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 BLACKBURNE
CH/2007/APP/0412

		Royal Courts of Justice Strand, London, WC2A 2LL
		12/03/2009

Lord Justice Mummery :

Background and issues

1. This case is about the taxation of capital gains of groups of companies under the Taxation of Chargeable Gains Act 1992 (the 1992 Act). The appeal turns on the construction of section 177A of and Schedule 7A to the 1992 Act. Those provisions place restrictions on the set-off of "pre-entry losses." They were inserted in the 1992 Act by section 88 of the Finance Act 1993. There were transitional provisions.
2. Schedule 7A makes provision in relation to losses accruing to a company before it becomes a member of a group of companies. The aim of the inserted provisions is to restrict the tax benefits which can be obtained by a group of companies buying a company which has capital losses. Even though the losses do not arise from its own activities, a group of companies would seek to obtain tax relief by setting off the pre-entry losses of the company against the capital gains made by companies in the group.
3. The 1992 Act, as amended, restricts the tax benefits of set off by ring fencing pre-entry capital losses brought into a group of companies. Specific rules cover the take-over of one group by another group, the reconstruction of companies and anti-avoidance measures.
4. The particular point in this case arises where a company joins a group of companies (the first group), which is later taken over by another group (the second group). It then becomes necessary to determine which is "the relevant group" in relation to the pre-entry losses. It is common ground that the appellants are entitled to set off the losses against the gains to the extent claimed in this case if, but only if, paragraph 1(6) of Schedule 7A applies to the facts of this case. The construction of paragraph 1(6) is at the heart of the dispute.
5. The relevant principles of statutory construction are not disputed. They are concisely stated in Barclays Finance Ltd v. Mawson [2005] 1 AC 684 at paragraph 32 of the single opinion of the committee delivered by Lord Nicholls-

"The essence of the new approach was to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. Of course this does not mean that the courts have to put their reasoning in the straitjacket of first construing the statute in the abstract and then looking at the facts. It might be more convenient to analyse the facts and then ask whether they satisfy the requirements of the statute. But however one approaches the matter, the question always is whether the relevant provision of the statute, upon its true construction, applies to the facts as found. As Lord Nicholls said in MacNiven v. Westmoreland Investments Ltd [2003] 1 AC 311,320, para 8: "The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case." "

6. Only one other authority was cited at the hearing, Inco Europe v. First Choice Distribution [2000] 1 WLR 586 at 592. It is not a tax case. The dispute was about the effect of the Arbitration Act 1996 on the jurisdiction of the Court of Appeal to entertain an appeal in relation to the refusal by the judge at first instance to grant a stay of an action in a case in which the parties had agreed to refer disputes to arbitration. The judge held that the arbitration agreement was null and void or inoperative, refused to grant a stay and refused leave to appeal. The only point of possible relevance to this case is that the House of Lords held that the courts have power to correct obvious drafting errors in legislation by adding, omitting or substituting words. Although the courts can improve legislative drafting in this way, apparently in the exercise of their constitutional function as interpreters of the law, the power is confined to plain cases and must be exercised with "considerable caution."
7. While asserting that the clear words of the 1992 Act, in particular in paragraph 1(6) of Schedule 7A, allow the set off of the pre-entry capital losses to the extent claimed in this case and that their interpretation was included in a 1993 Inland Revenue Press Release and in HMRC's own published manuals, the appellant taxpayers accept that it was not the intention of the legislation that they should be allowed to do this. Their case is that the draftsman has slipped up (possibly, it was suggested, the victim of his own detailed and prescriptive drafting technique), but it is beyond the power of the courts to correct his slip by a process of judicial interpretation. As was said in Inco at page 592E the courts "must abstain from any course which might have the appearance of judicial legislation."
8. The respondent Commissioners (HMRC) do not accept that there has been any drafting slip or mistake requiring correction by the courts or anyone else. Their case is that, properly construed, paragraph 1(6) and the other relevant provisions of the 1992 Act and Schedule 7A accord with the legislative intention and do not allow the taxpayers to set off losses to the extent claimed by them. No large question looms on the drafting of taxing statutes, the principles of statutory interpretation or on the constitutional role of the courts, upon which Mr Aaronson QC, for the appellants, made some interesting generalised comments, which were supplemented by more specific submissions and illustrative examples from Mr Prosser QC. In my opinion, the question for the court is a very narrow one: do the particular provisions in paragraph 1(6)(b) of Schedule 7A to the 1992 Act apply to this case?
9. I turn to the short facts of the case, quote the relevant statutory provisions and summarise their application in the proceedings so far.

Facts and law

10. The appellant companies, Limitgood Limited (L) and Prizedome Limited (P), realised capital losses. On 27 September 2000 they became subsidiaries of Grantchester Limited (GL), the principal company in the GL group. Other subsidiary companies in the GL Group owned certain assets. On 19 December 2000 GL was taken over by Grantchester Holdings plc (GH). During the accounting periods of L and P ended 30 September 2001 and 2002 subsidiaries in the GH Group made capital gains on the disposal of assets. Elections were made to set off L and P's losses against the gains in the GH group by deeming the gains as made by L and P.
11. The right to set off L and P's losses was claimed principally under paragraphs 1 and 9 of Schedule 7A. Paragraph 1 deals with the application and scope of the Schedule. Paragraph 9 deals with the identification of "the relevant group" where there is more than one group of companies which would be "the relevant group" in relation to any company and the application of the Schedule to every connected group. The paragraphs in the Schedule have to be read with section 170(10) in Chapter I (COMPANIES, Groups of companies) of Part VI of the 1992 Act. The section applies to the interpretation of section 177A, which introduced Schedule 7A.
12. The provisions cited in argument can be conveniently gathered in one place. They read as follows-

SCHEDULE 7A

RESTRICTION ON SET-OFF OF PRE-ENTRY LOSSES

Application and construction of Schedule

"1 (1) This Schedule shall have effect, in the case of a company which is or has been a member of a group of companies ("the relevant group"), in relation to any pre-entry losses of that company.

(2) In this Schedule "pre-entry loss", in relation to any company, means-

(a) any allowable loss that accrued to that company at a time before it became a member of the relevant group; or

(b) the pre-entry proportion of any allowable loss accruing to that company on the disposal of any pre-entry asset.

……..

[(3), (4) and (5) relate to "pre-entry assets"]

(6) Subject to so much of sub-paragraph (6) of paragraph 9 below as requires groups of companies to be treated as separate groups for the purposes of that paragraph, if-

(a) the principal company of a group of companies ("the first group") has at any time become a member of another group ("the second group") so that the two groups are treated as the same by virtue of subsection (10) of section 170, and

(b) the second group, together in pursuance of that subsection with the first group, is the relevant group,

then, except where subparagraph (7) below applies, the members of the first group shall be treated for the purposes of this Schedule as having become members of the relevant group at that time and not by virtue of that subsection at the times when they became members of the first group".

……..

Identification of "the relevant group" and application of Schedule to every connected group

9. (1) This paragraph shall apply where there is more than one group of companies which would be the relevant group in relation to any company.

(2) Where any loss has accrued on the disposal by any company of any asset, this Schedule shall not apply by reference to any group of companies in relation to any loss accruing on that disposal unless-

(a) that group is a group in relation to which that loss is a pre-entry loss by virtue of paragraph 1(2)(a) above or, if there is more than one such group, the one of which that company most recently became a member;

…………….

(6) Notwithstanding that the principal company of one group ("the first group") has become a member of another group ("the second group"), those two groups shall not by virtue of section 170(10) be treated in relation to any company that is or has become a member of the second group ("the relevant company") as the same group for the purposes of this paragraph if-

(a) the time at which the relevant company became a member of the first group is a time in the same accounting period as that in which the principal company of the first group became a member of the second group ; or

(b) the principal company of the first group was under the control, immediately before it became a member of the second group, of a company which at that time was already a member of the second group."

Section 170

Interpretation of sections 171 to 181

"(10) For the purposes of this section and sections 171 to 181, a group remains the same group so long as the same company remains the principal company of the group, and if at any time the principal company of a group becomes a member of another group, the first group and the other group shall be regarded as the same and the question whether or not a company has ceased to be a member of a group shall be determined accordingly."

13. It is agreed that, for present purposes, it is unnecessary to address the question of disposal of pre-entry assets. It is also agreed that the other provisions referred to in subparagraph (6) (i.e.subparagraph (7) and paragraph 9(6)) do not apply in this case.
14. The appellants' contention that paragraph 1(6) applies to the facts of this case is developed along these lines: GL was the principal company in the first group; it became a member of GH, the second group; the GL group and the GH group are regarded as the same by virtue of section 170(10); the GH group, together, in pursuance of section 170(10), with the GL group, is the relevant group; so L and P are treated for the purposes of Schedule 7A as having become members of "the relevant group" at that time (i.e. at the time GL became a member of the GH group on 19 December 2000) and not by virtue of section 170(10) at the time when they became members of the GL group on 27 September 2000.
15. When HMRC refused to allow the election, there was an appeal to the Special Commissioners on the basis of an agreed Statement of Facts and Issues. The Special Commissioners were divided on the point, as appears from the decision released on 18 May 2007. One Commissioner (Mr Theodore Wallace), who was in the Chair, agreed with the appellant companies and held that paragraph 1(6) did apply to the case, while the other (Dr John Avery Jones CBE) agreed with HMRC that it did not apply. By virtue of the Chairman's casting vote the appeal was allowed, so that the losses of the appellant companies were available to be set against any of the gains claimed.
16. In the High Court Blackburne J allowed HMRC's appeal on 18 January 2008. He held that paragraph 1(6) did not apply. The appellants criticise his conclusion as amounting to legislation under the guise of interpretation. The appellants contend that he gave too limited a meaning to subparagraph (6) by confining its purpose to one specific situation and by misconstruing the concept "the relevant group" in relation to particular pre-entry losses. These errors, it was submitted, pervaded the whole of his reasoning and his conclusion. The appellants' case is that the meaning of "the relevant group" is not fixed by reference to particular pre-entry losses. Its identity changes as and when a company joins or becomes part of different groups. The purpose and effect of subparagraph (6) is to change the date of entry of a company to a group in the given circumstances. That is the explanation for the existence and purpose of the condition (b) in subparagraph (6), a provision that, on the appellants' interpretation, the judge wrongly thought added nothing to the remainder of the subparagraph.

The appeal

17. L and P were given permission for a second appeal to this court by Lloyd LJ on 18 March 2008.
18. The parties repeated and refined their arguments in writing and orally. At the hearing leading counsel on each side helpfully presented their submissions by concentrating on the legislative purpose and context of the relevant provisions and the language in which they are expressed. A detailed critique of the judgments below would not have been the best way to present an appeal on a narrow question of statutory interpretation. I will follow a similar course in this judgment. In general, a judgment in this court should be intelligible without the reader having to refer to other judgments in the same case at other levels of decision. There is, however, no advantage to the specialist reader or a higher court in a repetition of the facts, law, rival submissions and conclusions. The details can all be found in the excellent decisions of the Special Commissioners and of Blackburne J. I do not think that the best and shortest way of explaining my conclusions would be by way of an analysis of their judgments. I will explain my decision on the appeal by a step by step application of the statutory provisions to the few facts of this case.

Application of Schedule 7A

19. The first step takes you to the scope of application of Schedule 7A, as stated in paragraph 1 of that Schedule. It applies to the case of companies L and P "in relation to" their pre-entry losses. For the Schedule to apply they must have identifiable, realised losses and they must be, or have been, members of a group of companies. L and P have both been members of the GL group. The paragraph applies the label "the relevant group" to the group of companies of which L and P are, or have been, a member.
20. The second step takes you to the definition in paragraph 1(2) of "pre-entry losses" in relation to L and P. They both have capital losses. They are pre-entry losses if they are allowable losses that accrued to L and P before they became a member of "the relevant group." Thus far, only the GL group satisfies the definition of "the relevant group" for the purpose of L and P's pre-entry losses. They became members of the GL group on 27 September 2000 after they had suffered their capital losses.
21. The third step takes you to the deeming provisions ("shall be regarded as") in section 170 (10) in the sections dealing with membership of groups of companies. The subsection means that the GL group is regarded as remaining the same group so long as the principal company, GL Limited, remained the principal company. On 19 December 2000 GL Limited became a member of the GH group whereupon, by virtue of section 170(10), the GL group and the GH group "shall be regarded as the same." As a consequence of the two groups being regarded as the same group, L and P did not leave the GL group. Further, the date of the entry of L and P into the GL group was not changed by the GL group becoming a member of the GH group. As explained in the second step, the pre-entry losses of L and P were in relation to the GL group and are identified as losses incurred before the date of entry into the GL group. That remains the case after the GL group was taken over by the GH group, unless altered by the deeming provisions of paragraph 1(6).
22. The fourth step takes you to the deeming provisions ("shall be treated") of paragraph 1(6), but they only apply if each of the two conditions specified in (6)(a) and (b) is satisfied so as to modify the position about pre-entry losses of L and P. The critical question is whether, on their true construction, both conditions are satisfied. There is no dispute that the first condition (a) is satisfied. GL Limited became a member of the GH Group, so that the two groups are regarded as the same by virtue of section 170(10).The critical question is whether the second condition (b) is satisfied. If it is not, paragraph 1(6) cannot be relied on by the appellants and they lose the appeal.

Construction of paragraph 1(6)(b)

23. Differing analyses of paragraph 1(6) are proposed by HMRC and the appellants in the context of Schedule 7A as a whole and of the interpretation provisions in section 170(10).
24. HMRC says that paragraph 1(6) cannot be relied upon by the appellants because condition (b) is not satisfied. HMRC's case, in brief, is that the date of entry of L and P into the GL group is not changed to the date of the later GH group takeover of the GL group. The GH group is not "the relevant group" in relation to L and P's pre-entry losses. "The relevant group", in relation to the pre-entry losses of L and P, which the appellants wish to set off, is the GL group. The relevant time remains the date on which L and P became members of the GL group, not the later date on which the GL Limited became a member of the GH group.
25. Mr Aaronson QC, appearing for the appellants, contends that the proper approach to the interpretation of Schedule 7A and its application to the facts of this case is first to identify every group of which the loss making company is, or has been, a member. Then you apply the rules in paragraph 9 of Schedule 7A to identify "the relevant group" and ask when the loss making company became a member of "the relevant group." If "the relevant group" is a merged group, you change the normal time of entry to the time of the merger. Having identified the relevant group and the time of entry you can then identify whether, under paragraph 1(2), the loss is a pre-entry loss in relation to the relevant group.
26. On the appellant's approach paragraph 1(6)(b) is satisfied. L and P, as members of the GL group, are treated as having become members of "the relevant group" at the time when GL Limited became a member of the GH group. The effect of paragraph 1(6) is to identify the pre-entry losses as at 19 December 2000 rather than as at 27 September 2000
27. As a matter of construction Mr Aaronson argues that the second condition (b) and its reference to "the relevant group" should be given its natural, ordinary and straightforward meaning. It serves a simple and necessary function, which the judge ignored. Condition (b) introduces and supplies a necessary link to the second group, GH, which, following GH's acquisition of GL, is the deemed "same" group. GH, he submitted, is "the relevant group" for all purposes of Schedule 7A. The judge wrongly construed "the relevant group" in (b) as confined to losses of the first group, which are not pre-entry losses in relation to that group immediately before its acquisition by the acquiring group. Mr Aaronson illustrated his point on the necessary function of (b) by means of a draft re-ordering of the structure of sub-paragraph (6).
28. Mr Gammie QC, appearing for HMRC, responded that the more natural and ordinary meaning of paragraph 1(2) of Schedule 7A is that under it you can identify the group to which the loss relates and when the company became a member of that group. He submitted that the straightforward construction of paragraph 1(6) supports that approach.
29. The company starts off on the basis that it has realised a loss. By reference to the loss it can identify the relevant group and when the company becomes a member of the group by reference to which its loss is a pre-entry loss. In a case to which section 170(10) applies this will identify a single group as the relevant group, notwithstanding the merger. From the perspective of a company within the GL group before the merger with the GH group the relevant group will be the GL group. From that perspective the loss making companies have already identified the pre-entry losses by reference to their date of entry to the GL group.
30. Against that background and as submitted by Mr Gammie, paragraph 1(6) is a provision in which the draftsman deconstructed in condition (a) the merged group into its constituent elements of "the first group" and "the second group." Then in condition (b) the draftsman treated the second group as "the relevant group" in order to see whether any of the companies' losses can be identified as pre-entry losses from the perspective of their membership of the second group. The perspective is reversed from the first group to the second group for the purpose of identifying the losses of the first group companies which have not been previously identified as pre-entry losses under paragraph 1(2)(a). They will be losses in respect of which the second group is the relevant group. But the second group is not the relevant group for all the purposes of Schedule 7A. It is for the more limited and precise purpose of seeing whether any losses of the companies in question are pre-entry losses, which have not already been identified as pre-entry losses of the relevant group.
31. Thus, the purpose and effect of condition (b) was to identify and bring within the scope of Schedule 7A losses of the first group of companies that have not previously been identified as pre-entry losses, as defined in paragraph 1(2) (a) of Schedule 7A. In respect of those losses, but only those losses, the second group is "the relevant group."
32. Mr Gammie submitted that the appellants gained no support for their construction from paragraph 9 of Schedule 7A. That paragraph deals only with situations in which there is more than one relevant group. A merged group is only required to be treated as two groups in the circumstances of paragraph 9(6) which, it is agreed, do not apply.
33. In my judgment, the submissions of HMRC on paragraph 1(6) are the correct construction. On a straightforward interpretation of the language they give a more sensible meaning and purpose to the whole of paragraph 1(6) than the appellants' construction does. The losses which the appellants wish to set off against gains for capital gains tax purposes are not within the category of pre-entry losses identified on the hypothesis in paragraph 1(6)(b) of Schedule 7A. That paragraph on which the appellants rest their case does not apply.
34. Blackburne J's overall conclusion on the construction of paragraph 1(6) correctly states the legal position-

"63. What then are the losses to which [paragraph 1(6)] is directed? In my judgment they are losses which are pre-entry in relation to the second group; they are not losses which are pre-entry to the first group. I reach that conclusion because, if it were the latter, there would be no need to disapply the operation of section 170(10); paragraph 1(6) would add nothing to the scheme of the Schedule. It is precisely because, as regards losses which have accrued to members of the group while members of that group, there is a need if the aim of the Schedule–to subject pre-entry losses to restrictions on set off-is to be achieved, to disapply section 170(10) that in my judgment, paragraph 1(6) was enacted. So regarded it puts losses accruing to companies in a group which is subsequently taken over by another group on the same footing as losses accruing to a single company which is subsequently taken over by a group. That being, as I see it, the purpose of the provision I see no reason, unless compelled by the words to do so, to construe it as having an effect which goes beyond that purpose. I consider that the purpose can be achieved-and the surprising results which I have described in paragraph 60 above-by construing the reference to "the relevant group" in subparagraph (b) as confined to losses of the acquired (the first) group which are not pre-entry losses in relation to that group immediately before its acquisition by the acquiring (second) group."

35. As Blackburne J pointed out at [60] of his judgment, if the appellants' construction is correct, the effect of paragraph 1(6) is that losses which were pre-entry losses in relation to the GL group (and therefore subject to the deductibility restrictions) ceased to be subject to these restrictions upon the merger with GH and were available for set-off against gains from disposals by any member of the former GL group. This makes no sense and cannot have been intended by Parliament. Like the judge, I would uphold such a construction only if compelled to do so by the language of the statute. For the reasons that I have given, far from compelling this construction the language of the statute points the other way.
36. For the reasons stated above (and the ampler reasons given by Blackburne J and Dr Avery Jones for the same result) I conclude that paragraph 1(6) of Schedule 7A to the 1992 Act, properly construed, does not apply to the facts of this case so as to allow the set off claimed by the appellants to the pre-entry losses of L and P. The appellants' attempt to use paragraph 1(6) of Schedule 7A to secure the benefit of a set off at the later date of 19 December 2000 fails. Its deeming provisions only apply if both conditions (a) and (b) are satisfied. For the reasons explained above condition (b) is not satisfied on the facts of this case.

Result

37. I would dismiss the appeal.

Lord Justice Dyson:

38. I agree.

Lord Justice Jacob:

39. I also agree.