Scottish Court of Session Decisions

In July 1995, Aberdeen Milk Company Limited ("the Company") paid advance corporation tax ("ACT") in the sum of £39,250, in respect of a dividend which had been paid out of the Company's taxed profits. The Company made a claim to H.M. Inspector of Taxes upon the basis that the ACT which had been paid was an amount of surplus ACT, which in terms of section 239(3) of the Income and Corporation Taxes Act 1988 should be treated, for the purposes of that section, as if it were ACT paid in respect of distributions made by the Company in an earlier accounting period. That earlier accounting period was the period ended 31 March 1990. The inspector having refused the claim, the Company appealed; and by a decision dated 31 March 1998, the Special Commissioners sustained the Company's appeal. The Commissioners of Inland Revenue now appeal against that decision.

The Special Commissioners were provided with a brief Statement of Agreed Facts, and no further evidence was required. The issue was, and is, one of statutory interpretation, turning upon the terms of section 239(3) of the 1988 Act, and certain provisions of the Agriculture Act 1993.

For many years prior to the 1993 Act, responsibility for the marketing of milk lay with a number of statutory milk marketing boards. Among these was the Aberdeen and District Milk Marketing Board ("the Board"), responsible for the marketing of milk in Aberdeen and Banffshire. The Board administered a milk marketing scheme, having effect under the Agricultural Marketing Act 1958, called the Aberdeen and District Milk Marketing Scheme 1984.

Section 1(1) of the Agriculture Act 1993 provided for the revocation of the milk marketing schemes which had effect under the 1958 Act, including the scheme administered by the Board. Section 2(1) provided that a milk marketing board might apply to the appropriate authority for approval of a scheme for "the reorganisation of the arrangements relating to the marketing of milk in its area". Putting the matter very shortly, what was envisaged was that the milk marketing boards would cease to exist, and that there would be a successor body or bodies who would take over assets and liabilities from them, and engage in milk trading, in their place, after a specified vesting date. Provision is made for the approval of such schemes, and section 11(1) provides that on the vesting day under an approved scheme certain qualifying transfers are to have effect. Section 11(3) provides that a transfer is a qualifying transfer if it is a transfer of "property, rights or liabilities" of the relevant Board or a subsidiary to a "qualifying body". The Board obtained approval of a scheme of reorganisation, and it is common ground that on the vesting day, 1 November 1994, there was a qualifying transfer in terms of section 11 to the Company. Section 13 of the Act provides that the Board administering a milk marketing scheme shall not be deemed to be dissolved by reason of the revocation of the scheme by section 1(1); but Schedule 1, in laying down requirements for a scheme to be a qualifying scheme, limits the functions which the Board may carry out after the vesting day to functions in relation to retained assets and liabilities or the winding up of its affairs, and expressly provides that these shall not include the purchase or sale of milk. It is not suggested that the Board continued to trade after the vesting day.

These provisions of the 1993 Act are not, or are not primarily or evidently, concerned with matters of corporation tax. However, Schedule 2 to the Act contains various provisions relating to carrying out of approved schemes of reorganisation, and Part I of that Schedule sets out, in paragraphs 1 to 32, a number of taxation provisions. In particular, paragraph 1 is in the following terms:

The Company's claim in terms of section 239(3) of the Income and Corporation Taxes Act 1988 depends essentially upon these provisions of paragraph 1 of Schedule 2 to the 1993 Act, and the way in which it is said that section 239(3) should receive effect, having regard to the provisions of paragraph 1. Putting matters generally, section 239(1) provides that ACT paid by a company in respect of any distribution made by it in an accounting period is to be set against its liability to corporation tax on any profits for that accounting period, with a corresponding amount of liability accordingly being discharged. Subsection (3) contains a provision that in that subsection "surplus advance corporation tax", in relation to any accounting period of a Company, means ACT which cannot be set against the Company's liability to corporation tax for that period because the Company has no profits charged to corporation tax for that period (or because of certain other provisions). It is not disputed that the ACT paid by the Company in July 1995 was surplus ACT for the purposes of section 239(3). The substantive provisions of that subsection are as follows:

Section 239(4) deals with the situation where there is an amount of surplus ACT which has not been dealt with under subsection (3): that amount is to be treated for the purposes of section 239 as if it were ACT paid in respect of distributions made by the Company in the next accounting period.

As is pointed out by the Special Commissioners, the accounting period to which the Company seeks to carry back surplus ACT is the 1990 accounting period of the Board. The Company itself did not exist at that time, having been incorporated in 1993. It therefore had no accounting period in 1990, and made no distribution in 1990. So far as section 239(3) itself is concerned, there could be no question of treating the later surplus ACT as if it were ACT paid in respect of distributions "made by the company" in any of "its" accounting periods beginning in the six years preceding. The claim can only be well-founded if distributions which were or might have been made by the Board, in its 1990 accounting period, are, in the factual circumstances and as a result of the provisions of the 1993 Act, to be treated as distributions made by the Company, with the 1990 accounting period being treated as the Company's, rather than the Board's.

We do not find it necessary to rehearse the submissions made to the Special Commissioners, or the conclusions which they reached in the light of those submissions, except in so far as these arise directly in relation to the submissions made to us. Put shortly, the Special Commissioners held that the effect of paragraph 1(1) of Schedule 2 to the 1993 Act was that for corporation tax purposes the Company was to be treated as the same person as the Board; that if so, then "its" accounting periods must include the Board's accounting periods as well as its own; and that a distribution made by the Board in any of its accounting periods before the transfer must be treated as a distribution by the Company. Moreover, they treated the ability to carry back surplus ACT as a contingent right, vested in the Board immediately prior to the vesting day, and as a right, transferred to the Company. On the basis that this contingent right became enforceable when the Company had surplus ACT to carry back to an earlier year, and holding that one of the purposes of paragraph 1 must be that it could be applied to statutory provisions such as section 239(3), they interpreted the phrase "distributions made by the company in any of its accounting periods" as meaning "distributions made by the company, or its statutory predecessor, in any of its or its statutory predecessor's accounting periods".

In submitting that the Special Commissioners had erred, and that the appeal should accordingly be allowed, Mr. Woolman for the appellants drew our attention to the fact that the 1993 Act makes no express reference to section 239(3) of the 1988 Act; that the 1993 Act does not use the mechanism of deeming the Company to be the same person as the Board, for ACT or indeed other purposes; and that there were no provisions in the 1993 Act or elsewhere entitling the Company to carry surplus ACT back, and set it against the liability of the Board. So far as the Board were concerned, they could not set the surplus against a mainstream liability, there being no such liability. It was acknowledged that paragraph 1 of Schedule 2 to the 1993 Act contained taxation provisions, and that these were expressly to apply "for the purposes of the Corporation Tax Acts". But it was submitted that its terminology, treating the "trade" carried on by the Board as having been carried on by the Company, indicated that continuity of the trade was the essential issue, and showed that the purpose of the paragraph was to avoid charges to tax of the kind that could occur when one trade was discontinued, and a new trade was commenced. If A was succeeded by B in carrying on a trade, one could say that the trade was to be treated as single and continuous, and even that it was to be treated as if B had carried it on throughout; but that was not the same as deeming A and B to be the same person, either generally or even in that specific context, which was effectively what the Special Commissioners had done. Moreover, in relation to the transfer of a supposed right, transfer did not involve alteration or extension of a right beyond its terms. Even if the Board had transferred all its rights, universally, to the Company, that could not confer upon the Company some right which, according to its nature and terms, would come to an end when the Board in fact ceased trading. The Special Commissioners had seen themselves as adopting a "purposive" approach to interpretation, but had gone too far into artificiality, in attributing to the Company an accounting period which it had never had, and distributions which it had never made. The essential question was as to the proper construction of the 1993 Act, and whether it gave to the 1988 provisions some special ad hoc meaning and effect. No doubt it could; but the proper approach to construction must be adopted, and did not result in any such "warped" meaning for section 239.

Leaving aside at present questions as to different approaches to construction, Mr. Woolman's submissions as to the meaning and effect of the statutory provisions can be stated quite briefly. Section 239 itself afforded no support for the idea that a successor body might achieve a set off which had not been available to a predecessor. In any event, the Company was not in a full sense the "successor" of the Board: the Board continued to exist after the vesting day; paragraph 4 of Schedule 1 to the 1993 Act showed that there were considerable limitations upon what, in terms of a qualifying scheme, could be transferred by the Board; and while paragraph 11 of Schedule 1 provided that the scheme must make provision for the transfer under section 11 of all the property, rights and liabilities to which the Board was entitled or subject on the vesting day, other than certain listed categories, it was to be noted that there were these excepted categories. The Company could not be regarded as a universal successor to the Board. While paragraph 1 of Schedule 2 referred generally to the Corporation Tax Acts, this was to be contrasted with other provisions which referred to specific taxing sections: unless the words used had the effect of altering the scope of section 239(3) of the 1988 Act, one had no reason to suppose that paragraph 1 was in any way concerned with that section. Looking at the section, it was submitted that if Parliament had intended what was claimed by the Company, this could have been done straightforwardly. Section 239(3) could have been referred to. A deemed identity of personality between the Board and the Company could have been created. Examples could be seen in the British Steel Act 1988 section 11(1); the Ports Act 1991 section 35; and the British Technology Group Act 1991 section 12. Parliament was drawing a distinction between such cases, and a case like the present, or what was to be found in the Electricity Act 1989 Schedule 11 paragraph 1. And even within Schedule 2 to the 1993 Act, a contrast was plainly intended between paragraph 1, and paragraph 6(2), where in relation to roll-over relief, there was a provision that the relevant provisions of the Taxation of Chargeable Gains Act 1992 were expressly to have effect in relation to the disposal in question "as if the board and the qualifying body were the same person". It was submitted that it was clear that Parliament only introduced such a provision where that was necessary for a particular fiscal purpose, it being clear elsewhere that no such identity of personality was being provided for. This confirmed that paragraph 1 was concerned with the actual change from one trader to another, with no need to go back across time or introduce retrospective effects.

Counsel for the appellants advanced certain further specific arguments, which it is convenient to leave over to later. But in relation to these general submissions advanced on behalf of the appellants the submission for the Company was that they were ill-founded. Paragraph 1 referred expressly to the Corporation Tax Acts, and the absence of any reference to a specific provision showed that it must be taken into account when any provision of those Acts fell to be considered in relation to the Company - as section 239 plainly could, and as subsection (3), with the occurrence of an amount of surplus advance corporation tax, in fact had. The fact that Parliament had adopted the mechanism of treating two persons as the same person in other contexts was of no significance: that was plainly not the only way of achieving any particular purpose, and the question remained as to what this paragraph meant, and how section 239 fell to be applied in the circumstances. The primary contention on behalf of the Company was that section 1(1)(a), taken alone, had the effect that for all corporation tax purposes, the person who was to be regarded as having carried on the trade over the period up to 31 March 1990, and made profits on which mainstream corporation tax was paid, was the Company and not the Board. That contention depended simply upon the terms of paragraph 1(1)(a), and did not involve any consideration of whether the ability to carry back surplus ACT had been a transferred "right".

The second submission for the Company was, however, that there had in fact been a contingent right vested in the Board, and that this had been transferred to the Company. In this connection, reliance was placed upon paragraph 1(1)(c). While it was submitted that both of these arguments were sound, it would be enough for the Company if one was.

For an understanding of paragraph 1(1), it was submitted, one should look at Schedule 2 as a whole. It was plain that it was not concerned only with the tax consequences of the actual transfer, and issues such as discontinuance and recommencement. That was one matter which was dealt with, and indeed was specifically dealt with by paragraph 1(1)(b). Reference was also made to paragraphs 16 to 18. But it was clear that Schedule 2 was also concerned with such matters as the preservation of existing reliefs, which had been available to the Board and which, without the provisions of Schedule 2, would have been lost. The provisions of paragraph 6 in relation to roll-over relief were one example, but others could be found in paragraph 7 (dealing with unallowed capital losses) and in paragraphs 11 to 15, dealing with the apportionment of losses and capital allowances. Reliance was also placed upon the general language used: section 11(3) of the 1993 Act referred to a transfer of "property, rights or liabilities" in general, and not only was that general expression used again in paragraph 1(1)(c), of Schedule 2 but paragraph 1(1)(a) showed that Parliament considered that a transfer under section 11, plainly of "property, rights or liabilities" could constitute a transfer of a "trade, or part of a trade". It was clear that what was envisaged was an overall transfer of an undertaking, with an overall intention that the new body should be in no different position from the position which would otherwise have obtained. That was so from the point of view of the Inland Revenue, as well as from the point of view of the taxpayer. Reference to Hansard showed that the intention of Parliament had been to avoid tax charges arising solely as a result of the reorganisation, but this had been expressed very broadly as an aim of "tax neutrality", so that "the new body will stand in the shoes of the old one". These aims would not be achieved if the Company was not put in the same position, in relation to its payment of surplus ACT, as the Board would have been in, if the trading had continued in the Board's hands rather than being transferred to the Company's. While these identified aims might justify a "purposive" construction of the provisions, no special approach to construction was required. It was indeed the whole trade of the Board which had been transferred to the Company under section 11. Paragraph 1(1)(a) was explicit that it was that trade which was to be treated as having been carried on by the Company; and it was moreover explicit that this trade was to be so treated as having been carried on by the Company "at the time when it began to be carried on by the board and at all times since that time". These words could only be explained if the provision was indeed to apply for all or any of the purposes of the Corporation Tax Acts, with no restriction to events at or after the time of transfer and no limitation to any particular reliefs, allowances or other situations which might be relevant for the purposes of the Corporation Tax Acts. If one treated the trade which had been carried on in 1990 as having been carried on by the Company, then the Company, and only the Company, must be treated as having made any distributions then made, and as having an accounting period at that time. That being so, when one applied section 239(3), there could be no doubt that "its" accounting period meant the Company's accounting period; and correspondingly there was no problem in proceeding upon the basis that "distributions made by the company" could be made at that earlier time. While the Company was thus deemed to be the person who was trading at that time, this was a provision made for the purposes of the Corporation Tax Acts, and the submission was not that the Company was the "same person" as the Board, or that a provision producing identi

For his second argument, depending on the transfer of a "right", counsel for the Company referred directly to the terms of paragraph 1(1)(c), again submitting that the words resolved the matter. Circumstances giving rise to surplus ACT were likely to arise after the vesting day, and this was a possibility which was plainly foreseeable. If that event occurred, that would constitute the emergence of a contingency, which if the Board had still been trading would properly be regarded as turning a contingent right into an actual right under section 239(3). If it was properly to be seen as a right at that stage, it should be treated as having been the Company's contingent right originally, and vice versa.

The primary submissions made by counsel for the Company in relation to paragraph 1(1)(a) appear to me in themselves to have some force. Taking paragraph 1(1)(a) on its own, and considering how section 239(3) should be applied in the light of paragraph 1(1)(a), I can understand that, treating the Company as the trading company, the accounting periods should perhaps be seen as "its", with any distributions being made by it in such periods. But as I have mentioned, counsel for the appellants advanced certain specific arguments which I have not yet dealt with; and these require consideration before any conclusion can be reached as to the meaning and effect of paragraph 1(1).

First, if the argument in relation to paragraph 1(1)(a) is sound, a question arises as to what paragraph 1(1)(c) is for. It did not appear to me that counsel for the Company gave any real answer to that question, and I do not myself see one.

Secondly, it is clear that a trade carried on by a milk marketing board might be transferred under section 11 not to one qualifying body, but to a number: this is expressly envisaged in paragraph 11 of Schedule 2, and provision is made for apportionment of losses and capital allowances where there are two or more such "successor bodies". A question plainly arises as to what would be the proper course, where there are two or more such successor bodies, in relation to surplus ACT, and claims or potential claims by more than one such body, under section 239(3). No provision is made to deal with that situation; and in the absence of such a provision (which one might have expected, given the terms of paragraph 11) counsel for the Company did not appear to me to be able to say what would be the result. It was suggested that the absence of provision might have arisen because the problem had not been foreseen. I do not find that suggestion very persuasive, and the problem appears to be one which affects both of the Company's main arguments.

Finally, a question arises as to the effect of paragraph 1(3). That provision does not seem to have been regarded as having significance, when the matter was before the Special Commissioners; and its possible significance only emerged somewhat slowly during the hearing before this court. But it appears to me to create a major problem in relation to the interpretation which the Company seeks to give to paragraph 1(1). If, as paragraph 1(3) provides, the whole paragraph, including paragraph 1(1), is only to have effect "in relation to accounting periods beginning after" the last complete accounting period of the Milk Marketing Board ending before the date of transfer under section 11, then it is apparently not to have effect in relation to accounting periods preceding that last complete accounting period. The accounting period which is in issue in terms of section 239(3), regardless of whether one treats "its accounting periods" as the Board's or the Company's, undoubtedly began, and indeed ended, before that last complete accounting period of the Board. Standing paragraph 1(3), I cannot see how paragraph 1(1)(a), or indeed paragraph 1(1)(c), can be said to "have effect in relation to" that earlier accounting period. Paragraph 1(3) does not of course mean that the paragraph cannot "have effect" in relation to 1995, when ACT paid by the Company resulted in the amount of surplus ACT with which we are concerned coming into existence. If therefore the relevant "effect" of paragraph 1 was its effect in relation to a 1995 accounting period, and not in relation to the 1990 accounting period, the provision contained in paragraph 1(3) would have no bearing upon the contentions advanced on behalf of the Company. And more broadly, counsel for the Company submitted that paragraph 1(3) was in truth simply a commencement provision: the changes which were being introduced by the paragraph, for the purposes of the Corporation Tax Acts, were changes introduced with reference to subsequent accounting periods, and it was thus these subsequent accounting periods which were affected by the changes. The changes would have to be taken into account when computing tax liability for these later periods. This provision, like the provisions which were found at paragraphs 2(3) and 3(4), was providing and acknowledging that it could be in relation to such subsequent accounting periods that one would have to consider and apply the new provisions. It was thus in relation to that later accounting period that the paragraph would "have effect"; and taking this reading of paragraph 1(3) along with the evident meaning of paragraph 1(1)(a) and (c), particularly in the context of what was apparently the overall purpose of the paragraph, it was submitted that the decision of the Special Commissioners was sound, and that the Company was entitled to have the surplus ACT treated as if it were ACT paid in respect of distributions made by the Company in the 1990 accounting period.

I do not doubt that there might well be situations in which a statutory provision linking events which occurred after some fundamental change with events which had occurred before that change could be said to have its "effect" at the latter, rather than the earlier, date. Such a view might, for example, be appropriate if some earlier loss could be brought into account at some later date, so that the tax effect was to be seen as occurring at the later date. And such an approach might be particularly appropriate if some overriding purpose had been identified, with which such a reading would be consistent. It may indeed be that the provisions contained in paragraphs 1(3), 2(3) and 3(4) afford scope for claims which would rest upon this type of reasoning. But I find myself unable to read paragraph 1(3) as leaving it open to the Company to make a claim in terms of section 239(3), applying paragraph 1(1) in the manner contended for by the Company. There is no problem in reading section 239(3) as applicable, in as much as there is here a case of an accounting period of the Company in which there is an amount of surplus ACT. But while that is the starting point for the subsection, and while that accounting period comes after the deadline set by paragraph 1(3), the whole nature and structure of section 239(3) is such that the accounting period with which one is truly concerned, and in relation to which the surplus ACT in question may be treated in the described way, is the earlier accounting period - in this case, 1990. For the Company's contentions to be upheld, the crucial "effect" of paragraph 1(1)(a), or indeed 1(1)(c), is the substitution of the Company for the Board as the relevant person, both in relation to payment of advance corporation tax in respect of distributions in that earlier period, and in relation to the expression "its" accounting periods. Even if the effect which the Company claims paragraph 1(1) has is in part an effect in relation to the later period, I find myself unable to hold that it does not also necessarily involve an "effect" in relation to the 1990 period. It is in relation to that period that the meaning and effect of section 239(3) would be transformed, by paragraph 1(1)(a), or paragraph 1(1)(c), giving these provisions the meanings for which the Company contends.

In my opinion, paragraph 1(3) is thus fatal to the contentions advanced on behalf of the Company. Support for the view that the Company is not entitled to carry back surplus ACT into the period when the Board was trading, for the purposes of section 239(3), is in my opinion to be found in the absence of any provisions for apportionment between different successor bodies, and while I have considered whether a "purposive" approach to construction might alter the position, I am not persuaded that it can. The provisions of the Schedule adopt the all too familiar approach of apparently trying to provide for everything specifically. Such a bit-by-bit approach to draughtsmanship seems to me to make it very difficult to say what the exact scope of any underlying purpose may have been. Where Parliament's overriding intention is that its purposes or ends should be achieved, it may be that it would be wiser for Parliament to express those purposes or ends in the statute, rather than remaining silent in that respect, and enacting more numerous, but less evidently purposive, provisions. It may be that Parliament intended the tax effect of these provisions, in years after the crucial change, to be the same, for those years, as it would otherwise have been. But it is less clear that Parliament intended the provisions to have what one may call a retrospective effect, allowing surplus ACT arising after the vesting day to be treated as if it were ACT paid before then. It may well be that the matter could have been handled differently; but if I am right in thinking that the Company's construction of paragraph 1(1)(a) or 1(1)(c) has its effect upon section 239(3) in relation to the earlier accounting period, then I can at least envisage that Parliament might not wish to bring about this effect, and wished to produce "neutralising" effects only when one came to accounting periods which were the Company's rather than the Board's.

In these circumstances, and upon that reading of paragraph 1(3), it does not seem to me to be useful or necessary to consider further the issue as to whether the Board had a contingent right, which paragraph 1(1)(c) would effectively vest in the Company, so as to enable the Company to invoke it when the contingency emerged. Finding it difficult or impossible, as I do, to understand the purpose of paragraph 1(1)(c) alongside paragraph 1(1)(a), even ignoring paragraph 1(3), I do not see this as a case where a hypothetical discussion of the nature of contingent rights should be embarked upon.

Finally, and for somewhat similar reasons, I do not see this as a case where any general comments on the nature or propriety of "purposive" construction would be appropriate. I am unsure as to Parliament's purpose. But I am satisfied that whatever that purpose may have been, the terms of paragraph 1(3) are such that any underlying purpose cannot break through them, so as to alter the meaning which they would otherwise have.

I would allow the appeal.

I agree with the opinion of your Lordship in the chair and there is nothing I can usefully add.

I have read the Opinion of your Lordship in the chair and for the reasons given therein I agree that this appeal should be allowed.

In particular I agree that the wording of paragraph 1(3) of Schedule 2 of the Agricultural Act 1993 is fatal to the respondents' arguments at the appeal.