[2011] UKFTT 838 (TC)

TC01674

Appeal number: TC/2010/4962

Corporation tax – joint referral – FA 1998, Sch 18, para 31A – group relief – consortium – surrendering company indirectly partly owned by Luxembourg company – condition that “link company” must be UK resident or carry on a trade in the UK through a permanent establishment – s 402(3), (3A) and (3B) ICTA 1988 – whether requirement an infringement of EU law that can be relied upon by claimant companies – questions referred to CJEU – whether that requirement cannot be applied against claimant companies by virtue of the non-discrimination article of the UK-Luxembourg double tax convention – whether group relief precluded by s 410 ICTA

FIRST-TIER TRIBUNAL

TAX

(1) THE FELIXSTOWE DOCK AND
RAILWAY COMPANY LIMITED

(2) SAVERS HEALTH AND BEAUTY

LIMITED

(3) WALTON CONTAINER TERMINAL

LIMITED

(4) WPCS (UK) FINANCE LIMITED

(5) AS WATSON CARD SERVICES (UK)

LIMITED

(6) HUTCHISON WHAMPOA (EUROPE)

LIMITED

(7) KRUIDVAT UK

(8) SUPERDRUG STORES PLC

Applicants

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

  TRIBUNAL: ROGER BERNER

SIR STEPHEN OLIVER QC

(Tribunal Judges)

Sitting in public at 45 Bedford Square, London WC1 on 24 – 26 May 2011 and after receiving further written submissions

Philip Baker QC and Nicola Shaw, instructed by Ernst & Young LLP, for the Appellant

David Goy QC and Gerry Facenna, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.       We are asked to determine certain questions on a joint referral pursuant to paragraph 31A of Schedule 18 to the Finance Act 1998 in the course of enquiries into the tax returns of certain companies in the Hutchison Whampoa group.

2.       The Hutchison Whampoa group is a worldwide group of companies headed by Hutchison Whampoa Limited, a company resident for tax purposes in Hong Kong.  The referral arises out of claims for group relief by the relevant Hutchison Whampoa companies (“the Applicants”) in respect of losses made by one member of the group, Hutchison 3G UK Limited (“the Surrendering Company”).

3.       At the relevant time the Surrendering Company was owned by a consortium of companies through an intermediate holding company.  Relief has been claimed pursuant to the provisions of s 406 of the Income and Corporation Taxes Act 1988 (“ICTA”).  In order for such relief to be available there must exist a “link company” which is both a member of the consortium and a member of a group of companies.  In the present case the Applicants say that Hutchison 3G UK Investments Sarl (“Investments”), a company resident in Luxembourg, was such a company on the basis that it was a member of the consortium owning, through an intermediate UK resident holding company (Hutchison 3G UK Holdings Limited), the Surrendering Company, and was in addition a member of a group of companies which included the Applicants.

4.       It is a requirement of s 406(2) ICTA that the obtaining of relief by a group member is dependent on the link company itself being able to make a consortium relief claim.  In the present case it was not possible for Investments to make such a claim on the face of the relevant legislation.  Entitlement of a company to group relief is given by s 402(3) ICTA.  Subsection (3A) provides that such relief is not available unless the claimant company satisfies the condition in subsection (3B), namely

5.       It is common ground that this condition is not satisfied in respect of Investments.  The Applicants say that such a requirement is ineffective as regards the Applicants in that:

6.       In addition to these issues on the fundamental right to claim consortium relief in these circumstances, a question also arises in the circumstances of this case on the application of the anti-avoidance provisions in s 410 ICTA.  This arises as a result of certain share sale agreements entered into at the relevant time.

7.       At the May 2011 hearing we heard oral argument from Mr Baker and Miss Shaw for the Applicants and from Mr Goy (assisted by Mr Facenna) for HMRC.  Because the appeal of the decision of the First-tier Tribunal in FCE Bank plc v Revenue and Customs Commissioners [2010] SFTD 718 had only recently been heard in the Upper Tribunal (Tax and Chancery), and the decision had not been released, we adjourned for written submissions following the release of the Upper Tribunal decision.  That decision (see [2011] UKUT 420 (TCC)) was released on 13 October 2011.  We are grateful for the written submissions we have received in that respect, which we have considered in reaching our decision.

The referral questions

8.       The questions referred to the Tribunal for determination are:

9.       There was no dispute on the facts.  We reproduce below the statement of agreed facts produced by the parties:

1. The Applicants are all companies incorporated and resident in the United Kingdom and were members of the group comprising Hutchison Whampoa Ltd and its subsidiaries  (the “Hutchison Whampoa Group”) during all, or part of, the period from 26 April 2002 to 23 June 2005 (the “Total Period”) (as specified in Appendices 2 & 3 to this Agreed Statement of Facts). They have made claims for consortium relief under sections 402 and 406 of the Income and Corporation Taxes Act 1988 (ICTA) in respect of the trading losses of Hutchison 3G UK Limited (“the Surrendering Company”), a company incorporated and resident in the United Kingdom. A list of the relevant Applicant claims appears at Appendix 1 to this Agreed Statement of Facts[1].

2. The Surrendering Company, a company incorporated and resident in the United Kingdom, commenced trading on 26 April 2002 and had an accounting period for all relevant years ending 31 December. The accounting periods of the Surrendering Company that fall within the Total Period are referred to here as the “Relevant Accounting Periods”. On 23 June 2005 the consortium relationship ceased to exist and the Surrendering Company became a member of the same group as the Applicants.

3. The ultimate parent company of the Hutchison Whampoa Group is, and was throughout the Total Period, Hutchison Whampoa Limited (“HWL”), a company incorporated and resident in Hong Kong. The diagram at Appendix 2[2] illustrates the Group position of the Applicants and the Surrendering Company as at 7 November 2003 (the relevance of that date is explained below). The diagram at Appendix 3[3] of this Agreed Statement of Facts illustrates the Group position of the Applicants and the Surrendering Company as at 23 June 2005.

4. The Surrendering Company is, and was throughout the Total Period, a 100% subsidiary of Hutchison 3G UK Holdings Limited (“Holdings”), a company incorporated and resident in the United Kingdom. On 7 November 2003 Holdings was owned:

(i) as to 50.1% by Hutchison 3G UK Investments SARL (“Investments”), a company incorporated and resident in Luxembourg;

(ii) as to 14.9% by three indirect subsidiaries of HWL, Brave First Limited (as to 1.5%), Clear Choice Limited (as to 5%) and Bright Thought Limited (as to 8.4%), all three being companies, incorporated and resident in the British Virgin Islands;

(iii) as to 20%, by Brilliant Design Limited (“Brilliant Design”) a company incorporated in the British Virgin Islands, whose indirect 100% shareholder was NTT DoCoMo, Inc. (“DoCoMo”), a company incorporated in Japan; and

(iv) as to 15%, by Waerdah Limited (“Waerdah”) a company incorporated in the British Virgin Islands, whose 100% shareholder was KPN Mobile N.V. (“KPNM”), a company incorporated in the Netherlands.

5. Throughout the Total Period, Investments was 100% owned by Hutchison Europe Telecommunications SARL, a company incorporated and resident in Luxembourg, which was throughout the Total Period 100% owned by Hutchison Whampoa Europe Investments SARL, also incorporated and resident in Luxembourg, which was throughout the Total Period 98.98% owned by Auditorium Investments 1 SARL, a company incorporated and resident in Luxembourg. The balance of the shares in Hutchison Whampoa Europe Investments SARL were, throughout the Total Period, owned by Auditorium Investments 2 SARL (0.51%) and Auditorium Investments 3 SARL (0.51%), which two companies were incorporated and resident in Luxembourg.

6. Throughout the Total Period, Auditorium Investments 1 SARL, Auditorium Investments 2 SARL and Auditorium Investments 3 SARL were each 100% owned by New Millennium Corp, a company incorporated and resident in the Cayman Islands, which was 100% owned by Ommaney Limited, a company incorporated and resident in the British Virgin Islands, which was owned 100% by Hutchison Whampoa International (00/03) Limited, a company incorporated and resident in the British Virgin Islands, which was owned 100% by Hutchison Telecommunications Limited, a company incorporated and resident in Hong Kong, which was owned 100% by Hutchison International Limited, a company incorporated and resident in Hong Kong, which was owned 100% by HWL.

7. During each Relevant Accounting Period (or part thereof) in respect of which consortium claims have been made, the Applicants were not less than indirect 75% owned subsidiaries of HWL. During each Relevant Accounting Period, the Applicants were neither directly nor indirectly owned by Investments.

8. The principal activity of the Surrendering Company is owning network infrastructure and providing mobile telecoms services in the United Kingdom. In May 2000, the Surrendering Company acquired a UK 3G telecoms licence (“the Licence”) and began incurring substantial expenditure in establishing a network, acquiring content and other services to be provided to customers, promotional work and agreeing contracts with suppliers and customers.

9. On 12 July 2000, HWL, KPNM, New Millennium Corp and Koninklijke KPN NV entered into an agreement under which KPNM agreed to subscribe for shares representing 15% of Holdings’ issued share capital, and this transaction completed on 21 September 2000.  Also on 12 July 2000, HWL, DoCoMo, and New Millennium Corp entered into an agreement under which DoCoMo purchased all of the shares in the issued share capital of Brilliant Design, and this transaction also completed on 21 September 2000.

10. On 7 November 2003 and on 27 May 2004, HWL entered into share purchase agreements (the “SPAs”) with KPNM and DoCoMo respectively under which (a) HWL agreed to purchase from KPNM all of the issued shares in Waerdah, and (b) HWL agreed to purchase from DoCoMo all of the issued shares in Brilliant Design.

11. On 23 June 2005, HWL exercised its rights under the SPAs by procuring that New Millennium Corp, an indirect 100% owned subsidiary of HWL, acquired from KPNM all of the issued shares of Waerdah and acquired from DoCoMo all of the issued shares of Brilliant Design.  Since 23 June 2005, Holdings has been 100% owned by HWL indirectly and directly owned by Waerdah Ltd (as to 15%), Brilliant Design Ltd (as to 20%), Brave First Ltd (as to 1.5%), Clear Choice Ltd (as to 5%), Bright Thought Ltd (as to 8.4%) and Investments (as to 50.1%).

12. During the Total Period the Surrendering Company incurred substantial losses. For each of the Relevant Accounting Periods to which the claims for consortium relief relate all of the Applicants made trading profits of at least the amount of relief claimed by them.

13. Pursuant to an arrangement within the Hutchison Whampoa Group, the Surrendering Company was entitled to receive 30 pence for every £1 of losses surrendered. Appendix 4 details the quantum of the claims made, the amounts invoiced and amounts paid to date[4].

The EU law question

10.    Having heard argument on the EU law question, we decided that we could not with complete confidence reach a conclusion on that question without a reference to the Court of Justice of the European Union (“CJEU”).  Accordingly, we invited the parties to submit a draft form of reference for us to settle.  We have made directions, incorporating the form of the reference to the CJEU, and have released those directions to the parties at the same time as this decision.

11.    Investments is a company resident in Luxembourg for the purposes of the UK/Luxembourg double tax convention of 24 May 1967 (“the DTC”).

12.    Article 26 of the DTC is a non-discrimination provision.  Article 26(4) provides as follows:

13.    The Surrendering Company is an enterprise of the UK, and its capital is partly owned indirectly by Investments.  That much is not in dispute.  But Mr Baker submitted that the link company residence requirements in s 406(2), (3A) and (3B) contravened Article 26(4) in two particular respects:

14.    Mr Baker submitted that the effect of Article 26(4), taken with s 788(3) ICTA, is that the Applicants can obtain relief from corporation tax by means of the group relief claims notwithstanding the link company residence requirement.

15.    Mr Goy, on the other hand, argued that the Applicants’ claims could not be made out, for three reasons:

16.    In any group relief claim there are two elements: the surrender of a tax loss by the surrendering company and the claim for relief from tax by use of the surrendered loss by the claimant company.  In the latter case it is easy to conclude that, if the claim for relief is denied to a company in foreign ownership in circumstances where it would have been available to reduce the claimant company’s liability to tax if the claimant company had been owned by a UK resident, the claimant company would have suffered more burdensome taxation.  That was the accepted position in FCE Bank plc v Revenue and Customs Commissioners [2010] SFTD 718 before the First-tier Tribunal and in the Upper Tribunal [2011] UKUT 420 (TCC).  We shall discuss FCE Bank in more detail later, but we do not agree with the written submission of Mr Baker and Miss Shaw that the Upper Tribunal decision in FCE Bank can in any way be authority that the inability to surrender losses is “taxation” which is “other or more burdensome”.  The point was not argued in FCE Bank, but was merely accepted in the context of group relief, where the company alleging discrimination on the ground that it was owned by a non-UK resident company was the claimant company.  The position is less straightforward in the case of the Surrendering Company, which does not itself make a claim to relieve its own taxation.

17.    There is no dispute on the appropriate comparison that needs to be made in construing Article 26(4).  Noting that the First-tier Tribunal in FCE Bank left the position open regarding discrimination on account of third state-ownership (p 729, fn 5), in this case the relevant comparison is between the case where the capital of the Surrendering Company, as here, is partly owned or controlled, indirectly, by a Luxembourg-resident company (Investments) that is a link company within s 406(1) ICTA, and the same structure where the link company is a UK-resident company.  Applying this comparison, there is clearly a difference of treatment; in the latter case the Surrendering Company would have been able to surrender its losses, whereas in the former it would not.  The question is whether this is a difference in treatment which has the result that the Surrendering Company in the former case has been subjected to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which the Surrendering Company in the latter case would be subjected.

18.    This then is a matter of treaty interpretation.  We were referred to the helpful summary of the approach to treaty interpretation by the special commissioners in Re the Trevor Smallwood Trust, Smallwood v Revenue and Customs Commissioners [2008] STC (SCD) 629 (at [94], [95] and [98] – [99]), which was repeated by the First-tier Tribunal in FCE Bank (at [3]).  We need not set that out in full.  We must look for a clear meaning of the words used, having regard to the purpose of the particular article or of the treaty as a whole.  The interpretation of an international treaty should take account of the general principle of international law, embodied in article 31(1) of the Vienna Convention on the Law of Treaties, 23 May 1969, 1155 UNTS 33 that “a treaty should be interpreted in good faith and in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object or purpose.”

19.    The DTC is based on the OECD (Organisation for Economic Co-operation and Development) model tax convention of 1963.  As the special commissioners described the position in Smallwood (in that case in relation to the corresponding OECD model of 1977), the model has a commentary explaining its terms and this is accordingly an important means of interpretation of the model and of the treaties that follow it.  If particular treaty wording to which meaning has been attached by the commentary is used by the treaty negotiators or drafters, it may be readily assumed that those words should bear such a meaning even if, on their ordinary meaning, they arguably might not do so.

20.    In the commentary on the non-discrimination article (Article 24) of the 1963 model treaty, the OECD refer to the phrase “… shall not be subjected … to any taxation or any requirement connected therewith which is other or more burdensome”.  Although this is in the context, not of Article 24(5) (which is the equivalent provision in the 1963 model to that with which we are concerned in Article 26(4) of the DTC), but of Article 24(1), which provides that nationals of a contracting state may not be less favourably treated in the other contracting state than nationals of the latter state in the same circumstances, the relevant wording is identical.  The commentary states (at para 9) that those words:

21.    In relation to Article 24(5), the commentary makes the point that the provision relates only to the taxation of enterprises, and not of the persons owning or controlling the capital.  But in that context it states that Article 24(5):

22.    We were referred also to the 2010 version of the OECD commentary, which contains an expanded commentary on Article 24(5) of the model treaty. This is relevant as it represents the current views of the member states of the OECD, although, as the First-tier Tribunal in FCE Bank pointed out (at [30]), some caution must be exercised in relying on commentaries added later than the treaty because it cannot be said that the parties made the treaty in reliance on them.  Our attention was drawn to paras 76 and 77 of the 2010 version in particular.  Paragraph 76 repeats the principle that Article 24(5), and the discrimination which it puts an end to, relates only to the taxation of enterprises and not of the persons owning or controlling their capital.  Its object is to ensure equal treatment for taxpayers residing in the same state, and not to subject foreign capital, in the hands of the partners or shareholders, to identical treatment to that applied to domestic capital.  Paragraph 77 then continues:

23.    We do not find this further commentary in para 77 to be of any assistance in determining the issue before us.  The most it tells us is that questions of treaty non-discrimination can fall to be considered in the context of domestic legislation concerning transactions within, or tax treatment of, groups of companies with an element of foreign ownership.  Mr Goy did not seek to argue that para 77 had the effect of precluding non-discrimination from applying in the case of group relief generally.  In any event, we would share the view expressed by the First-tier Tribunal in FCE Bank that para 77 does no more than say that grouping of losses etc might not be claimed where one group company is resident and the other non-resident, which is a very different case from that with which we are concerned, where both the Surrendering Company and the claimant companies are UK resident, and so the focus is clearly on the taxation of resident enterprises and not on that of the non-resident parent company.

24.    Mr Baker submitted that the refusal to allow the Surrendering Company to surrender its trading losses to the Applicants constituted both “taxation” that was other or more burdensome than in the case of the equivalent UK-owned surrendering company, and also “any requirement connected therewith” that was similarly other or more burdensome.  He referred to the need to interpret the treaty provision purposively; the purpose, ascertained from the OECD commentary, is to prevent differences in tax treatment based solely on foreign ownership.  That purpose would not be achieved by taking a narrow view of the meaning of “taxation” in this context.  On the ordinary meaning of the words in Article 26(4) of the DTC, the Surrendering Company is subjected to taxation other than or more burdensome than in the equivalent case.  The Surrendering Company cannot, in contrast to its UK-owned counterpart, transfer its losses.  It is restricted to carrying those losses forward, and may, or may not, be able to use them against its own trading profits.

25.    Mr Baker accepted that the inability of the Surrendering Company to surrender its losses did not have the result that it would be liable to a greater amount of tax.  Indeed, of course, its liability to tax for the accounting period of surrender would be the same, irrespective of any ability or inability to surrender, namely zero.  Furthermore, if it were to be able to surrender its losses, it could, if it subsequently made profits, pay more tax, as it would not have the benefit of the carried forward losses at that time.  However, the effect is that the Surrendering Company is deprived of the opportunity, available to its UK-owned equivalent, to use its losses at an earlier date.  This, submitted Mr Baker, means that the Surrendering Company is subject to a treatment for tax purposes that is other than that which would apply if it were owned indirectly by a UK company.  Furthermore, although he submitted that it was not a necessary ingredient of a claim under article 26(4), Mr Baker argued that the Surrendering Company is disadvantaged because it cannot receive compensation for the surrender of its losses.

26.    Mr Goy submitted that the inability of the Surrendering Company to surrender losses is not taxation, nor is it another requirement connected therewith.  The “other requirement” must be connected with taxation to which the company in question is subject.  The relief in this case is not taxation to which the Surrendering Company is subject and hence the requirement complained of cannot be a requirement connected with such taxation.  Mr Goy argued that the question is not whether the Surrendering Company is subject to different treatment but whether it is subjected to different taxation, or other requirement connected therewith.  An inability to part with a relief cannot mean that the Surrendering Company is subjected to taxation.  In respect of requirements connected with taxation, those, submitted Mr Goy, can relate only to obligations and not, in the case of a surrender, to opportunities.

27.    In this respect, Mr Goy referred us to two cases, R v Inland Revenue Commissioners, ex parte Commerzbank AG [1991] STC 271, and UBS AG v Revenue and Customs Commissioners [2005] STC (SCD) 589, as illustrative of the application of non-discrimination articles in cases that were concerned with burdens faced by the taxpayer.  In Commerzbank the question concerned a repayment supplement sought by the bank in respect of certain tax overpaid.  The claim was refused on the basis that eligibility for repayment supplement depended on the bank being resident in the UK.  On the issue of the non-discrimination article in the applicable treaty in that case, the Divisional Court (Nolan LJ and Henry J), whilst finding that the repayment supplement did not fall within s 788(3) ICTA, so that the non-discrimination provision did not have effect to that extent in UK law, nevertheless decided that the bank had been subjected to a more burdensome requirement than its UK counterpart, by not being entitled to the possibility of compensation on the overpayment.  That was a more burdensome requirement as regards the payment of tax, which was paid without the prospect of obtaining compensation.

28.    In UBS, a claim was made, under s 243 ICTA, for payment of tax credits by the setting of losses against franked investment income.  The special commissioners took the view that payment of the tax credit was part of the levying of taxation and that the taxation of the appellant in that case was less favourably levied.  Mr Goy submitted that the non-availability of the tax credit to the appellant meant that the tax burden on the appellant would be heavier.   However, on the facts of that case, the appellant (or its predecessor) had accumulated trading losses.  Its claim was an attempt to monetise those losses by making a s 243 claim so that its surplus franked investment income for the relevant accounting period was treated as trading income of that period and that accordingly the carried forward losses could be set against that income and payment of the tax credit could be received.  UBS is not therefore, in our view, a case where the difference in treatment resulted in an increased liability to tax.  It is closer to the facts of this case, where an inability to surrender does not lead to any change in the liability to tax of the Surrendering Company for the relevant period.

29.    In our view, construing Article 25(6) so as to relate only to discrimination that results in a liability to tax or a burden in respect of tax would be to take too narrow an approach to the interpretation of that article.  The article does not refer to tax liability as such, and we regard the more natural reading of “subjected to taxation” as referring to the taxation regime of the relevant contracting state, and not to any particular liability or burden.  The reference in the OECD commentary to “different treatment” suggests a broad meaning, and it is one that in our view accords with the ordinary meaning of the words in the article.

30.    We agree therefore with Mr Baker that the inability of the Surrendering Company to make use of its losses by surrender, in circumstances where its UK-owned counterpart could do so, and the inability therefore to obtain a payment for group relief, does have the result that the Surrendering Company has been subjected in the UK to taxation that is other or more burdensome than the taxation to which corresponding enterprises are subjected.  Although the inability to surrender losses can have no impact on the immediate tax liability of the Surrendering Company, and the fact that it carries forward the losses and may therefore suffer lower taxation in future accounting periods than if the losses had been surrendered, this inability, both to surrender and to obtain payment from the claimant companies for the losses, is a difference in treatment that in our view falls within Article 26(4).

31.    Mr Goy argued that, even if it were found that the inability of the Surrendering Company to surrender losses was a taxation or requirement connected therewith, that inability to surrender was not the sole ground on which the relief was precluded.  Accordingly, argued Mr Goy, relying on Boake Allen Limited v Revenue and Customs Commissioners [2007] UKHL 25; sub nom NEC Semi-Conductors Ltd v IRC [2007] STC 1265, the difference in treatment did not fall within the ambit of article 26(4) of the DTC.

32.    In Boake Allen the dispute concerned the application of the group income provisions of s 247 ICTA under which UK resident group companies could, subject to certain conditions, elect to pay and receive dividends without the paying company being liable to account for the then advance corporation tax (“ACT”) and without the recipient company receiving a corresponding tax credit.  On a claim that the refusal to apply the same treatment to payment of a dividend by a UK company to its non-UK parent, the House of Lords held that this did not amount to discrimination contrary to the relevant double taxation convention.  The equality ensured by a double taxation convention was only that any enterprise which a company or individual resident in one country owned in the other country would not be subject to taxation which discriminated on the ground of its foreign control, but the denial of the right of election for group income treatment was not on the ground of the company’s foreign control but on the ground that s 247 could not be applied in a case in which the parent company was not liable to ACT.

33.    Arguments based on Boake Allen were raised by HMRC in FCE Bank.  In that case, which concerned the UK’s group relief rules as they operated prior to the Finance Act 2000, group relief as between two UK subsidiaries of a common US parent was denied in circumstances where it would have been available had the US parent company been resident in the UK.  The Upper Tribunal, upholding the decision of the First-tier Tribunal, held that denial of group relief in those circumstances was in contravention of the non-discrimination article of the relevant treaty.

34.    In finding as it did, the Upper Tribunal examined HMRC’s reliance, in particular, on the speech of Lord Hoffman in Boake Allen.  Having set out a passage from that speech (para [14] to [22]), the tribunal concluded (at [18]):

35.    Accordingly, whilst there could be no doubt that the actual statutory prohibition was that s 247 could not apply to a non-resident parent company, this was unrelated to the question of control or ownership, and simply related to the fact that a company that was not liable to ACT could not be a party to a group income election.

36.    Boake Allen concerned a case where the non-resident company was itself a party to the transaction in question, in that case the payment of a dividend between group companies.  That was not the case in FCE Bank, where the group relief was claimed as between two UK-resident companies, and the only connection the non-resident company had with the transaction was as the common parent of both UK companies.  Accordingly, the reasoning of Lord Hoffman in relation to the group income election in Boake Allen had no application to the group relief claim in FCE Bank.  As the Upper Tribunal observed (at [19]):

37.    As the Upper Tribunal went on to say, whilst Lord Hoffman’s conclusion needed no further reasoning to support it, he nevertheless gave certain examples designed to illustrate that control by the non-resident company could not have been the sole ground for denial of the right to make a group income election.  HMRC argued in FCE Bank that, having regard to an example given by Lord Hoffman, there was no discrimination as regards group relief on the ground that the capital of the UK companies was owned or controlled by the non-UK resident parent company, because it would have been perfectly possible for group relief to be obtained if a UK resident intermediate company had been interposed.  This argument was rejected by the tribunal as it was just another way of saying that the reason why group relief was not available is because the actual (not hypothetical) parent of the two UK companies was in fact not resident in the UK.

38.    Lord Hoffman was not saying in Boake Allen that the mere ability to interpose a UK company and obtain the relevant relief will in all cases mean there is no discrimination.  The real reason why s 247 could not be applied in that case was not because a non-UK resident had control.  It was because a group income election is a concept that cannot be applied to a case where one of the entities is not within the scope of ACT.  In drawing attention to the fact that a s 247 election could be made if a UK intermediate parent company were interposed, Lord Hoffman was not suggesting that the non-discrimination article cannot apply if a different structure (albeit with the same ultimate non-UK ownership) can be adopted to achieve the relief; he was merely illustrating that the reason for the UK rule on group income elections was related to the quality of one of the parties to the election as a UK-company within the charge to corporation tax, and not solely to the fact of non-UK control.

39.    As the Upper Tribunal found in FCE Bank, the same analysis could not apply in the case of group relief.  In that case there is no need for the parent of two UK-resident subsidiaries itself to be UK resident in order for a group relief claim to be made between the UK–resident subsidiaries.  Where the UK law requires the parent company to be UK resident to establish the necessary group relationship, the only reason for the difference in treatment is the non-UK resident status of the parent company.

40.    In their written submissions on FCE Bank HMRC make the point, which we acknowledge, that they do not accept that the decision of the Upper Tribunal is correct.  Whilst accepting of course that this tribunal is bound by the Upper Tribunal, HMRC reserve the right, if appropriate, to raise at a higher level the correctness of that decision.

41.    Essentially the written submissions of Mr Goy and Mr Facenna sought to distinguish FCE Bank from this case on the basis of the various separate arguments we refer to in this decision.  We shall not repeat those arguments here.  But Mr Goy also argued before us, and this was repeated in the written submissions, that in relation to the “sole reason” issue the position in this case is different from that in FCE Bank for two reasons.  The first is that the real reason why the Surrendering Company cannot surrender its losses is that the Applicant companies cannot claim.  The second is that the relevant requirement would have been satisfied, and the consortium relief would have been available (subject to the section 410 question) if either the Luxembourg parent was resident in the UK or if it carried on a trade in the UK through a permanent establishment.

42.    As to the first of these submissions, we discuss later the question whether s 788 ICTA applies to provide the Surrendering Company with the relief claimed.  In that context we have concluded that the position of the Surrendering Company cannot be considered in isolation from that of the claimant companies.  There are two sides to any group relief equation: the surrendering company and the claimant company.  If the Applicant companies cannot claim losses surrendered by the Surrendering Company, it is because the relevant consortium relationship does not exist.  The reason why that relationship does not exist is that the Surrendering Company is indirectly owned by a Luxembourg company.  The inability of the Applicants to claim group relief is not a separate, unrelated, reason why the surrender cannot be achieved; it is inextricably bound up with the underlying reason, namely the indirect ownership of the Surrendering Company by the Luxembourg company.

43.    The second submission has echoes of HMRC’s failed argument in FCE Bank.  But instead of relying on the argument that the position would have been rectified if an intermediate company had been interposed, it is argued that the relevant requirement for consortium relief would also have been satisfied if the Luxembourg company, whilst remaining non-UK resident, had carried on a trade in the UK through a permanent establishment (see s 402(3B)).  Mr Goy argued in this respect that it could not in those circumstances be said that the real and sole reason for the refusal of the claim is that the Luxembourg company was not resident in the UK.

44.    In our view this argument fails for the same reason that HMRC’s arguments in FCE Bank failed.  In distinguishing Boake Allen from the group relief position in FCE Bank, the Upper Tribunal noted, as we have quoted at [19] of their decision, that it is conceptually quite irrelevant whether the parent company is within the charge to UK corporation tax or not in relation to whether or not two UK tax-resident companies are sufficiently connected to each other so as to form a group which permits the surrender of losses from one to another.  In our view the reasoning of the Upper Tribunal in FCE Bank is equally applicable to a case of consortium relief.  Unlike the position in Boake Allen, where the status of the parent company receiving the dividends as within the charge to corporation tax was the material factor, there is in this case no conceptual need for a link company, that is simply part of the ownership structure and is not itself seeking either to surrender or claim group relief, to be within the scope of that charge to tax.

45.    The essential question is whether in this case s 402 discriminates against the Surrendering Company on the ground that its capital is in part indirectly owned or controlled by the Luxembourg company.  In this case we consider that it plainly does.  In our view, following the reasoning in FCE Bank, the fact that a different structure may be put in place whilst preserving the ultimate non-UK ownership is not sufficient to displace a finding that the sole reason for a difference in treatment is that non-UK ownership.  If a non-UK resident company does not carry on a trade in the UK through a permanent establishment, the only reason group relief for the consortium that would otherwise be available if it had instead been resident in the UK is that it is non-UK resident.

46.    In our judgment Mr Goy’s argument also fails because it necessarily involves the ownership structure for the Surrendering Company being subject to other or more burdensome requirements than those for a corresponding company owned by a UK-resident link company.  In the latter case there is no requirement for the UK company to carry on a trade; it may be a pure holding company.  By contrast, a non-UK resident company must, if it is to be a link company, carry on a trade in the UK through a permanent establishment.  This is itself a difference of treatment that is solely based on the non-resident status of the non-UK company.  The alternative structure suggested by HMRC does no more therefore than to confirm that the sole ground for the discrimination is that the Surrendering Company’s capital is indirectly partly owned or controlled by the Luxembourg company. 

47.    The provisions of the DTC have effect by virtue of s 788 ICTA.  So far as material, that section provides:

48.    We start therefore with the interpretation of section 788.  This was considered by Park J in the High Court in NEC Semi-Conductors [2004] STC 489, which, as we have described, was a case concerning the application of non-discrimination provisions in certain double tax conventions to the same effect as Article 26(4) of the DTC.  We have described the factual background to that case earlier.  For this purpose it suffices to say that the issue was the inability of UK subsidiaries of foreign parent companies to make a group income election pursuant to s 247 ICTA, so that they could pay dividends to those parent companies without accounting for ACT.  Mr Justice Park held that the words in s 788(3) “in so far as they provide for” are limiting words: if the infringement of the double tax convention is not within the matters listed, then that aspect of the convention is not part of our domestic law.  Furthermore, there was no requirement to give a wide interpretation to the various matters listed; what was required was a natural interpretation, neither too wide nor too narrow.

49.    This approach was approved on appeal to the Court of Appeal [2006] STC 606.  There it was argued on behalf of the appellant that if reliefs from ACT were not covered by the natural meaning of s 788(3)(a), that paragraph should nevertheless be construed so as to extend to ACT since otherwise the UK would be in breach of its treaty obligations.  The court rejected that argument, and distinguished Salomon v Customs and Excise Commissioners [1967] 2 QB 116, as s 788 is a general provision whereby a number of treaties may be given effect as part of domestic law, whereas the provision in question in Salomon was intended to enact a particular treaty.  The court agreed with Park J that the only proper approach is to consider what is the natural meaning of the words used in s 788(3).  In the House of Lords [2007] STC 1265, the claim in question was held not to fall within the non-discrimination provision, so the question of the effect of s 788 did not fall to be determined.  Nevertheless, Lord Neuberger considered it, and, whilst recognising that the principle in Salomon would have less weight where the legislative provision had not been enacted to give effect to a specific treaty obligation, expressed the view (at [51]) that the point would have some force, but not sufficient to require the section to be construed other than on a fair reading of it.

50.    Mr Goy argued that s 788(3)(a), in this context, gives effect to the provisions of the DTC only so far as they confer a right to a relief from tax.  To the extent that a claim for relief from tax may be made under the relevant treaty article, it has effect by virtue of s 788.  But s 788 does not refer to the ability of one company to surrender losses to another company.  Such a surrender may provide relief from tax for a company claiming losses, such as the Applicants, but it is not a relief from tax for the company surrendering losses.  The position is rather the reverse.  The company surrendering losses is giving up a relief rather than claiming it.

51.    Mr Goy argued further that the application and effect of the non-discrimination provision can only be considered from the point of view of the Surrendering Company, as the company whose capital is indirectly owned by a Luxembourg resident.  A relief from tax that can be obtained under the provisions of a treaty must necessarily be a relief from tax for someone capable of benefitting from an article in the treaty.  Here, he argued, the Surrendering Company is not claiming any relief from tax but is rather claiming the right to surrender a relief. On this basis, Mr Goy submitted, s 788 does not enable Article 26(4) to confer on the Surrendering Company the right claimed.

52.    Mr Goy submitted that the true analysis in this case is that the requirement complained of is taxation or another requirement to which the Applicants, and not the Surrendering Company, are subject.  On its terms Article 26(4) is only concerned with the taxation treatment of a UK company owned or controlled by residents of Luxembourg.  It cannot operate to provide a relief from tax for other companies such as the Applicants.  Whilst it was accepted that an inability to claim group relief could be a difference in treatment falling within the scope of a non-discrimination article, subject to that difference in treatment being solely on the ground of ownership or control in the other contracting state, there was nothing in the terms of Article 26(4) to suggest that it could affect the claims of other companies not so owned or controlled.  Furthermore, the OECD commentary on the 1963 model treaty, in its reference to Article 24(5) of the model, could only refer to enterprises owned or controlled by residents of the contracting state in question.  A claimant company that was not in this category could not make a claim on the basis of the consequential effect of discrimination affecting a surrendering company.

53.    We were referred to a number of cases where treaty non-discrimination claims had been made by a company controlled by residents of the other contracting state, but in each case the claim had been denied on the ground that s 788 had only a limited effect.  We have referred above to NEC Semi-Conductors.  In that case it was held in the High Court and in the Court of Appeal that a claim in respect of ACT failed because, although it was corporation tax, it was not corporation tax in respect of income or chargeable gains.  In Commerzbank the repayment supplement was held neither to be a charging nor relieving provision, and so fell outside s 788(3), and in UBS the right to payment of the amount of the tax credit on set-off of franked investment income against the losses was not itself a relief from corporation tax.  These cases illustrate the application of the principle, clearly expressed, as we have described, in NEC Semi-Conductors, that s 788 does not import all the provisions and effects of a double tax convention into UK law.  But they provide no answer to cases involving different facts; each such provision and effect must be examined on its own merits.  

54.    Mr Baker argued that, ex hypothesi, there are two parties to a claim for group relief: the surrendering company and the claimant company.  A restriction on the ability of the surrendering company to surrender its losses impacts on both companies, and the only way to ensure that the Surrendering Company in this case is not subject to taxation or any connected requirement which is other or more burdensome is to allow the Applicants to utilise those losses.

55.    Mr Baker further submitted that the terms of s 788(3)(a) were not limited to the grant of relief to a resident of the other contracting state, or, in this case, to a company controlled by residents of that state.  On a plain reading of the legislation it is not limited to relief granted only to the Surrendering Company.  There is no reason to give s 788(3)(a) a narrow interpretation so that it applies only to a claim for relief by the company owned by a resident of the other contracting state.  To grant relief from corporation tax by allowing the Applicants to claim group relief is the only way to give effect to the non-discrimination commitment in Article 26(4).  Mr Baker submitted that an analogy could be drawn with FCE Bank where the grant of group treatment to the claimant company necessarily had an impact on the surrendering company.

56.    Mr Baker referred us to a number of cases where, he argued, it had been accepted that a claim for relief from income tax or corporation tax could be made by a person other than the person who is a resident of the contracting state for the purposes of the relevant tax treaty.  In Lord Strathalmond v IRC (1972) 48 TC 537 relief was claimed by the husband of the person entitled to the benefit of the treaty.  In Avery Jones v IRC (1976) 51 TC 443 relief was claimed by the executor of the deceased person entitled to the benefit of the treaty.  In Padmore v IRC (1989) 62 TC 352 relief was claimed by a partner in the partnership entitled to the benefit of the treaty.  Finally, in Smallwood relief was claimed – although rejected on other grounds – by the settlor of a trust claiming entitlement to the benefit of the treaty.

57.    We do not consider that any of these cases are of assistance in resolving the question before us in this appeal.  As Mr Goy submitted, all those cases involved situations where the treaty provided protection or relief from the taxation of particular income or gains, and the protection was available to the person sought to be taxed.  Nor do we accept that FCE Bank is analogous to the position in this case; that case was concerned with a claim for relief by a company owned by a resident of the contracting state in question.

58.    Nonetheless, although it is the case that, unlike other provisions of a double taxation convention, such as those dealing with dividends, interest and capital gains, a non-discrimination provision does not itself provide for a specific relief from tax, that itself, as a matter of principle, does not, as FCE Bank illustrates, prevent s 788 from giving effect to the non-discrimination provision.

59.    In their written submissions, Mr Baker and Miss Shaw argued that, although the s 788 issue was not addressed explicitly by the Upper Tribunal in FCE Bank, the tribunal must be taken to have accepted that s 788 would apply to the ability of one company to surrender losses to another company.  We do not regard FCE Bank as authority for such an application of s 788.  That issue was not argued in that case, and FCE Bank is accordingly of no assistance in that respect.  We agree with the written submission of Mr Goy and Mr Facenna that the effect of s 788 was not an issue in FCE Bank because the companies concerned in that case were claiming a relief from tax.  The issue in this case, where the Surrendering Company is the company whose shares are indirectly owned by the Luxembourg company, was not present in FCE Bank.

60.     In our view the correct approach to the question we have to address in this case is to look first at the nature of the difference in treatment that the non-discrimination article seeks to prohibit.  In this case it is that the Surrendering Company is not permitted to surrender its losses in the way an equivalent UK-owned subsidiary could, nor, consequently, can it receive a tax-free payment for group relief.  The treaty obligation therefore, is to remove those differences in treatment.  It would not be sufficient, in our view, despite Mr Goy accepting that this was the effect of his submissions, for the UK simply to enable the Surrendering Company to surrender its losses into a void.  That would not in practice enable it to obtain a payment for group relief and that result would once more leave the Surrendering Company in the position of having been treated differently from its UK-owned counterpart.

61.    For the difference in treatment to be effectively eliminated, the group relief system must operate as regards the Surrendering Company in the same way that it does in the equivalent UK-owned case.  That means that the Surrendering Company’s position cannot be considered in isolation.  The difference in treatment can only effectively be remedied by resolving both sides of the group relief equation.  For the Surrendering Company to be treated in the same way as its UK-owned counterpart, the claim for group relief must also be enabled.  If it is not, then the Surrendering Company remains at a tax disadvantage.  No payment for group relief could be made unless there is a recipient of that group relief in the form of the claimant company or companies, represented in this case by the Applicants.  To remedy the difference in treatment of the Surrendering Company, it therefore follows that, in order for the discrimination against the Surrendering Company to be eliminated, Article 26(4) must require that the concomitant group relief must be capable of being made.  The effect of Article 26(4) therefore is that the Applicants must be enabled to claim group relief in relation to losses surrendered by the Surrendering Company.

62.    On that basis the effect of the treaty obligation is not only to require that the Surrendering Company be entitled to surrender its losses notwithstanding the fact that its capital is partly, and indirectly, owned by Investments, but also to require that the Applicants be enabled to claim group relief on the surrenders of those losses.  That requirement accordingly provides for relief from corporation tax, and so falls within
s 788(3)(a) ICTA.

63.    We therefore conclude on the DTC question as follows:

64.    Section 410 ICTA has the effect of precluding group relief in certain circumstances if specified “arrangements” exist.  HMRC say that, as a result of the sale and purchase agreement entered into by Hutchison Whampoa Limited (“HWL”) with KPN Mobile NV (“KPNM”) on 7 November 2003 (and subsequently the agreement, on 27 May 2004, with NTT DoCoMo, Inc) to acquire indirectly their respective 15% and 20% interests in Hutchison 3G Holdings Limited (“Holdings”), such arrangements existed from 7 November 2003 to 23 June 2005, when HWL exercised its rights under the SPAs and completed the purchase indirectly of the 15% and 20% shareholdings in Holdings.

65.    So far as material s 410 provides as follows:

“Arrangements for transfer of company to another group or consortium

(1) …

(2) If a trading company is owned by a consortium or is a 90 per cent subsidiary of a holding company which is owned by a consortium and—

 (a)     in any accounting period the trading company or a member of the consortium has trading losses or other amounts eligible for relief from corporation tax which it would, apart from this section, be entitled to surrender by way of group relief; and

 (b)     arrangements are in existence by virtue of which—

(i)     the trading company or any successor of it could, at some time during or after the expiry of that accounting period, become a 75 per cent subsidiary of a third company; or

(ii)     …

(iii)     any person, other than a holding company of which the trading company is a 90 per cent subsidiary, either alone or together with connected persons, holds or could obtain, or controls or could control the exercise of not less than 75 per cent of the votes which may be cast on a poll taken at a general meeting of that trading company in that accounting period or in any subsequent accounting period; or

   (iv)     …

then, for the purposes of this Chapter, the trading company shall be treated as though it did not (as the surrendering company or the claimant company) fall within section 402(3).

(3) …

(4) In this section “third company” means a company which, apart from any provision made by or under any such arrangements as are specified in paragraph (b) of either subsection (1) or subsection (2) above, is not a member of the same group of companies as the first company or, as the case may be, the trading company or the holding company to which subsection (2) above applies.

(5) In subsections (1) and (2) above—

“arrangements” means arrangements of any kind whether in writing or not;

“connected persons” shall be construed in accordance with section 839 [but as if subsection (7) of that section (persons acting together to control a company are connected) were omitted]¹; and

   “control” has the meaning assigned by section 840.”

66.    There is no dispute on the facts.  Nor is it disputed that the SPAs had the effect that the Surrendering Company could become a 75% subsidiary of a company that was not a member of the same group as the Surrendering Company or Holdings.  However, the Applicants say that the SPAs are not “arrangements” falling within
s 410.  They make this submission on the basis that the arrangements in question in
s 410 are those which transfer the benefit of losses of a company within a group or owned by a consortium to another group or consortium, and that the scheme of the provisions is to target the manipulation of group relief so as to allow a non-associated, third company, which is not a member of the group or consortium to take the benefit of the tax advantage.

67.    The Applicants point to the fact that the effect of the SPAs, and the transfers of  the interests in the shares of Holdings, was not to take the benefit of the losses of the Surrendering Company outside of a relevant association (group or consortium in existence at the time the losses were incurred).  They contend that s 410(2) is not targeted at commercial arrangements which allow the holding in a company to be increased from one where a consortium claim can be made to one where a primary group relief claim can be made.  The Applicants say that if HMRC are right on the impact of s 410, the result would be that prior to 7 November 2003 the Applicants could (subject to the EU law and DTC questions) make valid consortium claims, and from 23 June 2005 they could make a valid group relief claim.  However, between those two dates they could make neither a consortium claim nor a group claim because of the existence of the SPAs.  The Applicants say that such a result is absurd and cannot be consistent with the will of Parliament.

68.    We were taken by Miss Shaw to a number of authorities on statutory construction.  Little of this was controversial, and we set out below a summary of the principles she referred to:

(1)        The object of statutory interpretation is to identify the intention of Parliament (R v Secretary of State for the Environment ex p Spath Holme [2001] 2 AC 349 at p 396).

(2)        Parliament is presumed to intend that its legislation will be interpreted in a meaningful and purposeful way so as to give effect to its basic objectives (A-G’s Reference (no 5 of 2002) [2004] UKHL 40; IRC v McGuckian [1997] STC 908 at pp 915-6).

(3)        Regard must be had to the whole of the statute and it should be construed so that the various parts make sense together (Colquhoun v Brooks (1889) 14 App Cas 493; Canada Sugar v R [1898] AC 735 at p 741).

(4)        Regard may be had to the heading of the section.  For this proposition Miss Shaw relied upon Dixon v British Broadcasting Corporation [1979] QB 546, citing in particular the judgment of Shaw LJ at p 552, where in the context of construing the meaning of the phrase “fixed term” in the Trade Union and Labour Relations Act 1974, he found it requisite to look at the applicable heading, which referred to “unfair dismissal”.  This does not seem to us to indicate that interpretation of the words of a statutory provision should in any way be constrained by reference to a heading; the Dixon case is merely an illustration of the need to look at the statutory words in their context.

In this connection, Mr Goy referred us to Page v Lowther [1983] STC 799.  There, in relation to an assessment to tax under s 488 ICTA 1970, the court had to consider whether the phrase “arrangement or scheme” construed in light of a preamble in s 488(1), which stated the anti-avoidance purpose of the section, and a sidenote reading “Artificial transactions in land”, denoted only a scheme or arrangement of an artificial nature, designed to avoid tax.  It was held that the operation of the section was not limited to transactions specifically designed to avoid tax.  The sidenote could not be relied upon as a guide to the construction of the section.  In his judgment, Slade LJ said (at p805g):

“… I myself feel no doubt that, even having full regard to the sidenote and s 488(1), the lease of 1971 was an 'arrangement' within the meaning of sub-s (2), entered into between the trustees and Trafalgar. The trustees' task on this appeal in this context would have been much easier if s 488 had specifically provided that a condition for the application of sub-s (2)(ii) should be that the main object, or one of the main objects, of the scheme or arrangement in question was for the avoidance or reduction of liability to tax.”

(5)        Parliament is presumed not to have intended a statute to have absurd or anomalous results (R (oao Edison First Power Ltd) v CVO [2003] UKHL 20 at [116], [117]; Hirsch v Crowthers Cloth Ltd [1990] STC 174 at p 181).

69.    There was no dispute that s 410 is an anti-avoidance provision.  But Mr Baker argued that the mischief at which the provision is aimed is arrangements to transfer the benefit of losses of a company within a group or owned by a consortium to another group or consortium, having regard to the heading to s 410.  He submitted that the scheme of the provisions is to target the manipulation of group relief and that, accordingly, the “arrangements” referred to are “avoidance arrangements”.

70.    Mr Baker submitted that, having identified its basic objective as being concerned with avoidance arrangements, this in turn informs the proper interpretation of each of the sub-provisions of s 410.

71.    Mr Baker took us first to s 410(1)(b), which applies in the case of group companies.  The focus of that provision is on arrangements by virtue of which a group company could cease to be a member of the group (specifically, by becoming a member of an associated “third company” group, or by another person obtaining control, or by a “third company” group carrying on its trade).  Plainly, as Mr Baker put it, these are all avoidance arrangements.

72.    Section 410(2)(b) contains the comparable provisions that apply in the case of a consortium.  We accept that these were intended to be parallel provisions to those applying to groups.  Mr Baker submitted that the focus of s 410(2)(b) is on arrangements by virtue of which a company could cease to be owned by the consortium members.

73.    Turning to s 410(2)(b)(i), this applies where the surrendering company becomes a 75% subsidiary of a “third company”.  The expression “third company” is a defined term, and its meaning is set out in s 410(4).  In the context of consortium relief, it means a company that is not, apart from any relevant arrangement, a member of the same group of companies as the trading company in question or the holding company of the trading company.  On the plain wording of this definition, HWL was not a member of the same group as either the Surrendering Company or Holdings. However, Mr Baker argued that s 410(4) should be interpreted in a way consistent with its meaning for the purposes of s 410(1); that is, that the third company should also be a company that is not itself a member of the consortium.

74.    As regards s 410(2)(b)(iii), Mr Baker submitted that, having regard to the purpose of the provisions and in the light of the other situations posited by the section, this sub-section is concerned only with avoidance arrangements involving manipulations to the voting rights attached to shares.  He argued that if s 410(2)(b)(iii) applied to arrangements relating to the mere acquisition of shares, it would overlap with sub-paragraph (i), but without the limitation contained in that sub-paragraph relating to “third companies”  This might lead to a result which conflicted with sub-paragraph (i).  On a proper interpretation of s 410(2)(b)(iii), Mr Baker submitted that it does not apply to the SPAs in this case, as those are agreements for the acquisitions of shares and not arrangements to alter the voting rights attached to shares.

75.    Mr Baker submitted that, as a general matter, s 410(2) is not targeted at commercial arrangements which allow the holding in a company to be increased from one where a consortium claim can be made to one where the primary claim to group relief can be made.  He argues that denial of relief in the circumstances of this case, where, assuming a valid claim for consortium relief could, absent s 410, be made in the relevant periods, the Applicants could make consortium claims prior to 7 November 2003, and group relief claims after 23 June 2005, but not (because of s 410) in the intervening period, was an absurd result and could not be consistent with the intention of Parliament.  If the remaining 355 of the shares in Holdings had been acquired immediately upon entering into the SPAs there would be no objection to the relief for the losses.  There is no rational basis, according to Mr Baker’s submission, for distinguishing between that and the facts of the present case.

76.    We turn first to the question whether s 410 is to be construed as limited to arrangements that have an avoidance purpose.  It is clear that the section is designed to counter avoidance of tax through losses being used outside the relevant group or consortium.  One example of avoidance is the temporary introduction of a loss-making company in one group to another group.  In the context of consortium relief, we accept, as Mr Goy submitted, that s 410(2)(b) appears to have as its purpose the prevention of companies being introduced as members of a consortium for a limited period.

77.    Mr Goy referred us to Shepherd v Law Land plc [1990] STC 795, which concerned the period during which s 29 FA 1973 (a precursor to s 410) operated.  That case concerned denial of a group relief claim on account of the existence of a series of options that were acknowledged to have been commercial and not designed to abuse the group relief system.  It was common ground that the options were “arrangements” of the kind referred to in the section (see Ferris J at p 803c).  However, we do not regard this as material to our own decision, as the issue of whether arrangements must have an avoidance purpose was not raised.

78.    Mr Goy also referred us to the special commissioners’ decision in Scottish and Universal Newspapers Ltd v Fisher [1996] STC (SCD), where again the arrangements in question concerned the grant of an option to acquire a company.  The appeal was allowed on the basis that the arrangements were conditional on the consent of the Office of Fair Trading having been obtained, and that until that time the arrangements had no effect.  But significantly the special commissioners referred (at [16]) to what Lord Bridge said in Pilkington Bros Ltd v IRC [1982] STC 103 (at p 113) about the expression “by virtue of” in the introductory part of s 410(2): “This directs attention to the effect of the arrangements not to their purpose.”  This shows clearly that there is no purpose test in s 410, and there is no reason for one to be implied.

79.    Parliament could have legislated against devices for the manipulation of group relief by introducing a purpose-based anti-avoidance provision.  It did not do so.  Instead it set out objective tests designed to achieve its own purpose of preventing losses being used in cases where arrangements it perceived as objectionable were put in place.  This inevitably catches all such arrangements, whether or not those arrangements themselves have an avoidance purpose, and whether or not they are commercial.  That objective measure was intended by Parliament to be the yardstick by which its anti-avoidance purpose was achieved.  Accordingly, adopting a purposive approach to s 410, we can see no foundation for a construction outside of its clear words.  The arrangements in question do not have to be shown to have an avoidance purpose.

80.    The next question is whether, as the Applicants submit, the definition of “third company” in the material part of s 410(4) should be read so as to exclude a company that is a member of the consortium, or, it would follow, a member of the same group as a member of the consortium.  On this we agree with Mr Goy that such an approach could not be supported by the wording of s 410.  Nor can any of the principles of statutory construction compel or permit us to make changes to what is clear and unambiguous legislation.

81.    In any event, we do not consider that such an intervention could be justified by regard to the purpose of the provisions.  It is quite clear that to import the exclusion from the definition of “third company” (as the Applicant proposes) would open up the very opportunities for avoidance that Parliament was seeking to forestall.  A loss-making company could be transferred out of a group and placed in the temporary ownership of a consortium including a member of the original group, with arrangements for it to be re-acquired by the original group.  Mr Goy provided us with an example of this:

82.    Mr Goy submitted, and we agree, that this is clearly an example of the sort of arrangement which s 410 is designed to counter.  Section 410 cannot possibly, therefore, be construed in the way the Applicants submit it should.

83.    Mr Baker referred in his submissions to the difficulty in discerning why s 410(4) excludes from the definition of “third company”, in relation to consortium relief, companies that are members of the same group as the trading company or the holding company.  Mr Baker pointed out that, under s 402(3) a trading company owned by a consortium could not be a 75% subsidiary of any company other than its holding company.  Mr Goy acknowledged that the reason for this exclusion was obscure, but submitted that this was not relevant to the question whether members of the consortium should be outside the definition of “third company”.  We agree with that submission.  In any event, it seems to us plain that, in a holding company case (such as the present case), the trading company and the holding company are members of a group together.  If the holding company had another 75% subsidiary, the exclusion in s 410(4) would not preclude consortium relief if there were arrangements to transfer the trading company to that other subsidiary.  The provision is understandable in that context, and not of no effect.

84.    In relation to s 410(2)(b)(iii), we do not accept Mr Baker’s submission that this must be construed only so as to affect arrangements for the manipulation of voting rights.  There may well, in some cases, be an overlap with s 410(2)(b)(i), but that will not universally be the case, and it cannot justify an interpretation of s 410(2)(b)(iii) that is narrower than its ordinary meaning.  The definition of 75% subsidiary, which is the focus of the condition in sub-paragraph (i), is not concerned with voting rights.  It focuses on the beneficial ownership of ordinary share capital and the economic rights of the shares.  In cases where such ownership does not correspond to voting rights, it is clear that Parliament intended that arrangements for the acquisition of 75% of the votes, by whatever means, should be covered by the section.  This is confirmed, in our view, by the wide meaning afforded in s 410(5) to “arrangements” as meaning arrangements “of any kind”.  It is true that in some cases the protection of the “third company” definition would not be available where both of sub-paragraphs (i) and (iii) would apply to a particular arrangement, but that is a defect that cannot be addressed by construction without itself producing further anomalies.  That therefore is a question for Parliament and not for this tribunal.

85.    As Mr Goy submitted, the real complaint that might be made by companies in the position of the Surrendering Company, and the Applicants, is not in relation to the conditions for the application of s 410, but in the effect of that application.  Section 410 does not operate in a subtle way; it is all or nothing.  If the section does not apply, group or consortium relief is unrestricted, according to its terms.  If it does, relief is wholly denied.  There is no middle course that arguably might provide a more logical result in cases of this nature, where a claimant company is at one time a member of a consortium, and at another a member of a group.  In such a case, if Parliament had decided to adopt a more nuanced approach, it could have provided that the effect of
s 410 would be to deny relief only in respect of claims by consortium members outside the group to which the trading company was to be transferred under the arrangements in question.  But Parliament made no such provision, and no amount of statutory construction can fill that gap.  If Parliament considers that a different approach should be introduced, that will be a matter for it to enact.

86.    In conclusion, therefore, we find that the effect of s 410 is to treat the Surrendering Company as not falling within s 402(3) for the period from 7 November 2003 to 22 June 2005 inclusive.

87.    We have determined the questions referred to us as follows.  In each case this is a very brief summary only and must be read in conjunction with our decision as a whole.