means-

    (a) where subsection (1)(a) of that section applies, the amount which, under any agreement mentioned in section 737A(1), the transferor or connected person is required to pay for the securities bought back, or

    (b) where subsection (1)(b) of that section applies, the amount which under any such agreement the transferor or connected person is required, if he exercises the option, to pay for the securities bought back.

    (5) In section 737A and subsection (4) above references to buying back securities include references to buying similar securities.

    (6) For the purposes of subsection (5) above securities are similar if they entitle their holders to the same rights against the same persons as to capital and interest and the same remedies for the enforcement of those rights, notwithstanding any difference in the total nominal amounts of the respective securities or in the form in which they are held or the manner in which they can be transferred; and 'interest' here includes dividends.

    (7) For the purposes of section 737A and subsection (4) above-

    (a) a person who is connected with the transferor and is required to buy securities sold by the transferor shall be treated as being required to buy the securities back notwithstanding that it was not he who sold them, and

    (b) a person who is connected with the transferor and acquires an option to buy securities sold by the transferor shall be treated as acquiring an option to buy the securities back notwithstanding that it was not he who sold them.

    (8) Section 839 shall apply for the purposes of section 737A and this section.

    (9) In section 737A "the appointed day" means such day as the Treasury may by order appoint, and different days may be appointed in relation to-

    (a) United Kingdom equities,

    (b) United Kingdom securities, and

    (c) overseas securities.

    730A. Treatment of price differential on sale and repurchase of securities

    (1) Subject to subsection (8) below, this section applies where-

    (a) a person ('the original owner') has transferred any securities to another person ('the interim holder') under an agreement to sell them;

    (b) the original owner or a person connected with him--

    (i) is required to buy them back in pursuance of an obligation imposed by, or in consequence of the exercise of an option acquired under, that agreement or any related agreement, or

    (ii) acquires an option to buy them back under that agreement or any related agreement which he subsequently exercises; and

    (c) the sale price and the repurchase price are different.'

    730B. Interpretation of section 730A

    (1) For the purposes of section 730A agreements are related if they are entered into in pursuance of the same arrangement (regardless of the date on which either agreement is entered into).

    (2) References in section 730A to buying back securities-

    (a) shall include references to buying similar securities; and

    (b) in relation to a person connected with the original owner, shall include references to buying securities sold by the original owner or similar securities,

    notwithstanding (in each case) that the securities bought have not previously been held by the purchaser; and references in that section to repurchase or to a repurchaser shall be construed accordingly.


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