England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE LINDSAY)
CH/2006/APP/0838

		Royal Courts of Justice Strand, London, WC2A 2LL
		23rd July 2008

Sir John Chadwick :

1. This is an appeal from an order made on 15 March 2007 by Mr Justice Lindsay on an appeal from the decision of the Special Commissioners (Mr John Clark, sitting alone) released on 9 October 2006. The issue between the parties turns on the true construction of section 179(2) of the Taxation of Chargeable Gains Act 1992 ("TCGA 1992").

The statutory framework

2. In order to set the issue in context it is necessary to describe the statutory provisions which determine the charge to corporation tax on gains accruing on transfers between associated companies. Those provisions are contained within Chapter I ("Companies") of Part VI ("Companies, Oil, Insurance Etc") of TCGA 1992. The underlying principle is set out in section 171(1) of the Act:

"171(1)     Notwithstanding any provision in this Act fixing the amount of the consideration deemed to be received on a disposal or given on an acquisition, where a member of a group of companies disposes of an asset to another member of the group, both members shall, except as provided by subsections (2) and (3) below, be treated, so far as relates to corporation tax on chargeable gains, as if the asset acquired by the member to whom the disposal is made were acquired for a consideration of such amount as would secure that on the other's disposal neither a gain nor a loss would accrue to that other; …"

3. The policy upon which that principle (commonly known as the "in-group rule") is based was explained by Mr Justice Hoffmann in Westcott (Inspector of Taxes) v Woolcombers Ltd [1986] STC 182, 190:

"The policy of para 2(1) of Schedule 13 [of the Finance Act 1965]" - the precursor of section 171 TCGA 1992 – "is to recognise that in the case of transactions between members of a group of companies, the legal theory that each company is a separate entity does not accord with economic reality. It gives effect to that policy by, broadly speaking, ignoring transactions within the group, computing the gain as the difference between the consideration given when an asset was acquired by the group and the consideration received when it left the group, and charging the tax on whichever company made the outward disposal. . . . Thus all the provisions with which we have been concerned are directed to neutralising the tax effects of transactions which are disposals in legal theory but not in real life".

4. As Mr Justice Millett pointed out, in NAP Holdings UK Ltd v Whittles (Inspector of Taxes) [1992] STC 59, 64c-d, it became apparent to the Revenue that, following the enactment of the Finance Act 1965, the in-group rule provided an opportunity to postpone liability for tax on gains by what became known as the "envelope" scheme:

". . . A company, owning an asset (other than shares) which has appreciated in value, wishes to sell it. The company incorporates a subsidiary and transfers the asset to it (no chargeable gain) in return for an issue of the subsidiary's shares (not a disposal: those shares have an acquisition cost reflecting the current value of the asset). The company then sells the shares in the subsidiary for their current market value (no chargeable gain). Thus, the company which has actually realised the gain is not charged at all; and the taxability of the gain is postponed until the purchaser of the subsidiary's shares sells the asset (to which the original low base cost still attaches). That may never happen."

He explained (ibid, 64g) that the provisions enacted as section 278 of the Income and Corporation Taxes Act 1970 (introduced by section 34 of, and paragraph 18 of schedule 12 to, the Finance Act 1968: and now re-enacted in section 179 TCGA 1992) were a response to schemes of that nature.

5. Section 179 TCGA 1992 (at the date relevant to these proceedings) was in these terms, so far as material:

"179(1)      If a company ('the chargeable company') ceases to be a member of a group of companies, this section shall have effect as respects any asset which the chargeable company acquired from another company which was at the time of acquisition a member of that group of companies, but only if the time of acquisition fell within the period of 6 years ending with the time when the company ceases to be a member of the group; . . .

(2)      Where 2 or more associated companies cease to be members of the group at the same time, subsection (1) above shall not have effect as respects an acquisition by one from another of those associated companies.

(3)      If, when the chargeable company ceases to be a member of the group, the chargeable company, or an associated company also leaving the group, owns, otherwise than as trading stock—

(a)     the asset, . . .

then, subject to subsection (4) below, the chargeable company shall be treated for all the purposes of this Act as if immediately after its acquisition of the asset it had sold, and immediately reacquired, the asset at market value at that time.

For the purposes of section 179 TCGA 1992 two or more companies are "associated companies" if, by themselves, they would form a group of companies: section 179(10). Section 170(3) – read with sections 170(4) to (6) – applies for the purpose of determining when two or more companies would form a group of companies.

6. As I have said, the provisions of section 179 TCGA 1992 were introduced in 1968 as a response to envelope schemes of the nature described by Mr Justice Millett in the NAP Holdings case. The effect of those provisions (ignoring, for the moment, section 179(2)) is to impose an "exit charge" when the group company which has acquired the asset leaves the group. So, in the envelope scheme described by Mr Justice Millett, when the subsidiary to which the asset has been transferred by a fellow group company leaves the group on the sale of its shares to a third party purchaser, it will be treated as having realised a gain (representing the difference between the deemed acquisition cost under section 171(1) and the market value at the time of acquisition) which will (prima facie) give rise to an immediate tax liability. The third party purchaser of the subsidiary's shares will not be able to postpone that liability until it sells the asset.
7. When introduced as paragraph 18(1), schedule 12, Finance Act 1968, the provisions now enacted as section 179(1) TCGA 1992 were subject to the proviso now enacted as section 179(2) TCGA 1992. In a case where two or more associated companies cease to be members of the group at the same time there is no exit charge "as respects an acquisition by one from another of those associated companies". The issue between the parties is whether – in the case where, following the acquisition of an asset by one group company (say, company A) from another group company (company B), both company A and company B leave the group at the same time - it is enough, for the purposes of section 179(2) TCGA 1992 and its predecessors, that company A and company B are associated companies at the time when they leave the group (as the appellants contend) or whether it is necessary, also, that company A and company B were associated companies at the time of the acquisition (as the Revenue contends).
8. The issue arises because companies which are members of the same group are not, necessarily, "associated companies" within the meaning given to that expression by section 179(10) TCGA 1992. Companies will be associated companies for the purposes of section 179 if, but only if, by themselves, they would form a group of companies. That condition will not be met in a case where (for example) company A and company B are each 75 per cent subsidiaries of a third company (company C), but neither company A nor company B is a subsidiary of the other: section 170(3) TCGA 1992. By contrast, the condition would be met in a case where (for example) company A was a 75 per cent subsidiary of company B, notwithstanding that company B was a 75 per cent subsidiary of company C.

The underlying facts

9. The facts which have given rise to the issue in these proceedings are set out fully at paragraphs 4 to 14 of the special commissioner's decision, [2006] UKSPC 00564. Those facts are not in dispute. It is sufficient, for the purposes of this judgment, to adopt (as I do, with gratitude) the summary at paragraphs [4] and [5] of the judgment of Mr Justice Lindsay, [2007] EWHC 512 (Ch):

"[4] . . . on 7^th July 1997 UPNH [the appellant, Johnson Publishing (North) Limited, then known as UPNH Limited] became a member of the UNM Group by way of being a wholly owned subsidiary of UNMG [United News & Media Group Limited], a member of that Group. On the same day, but after UNMG had been registered as the shareholder of UPNH, UPNH made a rights issue to UNMG in return for £314,700,000. Then another member of the UNM Group, UPN [United Provincial Newspapers Limited], which owned a number of operating subsidiaries, offered to sell the share capital in those subsidiaries to UPNH. That was stage 1. Then, still on 7^th July 1997, UPNH agreed to buy UPN's shares in those operating subsidiaries for £310,000,000. Still on that busy day, UPNH became registered holder of those shares and paid UPN that price. That was stage 2. At neither stage 1 nor stage 2 were UPN and UPNH such that they were themselves then 'associated' (within the meaning of section 179(10)). However, as UPN and UPNH were members of the same UNM Group, that transfer, being an intra-group dealing, was treated, pursuant to section 171 TCGA 1992, as for a consideration that gave rise neither to a gain or a loss to UPN. Yet later on 7^th July 1997, UPN, by now replete with the purchase money paid to it for the sale of its operating subsidiaries to UPNH, paid a dividend of £280,000,000 out of its distributable profits to its parent, URN [United Regional Newspapers Limited], another member of the UNM Group. Plainly the value of UPN was thereby diminished. Then, still on 7^th July 1997, UPNH bought URN's holding in UPN for £4,700,000. UPNH was registered as owner of the whole issued share capital in UPN. UPN, by way of being owned by UPNH, was still at this stage in the UNM Group. The disposition of shares in UPN from URN to UPNH – stage 3 – was another intra-group dealing at, for tax purposes, neither gain nor loss to URN.

[5] So much for the 7^th July 1997. The next stage – stage 4 – occurred on 27^th February 1998 when UNMG sold the whole share capital in UPNH for, in all, £365,897,000 to a company in a wholly unrelated group. At that stage, stage 4, UPNH ceased to be a member of the UNM Group. At the same time, UPN, as a subsidiary of UPNH, also ceased to be a member of the UNM Group but, by then, UPNH and UPN (and other subsidiaries of UPNH) were together such as to be 'associated' within section 179(10). . . ."

10. It is important to have in mind, as the judge noted, (i) that, at the time when UPNH acquired the relevant asset (the shares in the operating subsidiaries) from UPN, the two companies, although members of the same group (the UNM group), were not associated companies within the meaning of section 179(10) TCGA 1992; and (ii) that, at the time when UPNH and UPN ceased to be members of the UNM group, they were associated companies. On the agreed facts UPNH and UPN became associated companies when, on the same day as UPNH acquired the relevant asset from UPN (7 July 1997) for a consideration of £310,000,000, but after that acquisition had taken place, UPNH acquired the whole issued share capital of UPN from URN for a consideration of £4,700,000. UPN then became the wholly owned subsidiary of UPNH; and that remained the position when (on 27 February 1998) UPNH and its subsidiary UPN were sold out of the UNM group.
11. On 1 March 2004 an assessment in the amount of £280,000,000 was raised on UPNH. The assessment was based on the gain on the re-acquisition of the shares in the operating companies which, when UPNH left the UNM group on 27 February 1998, UPNH was deemed, under the provisions of section 179(1) TCGA 1992, to have made on 7 July 1997. The amount of the gain has not been agreed between the parties; that has been left to await the final outcome of UPNH's appeal against the assessment.

The appeal to the Special Commissioners

12. The special commissioner dismissed the appeal. He held (at paragraph 102 of his decision) that as a result of the sale out of the UNM group in February 1998 "a chargeable gain accrued to UPNH Ltd under s 179 in respect of the assets previously acquired by it from UPN Ltd by way of an intra-group transfer".
13. The special commissioner – correctly, in my view – treated the issue before him as "purely one of statutory construction": paragraph 74 of his decision. But he reminded himself that, in construing section 179(2) TCGA 1992, it was necessary to keep in mind the context in which it was enacted: section 179 was "a provision aimed at counteracting avoidance". It had been introduced "to prevent groups of companies from taking inappropriate advantage of the intra-group transfer exemption contained in s 171". Section 179(2) provided "an exemption from the anti-avoidance degrouping charge under s 179(3)". The question was as to the extent of that latter exemption.
14. The special commissioner went on, at paragraphs 83 to 86 of his decision, to set out what he understood to be the policy underlying the relevant statutory provisions. He said this:

"83 . . . The simple case of a transfer of an asset from one group member to another, followed by the latter leaving the group, clearly falls within the s 179 charging provisions; the asset has been transferred without any liability falling on the transferor, so that in the absence of s 179, the tax charge in respect of the asset would be deferred until the transferee disposed of it. The s 179 charge falls on the transferee; it has no effect on any normal tax charge falling on the company selling the transferee (in a case where the transferee leaves the group as a result of its parent selling the shares in it to an independent third party). . . .

. . .

85 On the sale of [a] sub-group in the open market, the price paid to the seller will be a proper open market price recognising the total value of the sub-group. Transfers which have taken place within this entity over the previous six years will not affect that value (except possibly to the extent that contingent future tax liabilities within members of the sub-group may have to be taken into account by the purchaser). Thus there is no need for a s 179 charge to be imposed in respect of any transfers made within the sub-group, and accordingly s 179(2) exempts such transfers.

86 In a case where the transferor and transferee, although members of the overall group, are not members of the same sub-group at the time of the intra-group transfer (ie they are not 'associated' at that time), the disposal of the asset is protected as an intra-group disposal because both companies are members of the overall group. If a sub-group is created or enlarged by putting those two companies into it after the intra-group transfer has taken place, that transfer has inflated the value of the sub-group (in the same way as, in the simple s 179 case above, the value of the transferee company has been inflated by the protected intra-group transfer). It follows that, if the language of s 179(2) is capable of being so construed, it should afford protection from the s 179 charge in a case where the transferor and transferee were associated at the time of the intra-group transfer, but should not provide such protection where the associated company status only began at some point after the intra-group transfer had taken place."

The special commissioner recognised (at paragraph 84) that the concept of a "sub-group" was not made explicit in the legislation: but, as he observed, the expression was a convenient shorthand for a collection of companies which fell within the definition of "associated companies" in s 179(10)(a) TCGA 1992.

15. The question, therefore, was whether section 179(2) TCGA 1992 was capable of being construed so as to afford protection from the s 179 charge in a case where the transferor and transferee were associated at the time of the intra-group transfer, but not to provide such protection where the associated company status only began at some point after the intra-group transfer had taken place. As the special commissioner observed, section 179(2) contained two limbs: it provided that section 179(1) was not to have effect [1] "Where 2 or more associated companies cease to be members of the group at the same time" and [2] "as respects an acquisition by one from another of those associated companies". The two limbs were separated by a comma. The answer to the question posed turned on the meaning to be given to the second limb of the section: did that limb require that the transferor and transferee companies were "associated companies" at the time of the acquisition. In particular, the answer turned on the purpose for which the word "associated" had been included in the second limb. He pointed out (at paragraph 89 of the decision) that "The sub-section would work in the same way as [the appellant] contends if the word were to be omitted from the phrase; the companies have been described as 'associated' at the beginning of the sub-section, so why did the draftsman see it as necessary to use the word again?". An explanation was needed for the inclusion of the word "associated" in the second limb of section 179(2).
16. The special commissioner rejected the explanation advanced on behalf of the appellant: that the phrase "associated companies" was used in the second limb of section 179(2) TCGA 1992 in order to emphasise that the companies referred to in that limb are the same companies as those referred to in the first limb. He went on to say this:

"90 If instead the use of that word is taken to imply that it is part of one of the necessary preconditions to be met in order for the exemption under s 179(2) to be available, this focuses attention on the whole phrase 'an acquisition by one from another of those associated companies'. The word 'associated' in the first part of s 179(2) clearly applies to the status of the companies at the time of leaving the group; as [the appellant] pointed out, that part of the sub-section uses the word 'cease' in the present tense. When it occurs in the second part of the sub-section, it is contained in a phrase which is considering the circumstances at the time of the acquisition by the one company from the other. My conclusion is that the draftsman chose to include it as part of the test to be applied as at the time of the acquisition, and that therefore the word is addressing the question whether the companies in question were associated as at the time of that acquisition."

The appeal to the High Court

17. UPNH appealed from the Special Commissioners to the High Court under section 56A(1)(a) of the Taxes Management Act 1970. The appeal came before Mr Justice Lindsay on 22 February 2007. As I have said, the judge dismissed that appeal.
18. The judge (in common with the special commissioner in this respect) took the view that the issue – which he described as "a very short point but none the easier for that" – turned on the question whether the word "associated" in the second limb of section 179(2) TCGA 1992 was to be treated as mere surplusage. He rejected the appellant's submissions that the word served only to emphasise what would, in any event, have been inferred. He reminded himself of the comment of Lord Hoffmann in Walker v Centaur Clothes Limited [2000] 1WLR 799, 805D-E that an argument based on redundancy seldom carried much weight, even in the context of a Finance Act: for "It is not unusual for Parliament to say expressly what the courts would have inferred anyway". And he noted the observations of Lord Justice Nourse in Omar Parks Ltd v Elkington [1992] 1 WLR 1270, 1273H that:

" . . . If a long experience of legislative drafting had brought with it a conviction that an Act of Parliament never included words of surplusage, that would no doubt have been a persuasive point. But that is not our experience and I for one do not complain of it. An emphasis of the obvious, unnecessary to a judge who has had the benefit of argument, may yet be welcome to a busy practitioner who has not."

Nevertheless, the judge went on to say this:

"23. . . . But it is legitimate to doubt, in assessing whether the second 'associated' is mere surplusage, whether even the busiest of practitioners, reading section 179(2) would, on finding the word 'associated' in its line 3, need to have emphasised for him that the word had also been used in line 1, had it not been intended thereby to add something rather than merely to repeat the adjective. The taxpayer's argument, as it seems to me, has no explanation for the second appearance of 'associated' save to say that it is an elementary and precautionary drafting device. But, given the very short distance between the first appearance of the word and the second, and given that the taxpayer's meaning would have been so readily achieved without that second appearance of the word, I do not find that the taxpayer has any adequate explanation of its second appearance. I thus look about for a construction that does give it meaning."

19. The judge accepted the submission, advanced on behalf of the Commissioners that the second limb of section 179(2) TCGA 1992 should be read so as to relate the word "associated" to the time of the acquisition: that is to say, in the sense "as respects an acquisition (while they were associated) by one from another of those companies": paragraph [24]. That, he held, was the sense which "the Courts not unreasonably could infer from that second appearance of the crucial word". The question was whether to accept that there was a redundancy in the second limb of section 179(2) for which there was no reasonable explanation; or to accept the Commissioners' construction as a way of avoiding redundancy. As the judge put it:

"[25] I do not feel able to say that the Special Commissioner was wrong in attaching real weight to the redundancy argument and, like him, I would thus prefer, in point of construction, that the acquisition spoken of in the latter part of section 179(2) is between a disponor and a disponee who, at the time of that acquisition, were associated with one another in the sense required by section 179(10)."

This appeal

20. UPNH appeals to this Court with permission granted on 15 May 2007 by Lord Justice Richards. The appeal is advanced on the ground that the judge was wrong to construe section 179(2) TCGA 1992 as requiring that not only should the companies leaving the group be associated companies (within the meaning of section 179(10)) at the time when they left the group; they should also have been associated companies at the time when the one acquired from the other the relevant asset.
21. The submissions advanced in support of that ground of appeal are set out at some length in the skeleton argument filed on behalf of the appellant. But, as were refined in oral argument, they may, I think, fairly be summarised as follows. First, the judge was wrong to think that the appellant's construction of the second limb of section 179(2) TCGA 1992 involved any redundancy: he should have appreciated that the expression "associated companies" was a defined term which the draftsman could be expected to use when referring (in the second limb of section 179(2)) to the companies which he had identified in the first limb of that section. Absent the "redundancy" point there was no basis for the Commissioners' contentions. Second, the judge was wrong in failing to appreciate that, when section 179(2) is read in context – that is to say, when it is read with section 179(1) - the only point in time relevant for the purposes of section 179(2) is the time at which the companies cease to be members of the group. There is nothing which suggests that the time of acquisition of the asset is a relevant time for the purposes of section 179(2). There is no warrant for rewriting section 179(2) so as to introduce a requirement which the legislature did not impose. Third, that the mischief to which section 179(1) is addressed – the artificial postponement of tax by use of an envelope scheme – does not arise in a case where the transferor and transferee companies are associated companies at the time of leaving the group. That is why section 179(2) provides exemption in such a case. There is no need to introduce a further condition – limiting the scope of the exemption – which requires the transferor and transferee companies to have been associated companies at the time of the transfer.
22. For my part, I would reject the first of those submissions. I am not persuaded that the expression "associated companies" was a defined term which the draftsman could be expected to use when referring (in the second limb of section 179(2)) to the companies which he had identified in the first limb of that section. There are, as it seems to me, two factors which point away from that conclusion:

(1) It is clear from examination of section 179 TCGA 1992 as a whole that, when the draftsman wished to identify a company, or group of companies, by a description which he could use later in the section (so as to avoid repetition), he did so by placing that description in parentheses (and within inverted commas) immediately after the first reference to that company or group of companies. That technique can be seen in the opening words of section 179(1) - "If a company ("the chargeable company") ceases to be a member of a group of companies . . . " – and in section 179(2A) – "(a) . . . a group of companies ("the first group"). . ." and "(c) . . . another group of companies ("the second group"), . . .". The same technique was used in the statutory predecessors of section 179 TCGA 1992. In paragraph 18(1), schedule 12, Finance Act 1968 the equivalent words in the parentheses are "in this paragraph called the chargeable company": in section 278(1) of the Income and Corporation Taxes Act 1970 ("ICTA 1970") the words are "in this section called the chargeable company". If the draftsman had wished to adopt that technique in section 179(2) he would have opened that section with the words "Where 2 or more companies ("associated companies") which by themselves would form a group of companies cease to be members of the group . . .". He did not do so.

(2) Second, even in those cases where he did adopt the technique which I have just described, the draftsman did not find it necessary to use the description which he had attached to the company or the group when referring to that company or group later in the same subsection. So, for example, in section 179(1) he used the phrase "if the time of acquisition fell within the period of 6 years ending with the time when the company ceases to be a member of the group" without finding it necessary to refer to the company as "the chargeable company". And, in section 179(2A)(a) he used the phrase "another company which was a member of that group at the time of the acquisition" without finding it necessary to refer to the group as "the first group".

In my view the judge – and the special commissioner – were correct to hold that, if the appellant's contention as to the meaning of section 179(2) TCGA 1992 was correct, then the word "associated" in the second limb of that section was redundant: the appellant had provided no explanation for the inclusion of that word.

23. That conclusion does not, of course, lead to the further conclusion that the appellant's contention as to the meaning of section 179(2) TCGA 1992 must be rejected. As the judge recognised, the legislature may have chosen to include the redundant word to emphasise the obvious. But the judge was correct to take the view that, before accepting that the legislature had included a word which had to be ignored as redundant, it was necessary to consider whether the section could be construed so as to give purpose and effect to that word.
24. The appellant submits, correctly in my view, that sub-sections (1) and (2) of section 179 TCGA 1992 must be construed together. It points out, again correctly, that (when first enacted) the two sub-sections appeared in the same sub-paragraph – paragraph 18(1), schedule 12, Finance Act 1968. But those sub-sections must also be construed in conjunction with the provisions of paragraph (a) of sub-section (10). As I have said, that paragraph provides that, for the purposes of section 179, "2 or more companies are associated companies if, by themselves, they would form a group of companies". The special commissioner was correct to appreciate that that paragraph identifies as a "sub-group" the group of companies which, taken together and by themselves, the associate companies would comprise. If company A and company B would not, by themselves, form a group of companies – because, for example, the sub-group of which they are members includes a third company (say, company C) – company A and company B are not associated companies for the purposes of section 179 TCGA 1992.
25. The effect of sub-sections (1), (2) and (10)(a), taken together, is that, although (but for the proviso) the further provisions in section 179 TCGA 1992 (and, in particular section 179(3) which imposes the exit charge) would apply where a company (company A) ceases to be a member of a group of companies "as respects any asset which [company A] acquired from another company [company B] which was at the time of acquisition a member of that group of companies . . . ", those provisions are limited in their application by the proviso that, where company A and company B (and any other company which, together with company A and company B would, taken together and by themselves, form a group of companies) cease to be members of the group at the same time, those further provisions in section 179 shall not apply (because section 179(1) shall not have effect) "as respects an acquisition by one from another" of the companies in the sub-group. It is important to keep in mind that in a case where, at the time when company A and company B cease to be members of a group of companies ("the principal group"), the sub-group of associated companies of which they are members also includes company C, the proviso applies only if, at the time when company A and company B cease to be members of the principal group, company C also ceases to be a member of the principal group.
26. In Dunlop International AG v Pardoe (Inspector of Taxes) [1999] STC 909 this Court had to consider – on appeal from Mr Justice Lightman [1998] STC 459 – whether the requirement (then in section 278(2) ICTA 1970) that two companies be associated companies when they cease (at the same time) to be members of the group was satisfied in a case where they were associated companies immediately before they both left the group but were not associated companies immediately after they both left the group. The Court (affirming the decision of Mr Justice Lightman) held that the requirement was not satisfied in those circumstances. It follows from the decision in the Dunlop case that where, immediately before company A and company B cease to be members of the principal group, the sub-group of which they are members also includes company C, the proviso applies only if, immediately after those three companies cease to be members of the principal group, they remain associated companies: that is to say, only if the three companies, taken together and by themselves, would form a group of companies as well after as before they all leave the principal group.
27. The decision in the Dunlop case is not determinative of the outcome in the present case: but the question which arose in the Dunlop case illustrates that, even on the construction advanced on behalf of the appellant in this case, there will be two distinct points of time – immediately before and immediately after the sub-group of which they are members leave the principal group - at which the requirement that the company A and company B be associated companies must be satisfied. I reject the submission advanced under the second ground of appeal: that it is obvious, from the words used, that the judge was plainly wrong to reject the view that there is only one point of time - the time at which the two companies cease to be members of the principal group - relevant for the purposes of the proviso (now section 179(2) TCGA 1992). As I have said, the proviso invites the question whether it is necessary that the two companies were associated companies both immediately before and immediately after the sub-group of which they were members left the principal group: as it seems to me, the proviso invites the further question whether it is necessary that the two companies were associated companies both at the time when the sub-group of which they were members left the principal group and at the time of the acquisition of the relevant asset.
28. I turn, therefore, to the third ground of appeal: that the mischief to which section 179(1) TCGA 1992 is addressed does not arise in a case where the transferor and transferee companies are associated companies at the time of leaving the group. In the course of my judgment in the Dunlop case, with which the other members of the Court (Lord Justice Peter Gibson and Lord Justice Pill) agreed, I identified the mischief which section 278 ICTA 1970 (now section 179 TCGA 1992) was enacted to counter in terms which the appellant does not challenge. I said this ([1999] STC 909, 920e-f):

". . . Section 273(1) [now section 171(1) TCGA 1992] provides for the deferral of tax on gains arising on a transfer between companies within the same group. Section 278(3) [now section 179(3) TCGA 1992] brings to an end that deferral when the company which owns the asset (T in the example given by Millett J in NAP Holdings UK Ltd v Whittle (Inspector of Taxes) [1992] STC 59) leaves the group. The object is to prevent the transferee company from taking the asset out of the group in circumstances in which the gain will not crystallise on a subsequent disposal – because there will be no subsequent disposal."

Upon further consideration of that passage I am conscious that the final sentence is (at best) opaque. A more complete statement would be that the object is to prevent the transferee from taking the asset out of the group without crystallising the gain (and the liability to tax) which would have arisen (had the transferor and transferee not been members of the same group) at the time that the transferee acquired the asset. The effect of the exit charge is that, in practice, the group will bear a loss equal to the amount of the tax which would have been chargeable if the original acquisition had not been the subject of an intra-group transfer: because it can be expected that the tax liability which will crystallise by reason of the transferee ceasing to be a member of the group – and so deplete its net assets – will be taken into account in determining the price which a purchaser will pay for its shares.

29. It is clear that when the provisions now enacted in section 179 TCGA 1992 were first introduced – as paragraph 18, schedule 12, Finance Act 1968 – the legislature intended some limitation on the measures that were being taken to counter the mischief that had become apparent. The legislature must be taken to have appreciated, as it seems to me, that the policy underlying the in-group rule introduced only a few years earlier as paragraph 2(1), schedule 13, Finance Act 1965 – as explained by Mr Justice Hoffmann in Westcott (Inspector of Taxes) v Woolcombers Ltd [1986] STC 182, 190 – would be offended if those measures were applied to a case where a transfer between companies which were, at the time, members of a sub-group was made the subject of an exit charge when, subsequently, the sub-group left the principal group to become either a principal group on its own or a sub-group of another principal group. It was to be expected that, in such a case, the in-group rule would continue to apply to that transfer. But there was no reason to expect that the in-group rule would continue to apply to a transfer between companies which, at the time, were not members of a sub-group – but which subsequently, became members of a sub-group ("the new sub-group") - when the new sub-group left the principal group to become a principal group on its own or a sub-group of a another principal group. It is pertinent to have in mind that the in-group rule would not have applied to a transfer between companies which, at the time, were not members of a principal group; notwithstanding that they subsequently became members of a principal group. Further, if it had been intended that the in-group rule would to apply to a transfer between companies which, at the time, were not members of a sub-group – but which subsequently, left the principal group to become a new group or a new sub-group of another principal group, it is difficult to see any reason why the rule would apply only if all the companies which were members of that new group or new sub-group had been members of the principal group and members of a sub-group immediately before they ceased to be members of the principal group. If the in-group rule were intended to apply to a transfer between companies which, at the time, were not members of a sub-group, the fact that there were other companies who ceased to be members of the principal group at the same time would seem irrelevant.
30. The question whether the mischief to which section 179(1) TCGA 1992 is addressed does or does not arise in a case where the transferor and transferee companies are associated companies at the time of leaving the group is not, in my view, determinative of the legislature's intention when it enacted the proviso which is now section 179(2) TCGA 1992. The legislature's intention is to be found in the words which it used. As I have said, the use of the word "associated" in the second limb of the proviso requires the court to consider whether that word was intended to serve some purpose; rather than to dismiss it as redundant. For the reasons which I have explained, the construction advanced on behalf of the Revenue provides a plausible explanation for the use of that word. For my part, I am persuaded that it would be wrong to reject that construction.

Conclusion

31. I would dismiss this appeal.

Lord Justice Toulson:

32. Sir John Chadwick has explained the complexities of the statutory framework, its history and the factual background. The issue is a short one of statutory construction. Section 179 of the Taxation of Chargeable Gains Act 1992 provided, so far as material:

"(1) If a company ("the chargeable company") ceases to be a member of a group of companies, this section shall have effect as respects any asset which the chargeable company acquired from another company which was at the time of acquisition a member of that group of companies, but only if the time of acquisition fell within the period of 6 years ending with the time when the company ceases to be a member of the group; …

(2) Where two or more associated companies cease to be members of the group at the same time, subsection (1) above shall not have effect as respects an acquisition by one from another of those associated companies. "

33. In subsection (2), were the final words "those associated companies" intended to be simply a reference back to the opening words "two or more associated companies" (as the appellant contends), or were they intended to import an additional ingredient that the companies must have been associated at the time of the acquisition of the relevant asset by one from another of them (as the respondent contends)?

The relevant mischief

34. Sir John Chadwick has explained that the provisions now contained in s 179 were introduced as a response to "envelope schemes" of the kind described by Millett J in the NAP Holdings case. The essence of an envelope scheme involved the transferor company remaining within the old group, while the asset left that group in the "envelope" of a company or companies sold to a third party. That is important in considering the target at which the drafter was aiming. What was done in the present case was not by any stretch an example or variant of the envelope scheme, nor does the respondent in fairness suggest otherwise.
35. Mr Gardiner QC acknowledged that the transaction could be regarded as demonstrating a mischief of another kind, that is, the extraction of value from UPN via the payment of a dividend of £280 million prior to its sale to UPNH. That problem was addressed by Parliament in the Finance Act 1999 and is a quite different matter.
36. So I would approach the question of the meaning of the words "those associated companies" at the end of s 179(2) on the basis that there is no reason to do otherwise than give them their ordinary and natural construction.

The natural construction of the words

37. The natural meaning of words is very much a matter of impression. On my first reading of the relevant words, and after reading the parties' arguments and the judgments below, I took the words "those associated companies" at the end of s 179(2) to be no more than a reference back to the opening words of the subsection. Having listened to several hours of argument, I was left of the same opinion. I have given anxious consideration to the judgment of Sir John Chadwick, who has far more experience in this area than I do, but I respectfully differ from his conclusion.
38. I agree with him that the words "associated companies" in s 179(2) are not "a defined term". But it often happens in modern legislation that a drafter uses a word here and there which is not strictly necessary. (Judges do the same.) Examples abound.
39. To illustrate this point, Mr Gardiner produced an instance involving the very same expression in a tax statute. In his skeleton argument he cited s 290(6) of the Income and Corporation Taxes Act 1970:

"The relevant maximum and minimum amounts referred to in subsection (5) above shall be determined as follows:-

(a) Where the company has no associated company in the accounting period, those amounts are £9,000 and £1,500 respectively;

(b) Where the company has one or more associated companies in the accounting period, the relevant maximum amount is £9,000 divided by one plus the number of those associated companies and the relevant minimum amount is £1,500 divided by one plus the number of those associated companies."

40. In each case the word underlined adds nothing. The expression "those associated companies" is simply a reference back to the associated companies referred to in the opening words of the paragraph. (I have not independently researched the point, but Mr Tidmarsh QC did not argue to the contrary.) Mr Gardiner also gave other examples, but the point is not improved by proliferation.
41. Over 40 years ago the Lord Chancellor, Lord Gardiner, made a valiant plea in the House of Lords for the simplification of the statute book when he introduced the Law Commissions Bill. Since then, by and large things have become a great deal worse. The Tax Law Rewrite project is a welcome attempt to rewrite the revenue tax code in simple and plain English. But in the meantime we must deal with revenue statutes as they are, recognising that they are seldom models of succinctness.
42. The alternative construction of s 179(2) is that the penultimate word "associated" was pregnant with the silent requirement that the companies must have been associated at the time of the acquisition of the relevant asset. If the drafter positively intended that meaning, he dealt with it in an uncharacteristically laconic, indeed delphic, manner. I am unpersuaded that he had the point in mind at all or that it would be right to infer an intention that the word should be so construed.
43. Notwithstanding the unanimity of view of the Special Commissioners, Lindsay J and Sir John Chadwick, I have reached a different conclusion for the reasons which I have briefly stated, and which would not gain by elaboration. I would allow the appeal.
44. Mr Gardiner in his skeleton argument (and an appendix to it) advanced further detailed arguments to the effect that the construction contended for by the respondent could give rise to difficulties, which have not been fully considered, in a variety of other cases, for example where group companies had rearranged themselves in various possible ways before the relevant companies ceased to be members of the group, and that such potential problems were matters which the drafter might have been expected to address. To a non-tax specialist these matters were complex, and if it had been necessary to form a view about them I would have needed fuller argument from both sides.

Lord Justice Tuckey:

45. The question we have to answer on this appeal is whether use of the word "associated" in the second part of section 179 (2) is intended to serve some purpose or whether it is redundant. Sir John Chadwick says it was intended to serve some purpose; Toulson L.J. in his simple and persuasive judgment says that it was no more than an unnecessary reference back to the opening words of the subsection.
46. Although I accept that surplusage is not unusual in tax statutes, one must start by trying to give meaning to all the words used. Can one discern a purpose, other than mere repetition, for what the draftsman has said? If that is not possible in this case I would agree with Toulson L.J.'s conclusion. But here those with huge experience in this field have identified a purpose for using the words in question which justifies giving them the meaning contended for by the Revenue.
47. In paragraphs 83, 85 and 86 of his reasons (quoted by Sir John Chadwick in paragraph 14) the Special Commissioner explains the rationale for the charge imposed by section 179 (1) and (3) (paragraph 83), the exemption (paragraph 85) and why the exemption could not be expected to apply to a case, as here, where the sub-group is created after the intra-group transfer has taken place (paragraph 86). Although I accept that there was no envelope trick in this case something akin to it took place which the legislature could not have been expected to exempt from the effect of the anti-avoidance provisions contained in section 179 (1) and (3) . In paragraph 29 Sir John Chadwick says:

There was no reason to expect that the in-group rule would continue to apply to a transfer between companies which, at the time, were not members of a sub-group but which subsequently became members of a sub-group…

I agree.

48. With this purpose in mind I think the second part of section 179 (2) can be construed in the way the judge did. In other words they mean "as respects an acquisition (while they were associated) by one from another of those companies". I am also attracted by the point made by the judge when rejecting the surplusage argument that even the busiest of practitioners on finding the word "associated" in line 3 of the subsection would not need to have explained to him that the word had also been used in line 1, had it not been intended to add something.
49. I am also attracted by the way in which the Special Commissioner approached the question of construction in paragraphs 87 to 92 of his reasons. He said:

87. Turning to the wording of section 179 (2), I accept that the words up to the coma are setting out a pre-condition to the application of the subsection. However, that is not the only pre-condition required. In the part of section 179 (2) falling after the coma, there is the requirement that there should have been "an acquisition by one from the other of those associated companies" …

88. …The remaining question is whether the final three words in section 179 (2), "those associated companies" are to be regarded as imposing a further condition, namely that the acquisition must have been by one of those associated companies from the other at a time when they were associated. Mr Gardiner contended that the only point in time focused upon was the time the companies left the group. However this ignores the fact that the wording in the second part of section 179 (2) is concentrating on the circumstances of the acquisition which inevitably will have been at a point earlier than when the companies in question leave the group. If all the words of the phrase are taken together an acquisition by one from another of those associated companies it appears more logical to examine all the circumstances comprised in that phrase as at the same time, namely that of the acquisition. …

90. … The word associated in the first part of section 179 (2) clearly applies to the status of the companies at the time of leaving the group; as Mr Gardiner pointed out that part of the subsection uses the word "cease" in the present tense. When it occurs in the second part of the subsection, it is contained in the phrase which is considering the circumstances at the time of the acquisition by the one company from the other. My conclusion is that the draftsman chose to include it as part of the test to be applied as at the time of the acquisition, and that therefore the word is addressing the question whether the companies in question were associated as at the time of the acquisition.

91. … The whole phrase requires to be considered as a single entity, rather than carrying out separate examinations of the constituent words of the phrase. The temporal context is the circumstances as they were at the time of the acquisition. If so it would appear strange to apply the test of association by reference to the circumstances at another time, namely the point at which the companies in question (which are required by the initial wording of section 179 (2)) to be associated at that other time), leave the group.

92 …I accept Mr Tidmarsh' submission that section 179 (2) is expressed in very "compressed" language, and that this was confirmed by the decision in Dunlop.

I accept this analysis as did the judge.

50. For these reasons and for the reasons given by Sir John Chadwick, with which I agree, I would dismiss this appeal.