England and Wales Court of Appeal (Civil Division) Decisions

Case No: CHRVF99/0625-31/3

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION) FROM THE HIGH COURT

OF JUSTICE CHANCERY DIVISION (REVENUE)

Royal Courts of Justice

Strand, London, WC2A 2LL

Thursday 7 December 2000

LORD JUSTICE MUMMERY:

These are seven appeals from the Judgment of Laddie J on 24 May 1999. He affirmed the determinations of the General Commissioners on 16 January 1997 that the taxpayers were entitled to tax relief under section 289 of the Income and Corporation Taxes Act 1988 (the 1988 Act). He dismissed the Crown's appeals, but granted unconditional permission to appeal to this court. His Judgment is now reported in [1999] STC 661.

The dispute concerns the eligibility of the taxpayers for relief from income tax in respect of their investment in a Business Expansion Scheme (BES). The relevant provisions, which were contained in Chapter III of Part VII of the 1988 Act, have been repealed as respects shares issued after 31 December 1993. They have been replaced by a new form of relief in the provisions in the Finance Act 1994 establishing the Enterprise Investment Scheme.

The Facts

The appeals all involve the same essential facts. In 1993 the seven taxpayers, including Mr Andrew Billings, were partners in the same partnership. They applied for ordinary shares in a property company called Fernhead Homes Limited (the Company). They each held equal numbers of shares amounting in each case to just under 15% of the issued share capital of the Company and the voting rights. Collectively they owned 100% of the shares and voting rights in the company.

When they claimed tax relief under the provisions governing BES it was not in dispute that each taxpayer satisfied certain of the relief requirements in section 291 (1): each had subscribed for the eligible shares in a qualifying company on his own behalf and was resident and ordinarily resident in the UK at the time when the shares were issued. Tax relief was, however, refused on the ground that in the relevant period the taxpayers did not qualify for relief as they were "connected with" the Company and did not therefore satisfy the qualifying condition for relief contained in section 291 (1) (c) of the 1988 Act.

The Statutory Provisions

Subsections (2)-(10) of section 291 set out various circumstances in which a person is or, as the case may be, is to be regarded as, "connected with" the company. In general terms it is possible to describe those who fall within the "connected with" provisions as people who already have, or come to acquire, a stake in the well being of the company, as director or employee, or a significant degree of ownership of the company. The definition of individuals who are "connected with" the company is expanded by the introduction of references to "associates" of those individuals connected with the company. Thus,

"(2) An individual is connected with the company if he, or an associate of his, is-

(a) an employee of the company or of a partner of the company;

(b) a partner of the company; or

(c) subject to subsection (3) below, a director of the company or of another company which is a partner of that company."

Subsection (3) provides that an individual, or an associate of his, who is a director is not connected with the company in the circumstances which are specified. They are not material to this case.

"(4) An individual is connected with the company if he directly or indirectly possesses or is entitled to acquire more than 30% of-

(a) the issued ordinary share capital of the company; or

(b) the loan capital and issued share capital of the company; or

(c) the voting power of the company."

Subsection (5) contains provisions concerning the treatment of certain debts incurred by the company as included in the loan capital. They are not material.

"(6) An individual is connected with the company if he directly or indirectly possesses or is entitled to acquire such rights as would, in the event of the winding up of the company or in any other circumstances, entitle him to receive more than 30 % of the assets of the company which would then be available for distribution to equity holders of the company..."

The remainder of that subsection is concerned with the determination of who are the equity holders of the company and of the percentage of the assets of the company to which the individual would be entitled.

"(7) An individual is connected with a company if he has control of it within the meaning of section 840."

The critical provisions are in subsection (8).

" For the purposes of this section an individual shall be treated as entitled to acquire anything which he is entitled to acquire at a future date or will at a future date be entitled to acquire, and there shall be attributed to any person any rights or powers of any other person who is an associate of his."

The Issue

The General Commissioners and the judge accepted the taxpayers' contention that none of them were "connected with" the Company within the meaning of those provisions, as each of them possessed less than the upper limit of 30 % of the issued share capital of the Company set by section 291 (4) (a).

The Crown appeals on a short (but by no means easy) point of statutory construction. It contends that each of the taxpayers is "connected with" the company. Although each of them only directly possesses under 30% of the issued ordinary share capital of the company, it is accepted that, by reason of the interpretation provisions in section 312 (1) of the 1988 Act, each taxpayer is an "associate" of the other within the wide definition of that term in section 417(3) of the 1988 Act. In those circumstances subsection (8) applies. That has the effect of attributing to each individual shareholder of the Company "any rights or powers of any other person who is an associate of his."

The result is that each individual taxpayer is treated as directly possessing more than 30 % of the issued ordinary share capital of the company and is therefore "connected with" the company. On this view none of the individuals would qualify for relief.

Laddie J rejected this construction. He preferred the taxpayers' contention that the application of the "attribution " provisions in the latter part of the subsection is confined to expanding the ambit of those cases of entitlement specified in the preceding part of the subsection. He held that they do not apply outside the subsection, for example, to the cases of direct or indirect possession of share capital, loan capital or voting power in the company specified in subsection (4).

The Legal Position.

In my judgment this appeal should be allowed as the individual taxpayers have not brought themselves within provisions governing the qualifications for tax relief. Although the excellent arguments of Mr Michael Furness QC, on behalf of the Crown, and Mr Sokol, on behalf of the taxpayers, were developed in detail, I can briefly state my conclusions on the legal position.

(1) The ordinary and natural effect of the opening words of subsection (8) - "For the purposes of this section"- is that they govern the whole of the subsection. They make both parts of it potentially relevant to the operation of other subsections of the section. The effect of the taxpayer's "conjunctive" construction of the two parts is that the latter part of the subsection is to be read as if it were separately governed by words which are not there i.e." and for the purposes of this subsection."

(2) I agree that the first part of subsection (8) does not apply to the facts of this case. The taxpayers directly possess their shares within the meaning of subsection (4). This is not a case of individuals being "entitled to acquire" shares in the company now or becoming entitled to acquire shares in the company at some time in the future. In those circumstances the taxpayers contend that the whole of subsection (8) is irrelevant to their case.

(3) It does not follow, however, from the inapplicability of the first part of subsection (8), that the latter part of subsection (8) is also inapplicable to this case. In the absence of express words confining its operation to the preceding part of the subsection and in the absence of any grounds for the necessary implication of a restriction to that effect, the latter part is to be construed as governed by the plain opening words of (8). It is therefore available for the construction of other parts of section 291, such as section 291 (4) , (6) and (7).

(4) If, as I hold, the latter part of subsection (8) is available for the construction of subsection (4), then it follows that there is attributed to each individual in this case the rights of "any other person who is an associate of his."As all the shareholders in the company are conceded to be associates of each other, all of them are treated as possessing more than 30 %(i.e.100%) and fail to qualify for relief.

(5) In this connection I would reject Mr Sokol's further point that section 6 (c) of the Interpretation Act 1978 ("words in the singular include the plural and words in the plural include the singular") is displaced by a contrary intention in the latter part of subsection (8), so that the expression " any other person " is to be read in the singular as if it had said "one other person." On this construction the latter part of subsection (8) produces an aggregation with only one associate. The result is that the 30 % limit set in subsection (4) would not be exceeded in this case by the aggregation of the rights of only two individuals. In my judgment, however, there is nothing in the language and the context or in the purpose which these provisions seek to achieve requiring the court to find a contrary intention and to disapply the rules of interpretation in the 1978 Act.

(6) In addition to these linguistic considerations I am persuaded that the construction of subsection (8) proposed by the Crown is more consistent with the evident purpose of section 291 in disqualifying from tax relief persons connected with the Company. It is, of course, true that the overall purpose of the BES is to encourage investors in qualifying companies by offering tax relief. There are, however, express limitations placed on the availability of relief in cases of significant personal, contractual, financial or investment connections of individuals (and their associates) with the company. The tax incentive is aimed at the "outside " investor. A substantial objection to the taxpayers' construction of subsection (8) is that, having due regard to the aim of the provisions, it is difficult to discern what sensible purpose would be served in, on the one hand, applying the "attribution " of associates provisions to cases of present or future entitlement of the taxpayer to acquire shares or voting powers in the company, but not, on the other hand, applying them to cases of a taxpayer's present direct or indirect possession of shares or voting powers in the company.

(7) Mr Sokol, for the taxpayers, referred the court to examples of how the subsection could have been differently drafted if Parliament had intended the latter part of the subsection to operate disjunctively and to apply outside the subsection. For example, in section 228 of the 1988 Act, which is concerned with "connected persons", the equivalent of the first part of subsection (8) is to be found in subsection (7), while the equivalent to the latter part of subsection (8) is to be found in a separate subsection (8) of section 228 preceded by the words "For the purposes of this section." That, he contended, is what the Parliamentary draftsman would have done in this case if it really was intended that the latter part should apply to more than the immediately preceding part of the subsection. Reference was also made to the drafting in other parts of the 1988 Act (see sections 416(4) and (6) and section 292 (3) (b)) and, more boldly, to the drafting of the later legislation governing the 1994 Enterprise Investment Scheme. These variants in drafting form and style (and others cited in the judgment of Laddie J) are insufficiently cogent indicators of a legislative intention to counter the plain meaning of the language of subsection (8), as reinforced by the evident purpose of the qualifying provisions in section 291 relating to individuals "connected with" the company. There are problematic cases of statutory construction in which it can certainly be said that the provisions could have been drafted differently and could have been expressed more clearly if it had been intended that the provisions should bear the meaning proposed. But the shades and subtleties of our "rich and delicate language " are such that the court should be cautious of attributing too much significance to that type of argument.

(8) Mr Sokol also invoked the advocate's technique, often ingeniously indulged in legal argument in revenue cases, of proposing hypothetical cases in which, on the Crown's construction, it would be surprising to find that BES tax relief was not available. There was deep discussion of the effect of the Crown's construction on the unavailability of this form of tax relief for partners in partnerships of global dimensions and, closer to home, for husbands and wives who had separately subscribed for shares issued in accordance with a BES. But Mr Furness, for the Crown, was also able to identify some surprising consequences of the taxpayers' construction. The fact is that the mind stretching exercise of attempting to balance the forces of competing anomalies is rarely a sound method of construing fiscal legislation.

I would allow these appeals, set aside the order of the judge and affirm the refusal of relief under section 289 (1) of the 1988 Act.

LORD JUSTICE WARD:

Having read the judgment of Laddie J. now reported as Cook (Inspector of Taxes) v Billings and Related Appeals [1999] STC 661 and having read the skeleton arguments, I started the appeal with two impressions, firstly, that the point at issue was not at all easy, but, secondly, that the views of the General Commissioners and the judge seemed quite convincing.

Having heard the argument and now having read in draft the judgment of Mummery L.J., I find the point even more difficult and so the judgments below need anxious scrutiny.

The question is one as to the proper interpretation of section 291(8) of the Income and Corporation Taxes Act 1988. It is convenient to repeat it:-

"(8) For the purposes of this section an individual shall be treated as entitled to acquire anything which he is entitled to acquire at a future date or will at a future date be entitled to acquire, and there shall be attributed to any person any rights or powers of any other person who is an associate of his."

The question is whether this is a single provision with two connected parts, as the taxpayer contends, or whether there are two quite separate unrelated parts to it, as the Revenue contend.

I see at once the force of the Revenue's argument that the language emphasises the difference in the subject matter and the lack of relation between the two parts of the subsection. The first part relates to "an individual" yet the second part attributes rights and powers "to any person". If there were an easy relationship between the two parts suggesting that they were parts of a single provision, then, submits Mr Furness Q.C. for the Revenue, one would have expected "individual" to have been used throughout. Mr Sokol meets that argument by asserting that the difference might well be deliberate and that the purpose behind the use of "any person" was to give width to the subsection so that it covered not only natural persons, the individuals concerned, but also non-natural persons such as a trust company. That may be so but for my part I simply cannot be sure what the purpose of the distinction is. As a result I am not wholly persuaded by Mr Sokol's argument. There is, however, another unsatisfactory feature about the Revenue's argument. If the "individual" and the "person" make unlikely bed-fellows when cast together in subsection (8), why do they not lie equally uncomfortably together when the "person" is transposed into subsection (4) to qualify the "individual" there? No clear answer seems to emerge from the use of language in subsection (8) and a linguistic approach to construction does not seem to me to resolve the uncertainty.

Like Laddie J. and the General Commissioners, I find the structure and grammar of subsection (8) give a much better clue to its meaning. The point is the simple one. If subsection (8) is comprised of two quite separate parts as the Revenue contends, why on earth did the draftsman not say so? He can make himself clear when he wants to be precise. Two examples will suffice to make this point. One is in subsection (6) of the very same section. That reads:-

"(6) An individual is connected with the company if he directly or indirectly possesses ... and for the purposes of this subsection -

(a) the persons who are equity holders of the company, and

(b) the percentage of the assets of the company to which the individual would be entitled,

shall be determined in accordance with ..."(emphasis added.)

Here (a) and (b) are separate provisions and each applies for the purposes of that subsection. The second example makes the point even more clearly. In an earlier part of the Act, section 228 was concerned with "connected persons". It is along lines very similar indeed to section 291. But it concludes:-

"(7) For the purposes of this section a person shall be treated as entitled to acquire anything which he is entitled to acquire at a future date or will at a future date be entitled to acquire.

(8) For the purposes of this section a person shall be assumed to have the rights and powers of his associates as well as his own."

When the legislature wants to make it plain that it has in mind two separate provisions, then conventional drafting can make that clear. That easy technique was not adopted for subsection 291(8). It drives me to the conclusion that the draftsman did not mean the subsection to be read as if it were in two parts. When one observes that there is no comma, no semi-colon, or (the more usual parliamentary punctuation) no dash after the words "for the purposes of this section", then one would expect what follows to be a unified provision albeit in related parts. That is the taxpayer's contention. That sort of punctuation is used throughout section 291. Look at subsection (1):-

"... qualifies for relief if he -

(a) .....

(b) ..." etc.

So too in subsection (4) with which we are directly concerned:-

"(4) ... entitled to acquire more than 30 per cent of -

(a) ...; or

(b) ..." etc.

The punctuation persuades me that the taxpayer is right.

No one in the case pretends the meaning is crystal clear. If there is ambiguity, one might resort to a purposive construction. That is no help to me because I cannot divine a single purpose which clears up any ambiguity. The Revenue argue that the purpose is to prevent a partnership as existed between these taxpayers being converted into a company in which the former partners subscribe for eligible shares and, hey presto, get tax relief. I can well understand why the Inland Revenue is not particularly happy about that. I am quite prepared to accept that the Inspector would not be best pleased to give relief in those circumstances. The problem is that his misery is not necessarily a test to establish what the purpose, as a aid to construction, actually is.

I find it easier to accept Mr Furness' identification of the purpose to be as he set it out in his skeleton argument, namely, "to limit BES relief to persons who invest in the company but who do not have a significant personal or financial connection with it. In other words, the BES is there to attract outside investment, not to give tax relief for investment which might have happened anyway". The problem Mr Furness has to confront is that if the construction of subsection (8) for which he contends in order to eradicate the perceived evil of the appellants' transforming their partnership into a company in which they then invest is the correct construction, then it also has the effect that tax relief has to be denied to many others whose investment may fall squarely within the beneficial purpose of the scheme he identifies. His construction would have the consequence of excluding relief in the very cases where one would have thought tax relief was fully justified. I put to him the example of a husband and wife, each separate taxpayers, reading the money pages of their newspaper and seeing an invitation to subscribe for shares in the newest high technology "dot.com" company inviting investment of £250,000 to exploit the ideas of the newest computer wizard, a person quite unknown to them and with whom they could have absolutely no connection. They invest £40,000 each. Each has, therefore, a 16% shareholding in the company. On the Inland Revenue's construction of subsections 291(4) read with 291(8) the shareholding of their spouse is attributed to them and they have no tax relief. If the fact of collaboration of a husband and wife were thought to be reprehensible, then one can take the example of a father and son, who each have no idea of the investments the other is making, but who find five years after they have invested in the same BES scheme that subsection (8) denies them all the relief they have enjoyed over those years. Why do they not meet Mr Furness' purpose for this part of the tax system? I find that pretty bizarre that such an ordinary investor be denied relief.

The other consequence of the Revenue's interpretation is that it must be applied not only to subsection (4) but also to the whole of section 291 because the opening words are: "For the purposes of this section ...". Since, for example, subsection (2) provides that an individual is connected with the company if he or an associate of his is an employee of the company or of a partner of the company, then the application of the second part of subsection (8) expands it to embrace an associate of an associate. The result is that individuals are connected with the company when a million miles removed from the seat of power. That again seems a pretty bizarre extension of connected persons going far beyond parliament's "clear" object which Mr Furness elsewhere describes as being "BES relief is not to be available to people who already have, or come to acquire, either a significant measure of ownership of the company or a stake in its financial well being (e. g. as an employee or paid director)." Since the draftsman included "associates" in subsections (2) and (3) and excluded them in subsections (4), (6) and (7), it might be thought that he intended to make that difference, especially since he went on to widen the ambit of subsections (4) and (6) to "indirect" possession or entitlement.

Conclusions

Since I know that Otton L.J. will agree with Mummery L.J. and since the language is so reasonably capable of different views being taken of it - as the present two-all split between the Commissioners and Laddie J. on the one hand and my Lords on the other demonstates - I could, following Lord Steyn in Cadogan Estates v McMahon [2000] 3 WLR 1555, 1557H, persuade myself that "it is not every disagreement with a majority view which must be pressed to dissent", and so go quietly in reluctant agreement with my Lords. I am very tempted to do that, but since I happen to think that the Commissioners and Laddie J. were right for the reasons I have given - though it is by a very fine margin - then I should support them. If it were left to me I would dismiss the appeal.

LORD JUSTICE OTTON:

I have had the advantage of reading the draft judgments of Ward and Mummery LJJ. I have come to the conclusion that while recognising the approach and reasoning of the former I prefer to follow that of the latter.

The object of the BES Scheme is to encourage people who are not connected with a company to invest in it, thus making it easier for companies to attract capital investment from outside sources. A primary feature of the scheme is that a person who already has, or acquires, a significant measure of ownership of the company, or who is a paid director or employee cannot participate in the scheme, during the relevant period.

The sole issue to be determined is whether the taxpayers who participated in this particular scheme were `connected with' the company during the relevant period (as defined). If not, they qualify for tax relief under s.291 of the Income & Corporation Taxes Act 1988 Chapter III of Part VII. During the relevant period each respondent owned 1/7th of the ordinary share capital and collectively owned 100%. The respondents accept that as partners in the same partnership, they were all `associates' as defined by section 312 by reference to the definition in section 417(3) and (4).

The Judge (and the Commissioners) found that none of the taxpayers was `connected with' the company within the meaning of s.292(2)(4)(6) and (7) as each possessed less than 30% of the issued capital. The judge affirmed the Commissioners' conclusion that the taxpayers were entitled to tax relief under section 289 of the Act.

The appellant contends that each taxpayer is `connected with' the company by virtue of sub-section (8) which provides :

"For the purposes of this section an individual shall be treated as entitled to acquire anything which he is entitled to acquire at a future date or will at a future date be entitled to acquire, and there shall be attributed to any person any rights or powers of any other person who is an associate of his."

Put simply it is submitted that the effect of the words after the comma is that each taxpayer is an `associate' to whom is attributed any rights or powers of any other person who is an associate. Accordingly each taxpayer `directly possesses more than 30% of the issued ordinary share capital' (see sub-section (4)(iv)(a)) and does not qualify for relief.

Laddie J. while recognising that the sub-section fell into two parts accepted the submission on behalf of the taxpayers that the second part `merely qualifies the first.' As a result the second part of the sub-section comes into play whenever a taxpayer is entitled to acquire shares at a future date as envisaged in the first part of the sub-section. The initial subscription of capital will be aggregated with any future acquisition for the purposes of sub-section (4). None of the taxpayers was ever entitled to acquire shares on a future date and the second part never applied to them. As each owned less than 30% of the share capital all are entitled to relief.

My initial difficulty stems from the juxtaposition of `individual' and `person' within the same short sub-section. Given the recognition by the Revenue that the shares were subscribed for a bona fide commercial purpose and not as part of a tax avoidance scheme the effect of the subsection contended for by the Crown has a catastrophic effect on these individuals. One could have wished that the draftsman had spelt out this effect in less elliptical terms, and I agree with Ward LJ that it would have been possible to do so.

However the sub-section must be construed within the arcane context of Revenue law. `Individual' and `person' have separate distinct and technical meanings, the latter accommodating the effect of a trust within the meaning of an `associate' (see s.417(3)(b)). This distinction enhances the argument that the sub-section must be read in two parts. To my mind the words before and after the comma read more naturally as two separate provisions, rather than two parts of a single provision the latter qualifying the former, but each part applying `for the purposes of this section.'

As to the first part, I doubt if these taxpayers are within its ambit. They are not and never have been now or in the future "entitled to acquire" shares in the company. They possess their shares `directly' within sub-section (4). If this be correct it undermines Mr Sokol's argument that there is "conjunction" or "subordination" between the two parts. It follows that with the first part stripped out we are only concerned with a deeming provision which reads :

"For the purpose of this section ... there shall be attributed to any person any rights or powers of any other person who is an associate of his."

Sub-sections (4),(6) and (7) provide for the exclusion of relief by reference to an individual's ownership etc. of the company. The deeming provision does not attach to sub-section (2) and would be redundant if it did. By attributing to an individual (or person) the rights and powers of his associate a major shareholder is prevented from obtaining the relief. Similarly, it is impossible for a group of associated individuals who form a company to carry on their own business to obtain tax relief for doing so.

On this analysis, I am satisfied that sub-section (4) when read to include the deeming provision together with the respondents' recognition that shareholders are associates of each other has the effect of treating all and each of them as possessing more than 30% (indeed 100%) of the issued capital and precludes them from obtaining relief.

Finally, I am unable to accept Mr Sokol's theoretical (albeit interesting) examples and consequences which follow from each `sides' contended for construction, and which he claims support that on behalf of the taxpayers. In my judgment the purposive approach he advocates to cure apparent anomalies must give way to the literal and linguistic interpretation of a Revenue Act, particularly when the anomalies if so cured would frustrate and erode the primary object and feature of the BES Scheme.