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Cite as: [2006] UKSPC SPC00564, [2006] UKSPC SPC564

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Johnston Publising (North) Ltd & Ors v Revenue & Customs [2006] UKSPC SPC00564 (9 October 2006)

SPC00564

Corporation tax on chargeable gains – whether exemption from degrouping charge under s 179 TCGA 1992 available to companies associated at time of leaving group but not associated at time of the intra-group transfer

THE SPECIAL COMMISSIONERS

JOHNSTON PUBLISING (NORTH) LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Special Commissioner: JOHN CLARK

Sitting in public in London on 21 July 2006

John Gardiner QC and Philip Walford, Counsel, instructed by Nabarro Nathanson, for the Appellant

Christopher Tidmarsh QC, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The issue in this case is whether, in relation to the capital gains degrouping charge imposed in certain circumstances on companies leaving a group, it is necessary in order for associated companies to qualify for exemption from the charge that they should have been associated not only at the time of leaving the group but also at the time of the previous intra-group transfer. At the time when it left the "UNM Group", the Appellant, referred to in this decision by its initials at the time of the relevant transactions as "UPNH Ltd", owned the transferor company, "UPN Ltd"; at the time of the previous intra-group transfer, UPNH Ltd and UPN Ltd were not associated. UPNH Ltd contends that association at that previous time is not a requirement imposed by the legislation; the Respondents (referred to in this decision in relation to all material times as "HMRC") contend that the legislation does impose that requirement.

The law

The relevant legislation at the time of the transactions in question was in the following form, all the provisions falling within the Taxation of Capital Gains Act 1992. (Except where indicated otherwise, references to sections in this decision are to sections of that Act.)

"171 Transfers within a group: general provisions

(1) Notwithstanding any provision in this Act fixing the amount of the consideration deemed to be received on a disposal or given on an acquisition, where a member of a group of companies disposes of an asset to another member of the group, both members shall, except as provided by subsections (2) and (3) below, be treated, so far as relates to corporation tax on chargeable gains, as if the asset acquired by the member to whom the disposal is made were acquired for a consideration of such amount as would secure that on the other's disposal neither a gain nor a loss would accrue to that other; but where it is assumed for any purpose that a member of a group of companies has sold or acquired an asset, it shall be assumed also that it was not a sale to or acquisition from another member of the group. …"

"179 Company ceasing to be member of group: post-appointed day cases

(1) If a company ("the chargeable company") ceases to be a member of a group of companies, this section shall have effect as respects any asset which the chargeable company acquired from another company which was at the time of acquisition a member of that group of companies, but only if the time of acquisition fell within the period of 6 years ending with the time when the company ceases to be a member of the group; and references in this section to a company ceasing to be a member of a group of companies do not apply to cases where a company ceases to be a member of a group in consequence of another member of the group ceasing to exist.

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

…

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

(a) the asset, or

(b) property to which a chargeable gain has been carried forward from the asset on a replacement of business assets,

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

…

(5) Where, apart from subsection (6) below, a company ceasing to be a member of a group by reason only of the fact that the principal company of the group becomes a member of another group would be treated by virtue of subsection (3) above as selling an asset at any time, subsections (6) to (8) below shall apply.

…

(10) For the purposes of this section—

(a) 2 or more companies are associated companies if, by themselves, they would form a group of companies, . . . "

The facts

The evidence consisted of a Statement of Agreed Facts, and a bundle of documents. There was no oral evidence. Structure diagrams of the position at various stages of the relevant transactions were provided; no attempt has been made to reproduce these in this decision. About three weeks after the hearing, the parties supplied a CD containing case materials, namely arguments, commentary on HMRC's arguments, the diagrams, and the Statement of Agreed Facts. The following description of the transactions giving rise to the matters in dispute is largely based on the Statement of Agreed Facts.

UPNH Ltd is, and was at all material times, a private limited company, incorporated and registered in England and Wales and resident in the United Kingdom. On 7 July 1997, United Business Media Group Limited (which, at all material times, was incorporated under the name of United News & Media Group Limited) ("UNMG Ltd") acquired UPNH Ltd as an off-the-shelf company: UNMG Ltd acquired the entire issued share capital, consisting of two ordinary shares of £1 each. At all material times, UNMG Ltd was a member of the United News & Media group of companies ("the UNM Group") of which United Business Media Plc (which, at all material times, was incorporated under the name of United News & Media Plc) ("UNM Plc") was the ultimate parent company. Accordingly, on becoming a subsidiary of UNMG Ltd, UPNH Ltd also became a member of the UNM Group within the meaning of s 170.

Following the registration of UNMG Ltd as shareholder, UPNH Ltd, on 7 July 1997, made a rights issue of 9,998 ordinary £1 shares to UNMG Ltd, for a total consideration of £314,700,000.

The following stage involved the sale by UPN Ltd of certain subsidiaries to UPNH Ltd. At all material times prior to its sale to UPNH Ltd as described below, Regional Independent Media Limited (which, at all material times, was incorporated under the name of United Provincial Newspapers Limited) ("UPN Ltd") was a wholly-owned subsidiary of United Regional Newspapers Limited ("URN Ltd"). At all material times URN Ltd was a member of the UNM Group; accordingly, UPN Ltd, while a subsidiary of URN Ltd was also a member of the UNM Group. UPN Ltd owned shares in certain companies ("the Operating Subsidiaries"); these were the subject of the subsequent sale to UPNH Ltd.

Following the making of the rights issue by UPNH Ltd, the registration of UNMG Ltd as holder of the additional 9,998 shares in UPNH Ltd, and the payment to UPNH Ltd of the consideration for them, UPN Ltd and UPNH Ltd entered into an agreement ("the First Agreement") on 7 July 1997 for the sale to UPNH Ltd of UPN Ltd's shares in the Operating Subsidiaries for a total consideration of £310,000,000 with completion to take place immediately.

Pursuant to, and after entering into the First Agreement, UPNH Ltd, on 7 July 1997, acquired UPN Ltd's shares in the Operating Subsidiaries, was registered as the owner of those shares, and paid UPN Ltd the purchase consideration of £310,000,000. Pursuant to s 171 TCGA 1992, the disposal of the shares in the Operating Subsidiaries by UPN Ltd and their acquisition by UPNH Ltd were treated as being for a consideration that gave rise to no gain or loss to UPN Ltd.

UPNH Ltd and UPN Ltd did not, by themselves, form a group at the date of the First Agreement or at any material time prior to the sale of UPN Limited to UPNH Ltd (see below). Therefore, UPNH Ltd and UPN Ltd did not fall within the definition of associated companies in s 179(10) prior to the time of that sale.

Following the sale of the Operating Subsidiaries to UPNH Ltd and the receipt by UPN Ltd of the purchase consideration, UPN Ltd, on 7 July 1997, resolved to pay, and did pay, a dividend within a group election under s 247 of the Income and Corporation Taxes Act 1988, amounting in aggregate to £280,000,000, to its parent company URN Ltd out of UPN Ltd's distributable profits of £284,661,981.

Following the payment of the dividend by UPN Ltd, URN Ltd and UPNH Ltd entered into an agreement ("the Second Agreement") on 7 July 1997 for the sale to UPNH Ltd of URN Ltd's shares in UPN Ltd for a total consideration of £4,700,000 with completion to take place immediately.

Pursuant to, and after entering into the Second Agreement, UPNH Ltd, on 7 July 1997, acquired URN Ltd's shares in UPN Ltd (being the entire issued share capital of UPN Ltd), was registered as the owner of the same, and paid URN Ltd the purchase consideration of £4,700,000. UPN Ltd remained a member of the UNM Group since UPNH Ltd was a member of the UNM Group. The disposal of shares in UPN Ltd and their acquisition by UPNH Ltd again took place pursuant to s 171 on a no gain/no loss basis.

The next stage of the relevant transactions involved the sale of UPNH Ltd to another group. On 27 February 1998, UNMG Ltd, UNM Plc and Regional Independent Media Funding 2 Limited (formerly Regional Independent Media Group Limited and before that, and at all material times, YPG Group Limited) ("YPG Group Ltd") entered into an agreement ("the Third Agreement") for the sale to YPG Group Ltd of UNMG Ltd's shares in UPNH Ltd for a total consideration equal to the aggregate of £360,000,000 and £5,897,000, the latter sum to be paid pursuant to a specific provision of the Third Agreement, with completion to take place the same day.

Pursuant to, and after entering into the Third Agreement, YPG Group Ltd, on 27 February 1998, acquired UNMG Ltd's shares in UPNH Ltd (being the entire issued share capital of UPNH Ltd) and paid the purchase consideration.

YPG Group Ltd is not – and, at all material times, was not – a member of the UNM Group. Accordingly, UPNH Ltd ceased to be a member of the UNM Group on being sold to YPG Group Ltd. At the same time, UPN Ltd also ceased to be a member of the UNM Group, since UPN Ltd was a subsidiary of UPNH Ltd. UPNH Ltd and its subsidiaries, by themselves, formed a group of companies at the time UPNH Ltd ceased to be a member of the UNM Group. Therefore, UPNH Ltd and its subsidiaries, which included UPN Ltd, were associated companies within the meaning of s 179(10) at that time.

Between 2000 and 2004, the UNM Group and HMRC entered into correspondence which, inter alia, related to the sale of UPNH Ltd to YPG Group Ltd and which in particular raised the issue of whether a charge under s 179 arose on UPNH Ltd, in respect of the Operating Subsidiaries it had acquired from UPN Ltd when both companies were members of the UNM Group.

In a letter to UNM Plc, dated 6 February 2004, Mr PJ Sparrow, HM Inspector of Taxes, stated that he considered such a charge did arise and that he would accordingly be making an assessment on UPNH Ltd with £280 million as the provisional figure for the deemed gain.

An assessment on UPNH Ltd was issued on 1 March 2004, which UPNH Ltd appealed on 30 March 2004. Consent to the transfer of the appeal from the General Commissioners to the Special Commissioners was given on 9 December 2005.

The figures on which the assessment is based have not been agreed by the parties. In the event that this point of principle should be decided in favour of HMRC, the figures will need to be agreed between the parties before a final determination of the appeal can be made.

Arguments for UPNH Ltd

Mr Gardiner's submissions were divided into two sections, the first considering the background and purpose of the legislation, and the second addressing the statutory wording and statutory machinery.

In relation to the first, he cited the comments of Hoffman J in Westcott (Inspector of Taxes) v Woolcombers Ltd [1986] STC 182 at 190 on the policy of the legislation which was subsequently re-enacted as s 171. These comments had been approved by the House of Lords in NAP Holdings UK Ltd v Whittles (Inspector of Taxes) [1994] STC 979 at 987-988 (Lord Keith) and at 988 (Lord Jauncey of Tullichettle). At first instance in the latter case, Millett J had commented on the predecessor to s 179 and explained its origins ([1992] STC 59 at 70-71).

The legislation now contained in s 179(2) had been on the statute book for 38 years. It had been introduced by the Finance Act 1968, in identical form to the current version. It was a key provision that had been there from the outset. However, it was not part of the original code for the treatment of capital gains within a group of companies, which had been altered to deal with what was known as the "envelope trick". Other provisions had been altered over the years, especially by the Finance Act 1989. Thus the background to the most relevant case was different to the present law, but the cases helped to illustrate what was in mind when the provision was enacted. Judicial consideration specifically of s 179(2) and its statutory predecessors was limited to the case of Dunlop International AG v Pardoe (Inspector of Taxes) [1992] STC 459 (Lightman J) and [1999] STC 909, in which Chadwick LJ had given the only reasoned judgment. Lightman J referred to the purpose of the sub-section, and referred to the requirement at the cesser of membership of the previous group. Chadwick LJ referred to the construction of the sub-section in the context of the charge imposed by the section, and considered that the object of that main charge was preserved by construing sub-section (2) as requiring the companies to be associated both before and after they each ceased to be members of the original group.

Mr Gardiner argued that from the above cases a number of conclusions could be drawn regarding the purpose of s 179(2) and its statutory predecessors:

(1) it was enacted to reduce the effect of the charge that would otherwise arise under s 179 at the moment a company ceases to be a member of a group;

(2) as an exception to that anti-avoidance provision (ie s 179), which itself was introduced to prevent abuse in relation to the "in group rule" (ie s 171), it should both promote the objectives of the "in group rule" and not frustrate the effect of the anti-avoidance provision against that particular mischief at which it was aimed;

(3) in the light of that, and as explained in Dunlop, its purpose must be to cater for the situation where a sub-group is sold off whose members having acquired assets from one another, such that the latent gain on the transfer of the assets is preserved.

Mr Gardiner contended that this was the case here: if UPNH Ltd were to dispose of any of the Operating Subsidiaries, that would trigger a charge to corporation tax on chargeable gains which (assuming UPNH Ltd was correct) would fully take into account any increase in value while the Operating Subsidiaries were owned by members of the UNM Group.

HMRC had not set out in correspondence a detailed reasoned argument in favour of the conclusion that it sought. It was assumed that the HMRC view was based on what was said at paragraph 45456 of its Capital Gains Manual [cited below]. Mr Gardiner argued that the purpose as indicated by HMRC in this extract went further than, and was much more specific than, anything identified by any of the tribunals in Dunlop. Whilst one could certainly infer from the legislation the propositions set out at paragraph 23 above, HMRC's contention as to purpose at CG45456 was mere assertion. HMRC might have decided that it wished that to be the purpose of s 179(2), but there was nothing in the legislation (or Hansard) to indicate that that was Parliament's purpose. The only other known support for their proposition (acknowledged to be a minority view) was an article in The Corporate Tax Review by Mr Julian Ghosh of Counsel [considered below]. Mr Gardiner pointed out that the group provisions had changed substantially over the last 30 years. He referred to Millett J's comment at first instance in NAP Holdings UK Ltd v Whittles [1992] STC 59 at 72-73 on HMRC's erroneous understanding of the law. Mr Gardiner argued that the Manual should therefore be viewed with a "health warning". The key was the construction of the words; not a supposed theory based on those words.

In relation to purpose, the key was the "envelope trick". This led on to the purpose of s 179(2). The draftsman took the view that if the transferor and transferee left the group together within a group of associated companies, this should not trigger a charge under s 179(1). The key distinction was that in a case involving the "envelope trick", the asset was divorced from the transferor, ie the asset was in the new group, and the transferor in the old. If the transferor and the transferee went out of the group together, this was not within the vice of s 179, and therefore s 179(2) exempted the transferee from the s 179 charge.

On the statutory wording and statutory machinery, Mr Gardiner argued that there could be no doubt that, contrary to HMRC's case, there was no requirement in s 179(2) for companies leaving a group to be associated at the time the relevant asset was acquired intra-group. The key was the words of the statute; these should be construed in context, and regard was required to the purpose. It was necessary to construe the words with some precision, and do so in respect of s 179(2) in relation to s 179(1). HMRC's construction made no attempt to construe or consider the actual words of s 179(2) in relation to s 179(1); it approached the question as if the only relevant words were those in the second part of s 179(2). HMRC's approach was not construction; it invited a conclusion regardless of the words of the provision. It amounted to an invitation to enact something that Parliament had not enacted.

In s 179(1), "ceases" was in the present tense. "Acquired" was in the past tense. This was looking at the moment at which UPNH Ltd ceased to be a member of the UNM Group, ie 28 February 1998, when it was sold to YPG Group. This was the condition. If it was satisfied, s 179 " . . . shall have effect as respects any asset which the chargeable company acquired . . . " [Mr Gardiner's emphasis], which was at the time of acquisition. The sub-section did not in terms require the chargeable company to have been a member of the group at the time of the acquisition. This was a precise but correct construction. HMRC had exploited it in cases where the transferee was not in the group at the time of the transfer, and then subsequently became a member. The opening condition was in the present tense, but the consequence related to an acquisition in the past. The phrase "but only . . . ceases" was in the present tense. Everything was looking at one moment of time, the point of cessation of membership of the group.

Section 179(2) was picking up the opening words of s 179(1); again it was in the present tense. The exoneration was given by the first line in s 179(2). The consequence was that sub-section (1) was not to have effect in relation to an acquisition by one from another of those associated companies; this was looking back. Thus sub-section (1) was looking at the point of time when the company ceased to be a member of the group. Sub-section (2) was looking at precisely the same time. It followed inexorably that the time to test whether the companies were associated was when they ceased to be members of the group. The consequence of sub-section (2) was to remove the effect of s 179(1).

The chargeable company might have acquired assets from various members of the group. Sub-section (2) provided a limited exoneration: this explained its precise terminology. UPNH Ltd had received two assets, the first being the Operating Subsidiaries from UPN Ltd, and the second being the shares in UPN Ltd transferred to it by URN Ltd. On its own, s 179(1) imposed a charge in respect of both these acquisitions. In its terms, it was simply talking about acquisitions from members of the old group. The key for s 179(2) was that it was protecting the first asset (ie the shares in the Operating Subsidiaries). These had been acquired from UPN Ltd, and both UPNH Ltd and UPN Ltd were leaving the group at the same time. The acquisition of UPN Ltd was from another member of the group. Section 179(1) was drafted widely; s 179(2) restricted its operation, but in limited numbers of cases. The time of cesser of group membership was the condition for both s 179(1) and s 179(2).

The terminology of s 179(2) was plainly consistent with the draftsman's objective of providing a limited exemption. It referred to an acquisition from another of those associated companies. The only reference to the latter was at the time of cesser; that was the appropriate time at which to determine whether they were associated. He submitted that there was no other conceivable construction. He referred to HMRC's construction; this involved adding in to s 179(2) a requirement that the companies should have been associated at the time of the acquisition. He argued that the words would not bear this construction on their own. He emphasised the need to read s 179(2) with s 179(1). The consequence was the s 179(3) charge. This was also looking at the question of association at the time of cessation. This was so for s 179(5), and s 179(10) used the present tense. Section 180(4)(b) was referring to the moment of cessation, so status had to be determined as at that time. Section 838(1)(b) of the Income and Corporation Taxes Act 1988 was also expressed in the present tense.

The words in s 179(1) "as respects . . . companies" had to be read into s 179(2). The whole of HMRC's argument had to rest on the second reference to "associated" in s 179(2). Mr Gardiner contended that the draftsman was taking care to limit the exemption to the particular companies specified. There was nothing in the adjective "associated" referring to time; it was simply identifying the company. Adjectives did not determine time; verbs did, and therefore it was necessary to refer to the tense used. For HMRC's argument to work, that part of s 179(2) required a verb; this was missing.

He referred to the syntactical structure of s 179(2). This clearly had the grammatical form of a conditional proposition: the words in the first part, ending with "same time" were the condition, the words in the second part, from "subsection (1)" to the end, were the consequence. Thus one was required to ask the question, is this a case "where 2 or more associated companies cease to be members of the group at the same time"? If so, then one must apply the consequence with the result that "subsection (1) above shall not have effect as respects an acquisition by one from another of those associated companies". From the syntax one would not expect there to be a separate substantive condition hidden within the words in the second part of the sub-section.

Mr Gardiner then referred to the temporal focus of s 179(2) and (3). He argued that it was clear from the wording of s 179(2) than the only point in time focused upon was the time when the companies leave the group. The word "cease" was the only verb representing an action of the companies. It was in the present tense. Therefore it was at that point of time (immediately before and immediately after leaving the group) that the companies had to be associated.

Similarly it was clear that subsection (3) focused exclusively on this time as well; he emphasised the use of the words "ceases" and "leaving". He argued that the comments of Lightman J in Dunlop fully supported this, referring to the moment when the conditions in the relieving provision had to be satisfied. HMRC contended that s 179(2) imposed a requirement that UPNH Ltd and UPN Ltd were associated in July 1997, when, as Lightman J's comments demonstrated, the section was clearly focused on 27 February 1998.

Mr Gardiner then referred to the temporal applicability of s 179(10)(a) and the absence of necessary statutory machinery for HMRC's contention. Section 179(10)(a) set out the definition of association for the purposes of s 179. Mr Gardiner emphasised the words "by themselves". To apply the definition, it was necessary to have in mind what the subject of the definition was, ie the "2 or more companies" referred to. To establish whether two particular companies were associated, the question would only be well-posed if first a collection of companies in the group was identified (including at minimum the two companies under consideration) and then the question was asked whether that collection of companies would form a group for the purposes of s 170(3). Taking his example of a vertical chain of five companies, a principal company "A" with wholly-owned subsidiaries "B" to "E" each holding the next, the answer to the question would depend on the collection of companies being considered. Section 179(10)(a) gave no information about which collection of companies should be chosen; it simply required a collection of companies to be identified before it could be applied.

The necessary information had to come from the statutory context in which it was necessary to know whether companies were associated. References to "associated" as a defined term were contained in s 179(2), s 179(3), s 179(10), and s 180(4)(b). It was clear that in each case the associated companies were drawn from the collection of companies leaving the group; s 179(10)(c) was a tracing section and was parasitic on s 179(3). This had been recognised by Lightman J in Dunlop.

HMRC's case was that s 179(2) required that the companies which were parties to the intra-group acquisition must have been associated at the time of that acquisition. The question therefore arose as to the collection of companies which required to be taken into account to determine association at the time of acquisition. It was clearly not sufficient to take the two companies themselves (B and D in the example given) because that would prevent them from relying on s 179(2) on the highly arbitrary ground that they were indirect, rather than direct, subsidiaries, and would therefore not form a group by themselves. Mr Gardiner suggested that if this were the case, there would have been no need in Dunlop to consider the point in relation to the predecessor of s 179(2); if one took the entire group, the condition was satisfied.

The draftsman had chosen to use a concept of an associated collection of companies. However, the draftsman had not provided the necessary statutory machinery to identify this collection with a class of companies at a point of time other than that of ceasing to be members of a group. This contrasted with enactments relating to the identification of groups, eg ss 170(10) and 179(5), where careful provision had been made. Contrary to the suggestions of HMRC, the concept of sub-group was not employed by the draftsman. Without the necessary statutory apparatus to identify that collection of companies with a class of companies at another point in time, it could not have been the intention of the draftsman that there should be an enquiry into whether there was a relationship of association at a different point in time.

The two concepts – being associated and being a member of a "sub-group" – coincided at the time of leaving the group (indeed it was perfectly reasonable to talk about there being a sub-group at that time which was sold off), but this did not convert one concept into the other.

Mr Gardiner argued that highly capricious results would follow from HMRC's contention. Taking the example already given, assume that B had acquired an asset from D and that B was then sold to a third party by A. If C did not exist at the time of the acquisition of the asset from D (for example, if D was a direct subsidiary of B, and C was incorporated later as part of a restructuring), then, presumably on HMRC's case, that would prevent reliance on section 179(2) (in spite of the fact that the asset would have been in a "sub-group" at all times). This would also be the case if C did exist at the time of acquisition, but had been wound up by the time B was sold off.

HMRC's contention even led to a completely arbitrary result in the present case: HMRC did not appear to require that the relevant companies must be "associated" throughout the period from the time the asset in question was acquired until the time that the relevant companies left the group. Mr Gardiner posed the following alternative circumstances: assume that UPNH Ltd had been bought as an off the shelf company by UPN Ltd on 7 July 1997, and UPN Ltd had then sold the Operating Subsidiaries to UPNH Ltd on the same date, and UPNH Ltd had then been sold by UPN Ltd to UNMG Ltd on that date. Assume also that (as had actually happened) UPN Ltd paid a dividend to its parent and was then sold to UPNH Ltd on that date, and that UPNH Ltd was sold to YPG Group Ltd on 28 February 1998.

In the circumstances as set out in the previous paragraph (and as on the facts of the present case) UPNH Ltd and UPN Ltd would clearly be associated at the time of leaving the UNM Group. However, presumably HMRC would accept that its requirement that UPNH Ltd and UPN Ltd should be associated on acquisition was also met by those facts (and so within s 179(2)). Mr Gardiner argued that there was no principled reason, or purpose to be served, in Parliament permitting reliance to be placed on s 179(2) on the facts set out in the previous paragraph, whilst not (on HMRC's case) permitting it in the present case.

Mr Gardiner then considered the words "an acquisition by one from another of those associated companies" in s 179(2). He questioned how HMRC sought to assert that its construction was correct as a matter of language. The whole reliance of such construction was placed on the concluding words of s 179(2): "an acquisition by one from another of those associated companies". He contended that even if there were compelling reasons for HMRC's contention (which he did not accept), the reliance on those words, to establish a requirement that the companies must be in some sense associated at the time of the acquisition, placed upon them an impossibly heavy semantic burden.

HMRC suggested that the words "an acquisition by one from another of those associated companies" would be otiose if the HMRC interpretation was not accepted. This was not the case: the function of the concluding words in s 179(2) was entirely understandable. The reference in s 179(2) to "group" – which was preceded by the definite article – was clearly a reference back to the "group of companies" referred to in section 179(1). Consequently, the reference to "associated" in the concluding words of s 179(2) was intended to ensure that the companies referred to in the consequence were restricted to those referred to in the condition, ie that the only transfer protected was a transfer from the particular associated company leaving the group to the other (in the example posed at paragraph 36 above, B to D).

In summary, UPN Ltd relied principally on construction.

Arguments for HMRC

Mr Tidmarsh argued that the short issue was whether the phrase "an acquisition by one from the other of those associated companies" in s 179(2) meant merely (as UPNH Ltd contended) that the two companies had to be associated when they ceased to be members of the group, or, as HMRC contended, that the companies leaving the group also had to be associated when the acquisition by one from the other took place. HMRC's case was that both principle and authority indicated that, properly construed, sub-section (2) required the companies that left the group to have been associated when the acquisition took place.

In effect, the issue turned on the role of the word "associated" in the concluding phrase "those associated companies". UPNH Ltd argued that the function of the word "associated" was to ensure that the second limb of s 179(2) (ie from "subsection (1) above" to the end) referred back to the "2 or more associated companies" rather than to the "group" mentioned in the first limb (ie the part from the beginning to the comma after "time").

HMRC submitted that if, as UPNH Ltd contended, the "leaving companies" did not have to be associated when the acquisition took place, the concluding phrase of the sub-section would need only to refer to "those companies". That would quite plainly refer back to the "2 or more associated companies" mentioned in the first limb. The painstaking care supposed by UPNH Ltd's argument was a little surprising in a sub-section whose first limb did not even mention the essential requirement that the companies must be associated not just when they cease to be members of the group but immediately afterwards as well (for comparison, Mr Tidmarsh referred to Dunlop in the Court of Appeal).

HMRC's view was that the word "associated" had been inserted for a purpose and not for emphasis or clarity, that purpose being to require that the companies leaving the group had to be associated when the acquisition by one from the other took place.

There was little in the wording of the sub-section or surrounding sections that helped to resolve the issue. In particular, contrary to UPNH Ltd's submissions:

(1) there was nothing particularly surprising in finding in a sub-section which was on any footing expressed in remarkably compressed terms (ie it did not even mention the essential requirement, established by the Court of Appeal by means of a purposive construction in Dunlop, that the companies had to be associated not just when they ceased to be members of the group but immediately afterwards as well), a separate condition in the concluding phrase;

(2) the fact that the opening phrase of sub-section (2) was in the present tense, and required the companies to be associated at the time that they left the group, threw no light on the meaning and role of "associated" in the concluding phrase. On HMRC's reading, the word "associated" in the concluding phrase, was referable to the time of the acquisition.

Mr Tidmarsh referred to the scheme of the legislation and the underlying purpose of the legislation. Section 171 provided that in general, disposals between companies which were members of a group were neutral for the purposes of corporation tax on chargeable gains. In principle, as mentioned by Hoffman J in Westcott v Woolcombers (and approved by the House of Lords in NAP Holdings UK Ltd v Whittles), gains and losses should be computed by reference to the consideration paid when an asset came into the group and the consideration received when it went out.

Section 179(3) qualified that approach, in order to deal with what was known as the "envelope scheme" (as explained by Millett J at first instance in NAP Holdings). Mr Tidmarsh pointed out that the s 179(3) charge applied generally when an asset had been transferred between group companies, and not just to the envelope scheme. The purpose was to ensure that a tax charge arose whenever a company left a group having recently acquired an asset from another group company and to counteract any advantage that might otherwise be obtained by intra group transfers.

The function of s 179(2) was to provide an exception from the charge imposed by s 179(3). Mr Tidmarsh summarised the scheme of the legislation; s 179(2) provided that in the circumstances in which it applied, s 179(3) should not apply so that the s 171 regime applied.

He argued that s 179(2) should be construed so as to make that a rational scheme. This meant that sub-section (2) should be construed so that it applied in situations not only consistent with the object of s 179(3) but also consistent with the scheme established by s 171. The latter scheme was that the tax treatment should reflect the economic reality and that a group should be treated as a single entity so long as the relevant assets remained within that entity.

Two comments could be made about s 179(2). First, as already mentioned, it was in a compressed style; it did not spell out all its requirements. Secondly, the wording of sub-section (2) was not necessarily being used with a meaning consistent with other parts of the legislation, and in particular not even with the words of sub-section (1). Sub-section (2) was not drafted with precision at all. A detailed textual and grammatical analysis of s 179(2) was unlikely to provide a sound guide to its meaning. Analysing the language by reference to s 179(1) was unlikely to be a sound guide: as Dunlop decided, wording in sub-section (2) was not used in the same sense as in sub-section (1). Mr Gardiner had referred to "manifest defects"; on HMRC's case, s 179(1) was not likely to be a sound guide to s 179(2).

The wording of s 179(2) depended on "associated", the penultimate word in the sub-section. For UPNH Ltd, it had been argued that this word was referring back to the opening phrase in sub-section (2) rather than being a reference back to the group. Although it was possible that the word was being used in that latter sense, HMRC thought it unlikely that such painstaking precision was to be found in a provision which, as already mentioned, did not even spell out its primary requirement that the companies had to be associated after leaving the group. If an additional word had been used, it was likely to have some substantive purpose, and here it would have been sufficient to refer to "those companies". HMRC contended that the word did have a substantive purpose; its role was to show that the companies had to be associated at the time of the relevant acquisition.

The use of the present tense in the first limb of s 179(2) (ie "cease") did not mean that the word "associated" in the second limb referred to the same point in time. The second limb was concerned with the time of acquisition, which was in the past; "associated" referred to that time. Mr Tidmarsh did not accept UPNH Ltd's argument that because the first limb contained a condition, the second limb could not contain a condition. This was to beg the question of what role the word "associated" had, ie whether it was an adjective referring back, or whether it had some greater role. Section 179(2) was capable of being read in the sense of "immediately before and immediately after" in the first limb, and, in the second limb, of referring back to the time at which the acquisition had been made. This was not making new legislation; it was giving a purposive construction to the words, exactly as the Court of Appeal had done in Dunlop.

Disposal and acquisitions between companies in a sub-group (ie a collection of companies that would by themselves form a group of companies) were economically neutral as regards the company that owned the sub-group ("H") and other companies in the group. So long as the asset remained within the sub-group, the gain referable to it remained within the sub-group despite any disposals and acquisitions of the asset between members of the sub-group. Accordingly, there would be a rational scheme to the legislation if s 179(2) had the result that disposals and acquisitions between members of a sub-group were treated as neutral so long as the asset remained within the sub-group, or, in other words, that a sub-group was treated as a single entity.

As pointed out by Julian Ghosh in his article, in the absence of s 179(2) disposals and acquisitions within a sub-group would lead to an inevitable double charge on a sale by H of a sub-group. Such a charge would undermine the general scheme of the legislation (ie to treat truly economically neutral disposals as fiscally neutral) because H's position was unaffected by the disposals and acquisitions within the sub-group and the gain referable to the asset remained within the sub-group.

Accordingly, if the legislation was to have a rational scheme, s 179(2) must be construed so as to treat a sub-group as a single entity so that disposals and acquisitions of an asset within a sub-group did not lead to a charge pursuant to section 179(3). This was consistent with the object of s 179(3), as the gain referable to the asset remained within the sub-group and so a charge should not be imposed when that sub-group left the group. It would be consistent with the scheme of the legislation if s 179(2) had the effect that s 179 did not apply where acquisitions were made between companies which were associated at the time of the acquisition and were also associated when they left the group. In that case there would be a rational scheme to the legislation.

That scheme would start with s 171, which treated a group as a single entity, disposals within which had no tax consequence. Then s 179(1) and (3) would apply to impose a charge when a company went out of the group when owning an asset acquired from another group company. Then s 179(2) would negate a charge, ie prevent it from arising, where companies which could be regarded as a single entity left the group and there had been an acquisition within that single entity. This was also consistent with the object of the charge imposed by s 179, because acquisitions of assets within that entity could not affect the position of other members of the group, so could not have given other members the chance to realise the gain but defer the tax. In practice, so far as acquisitions between members of a sub-group were concerned, this was no different from a company making internal transfers. Thus there would be no reason to impose a charge when a sub-group left the group. These submissions were supported by the Dunlop case. Lightman J had not been looking at the question of association at an earlier time. What Chadwick LJ had been referring to was transfers between P and T as a sub-group.

Thus both principle and authority showed that the purpose of s 179(2) was to procure that a sub-group was treated as a single entity, so that the acquisition and disposal of an asset within a sub-group did not lead to a charge within s 179.

Mr Tidmarsh argued that the latter conclusion was supported by the authorities. He referred to the comments of Chadwick LJ in Dunlop at 920-921 as to the mischief which the predecessor to s 179 was enacted to counter, and the role within that scheme that what is now s 179(2) could be regarded as intended to have. Contrary to UPNH Ltd's suggestion in its argument, Chadwick LJ was not explaining that the purpose of s 179(2) was "to cater for the situation where a sub-group has been sold off, whose members have acquired assets from one another, such that the latent gain on the transfer of those assets is preserved". In fact Chadwick LJ was saying that the object of s 179(3) was preserved where: "The latent gain on the transfer of the asset by P to T is preserved within the new group of which P and T are members" because the latent gain would crystallise if T sold the asset or P sold T. That was not the result in the present case. Here UPNH Ltd was equivalent to P, it owned the asset and UPN Ltd was equivalent to T. If P (UPNH Ltd) sold T (UPN Ltd) the gain would not crystallise.

Earlier in his judgment Chadwick LJ had (at 913) recognized that s 179 was enacted to counteract the envelope scheme, and that the aspect of that scheme that was counteracted was the deferral of tax by means of the preservation of the latent gain on the asset within the envelope comprising the transferee company. Mr Tidmarsh argued that Chadwick LJ could not have been saying that the purpose of s 179(2) was to permit the deferral of tax by means of the preservation of the latent gain within an "envelope" comprising not a single company but 2 or more companies associated only at the time of leaving the group. The meaning became clear from the passage following that quoted in argument by UPNH Ltd, where Chadwick LJ stated that in his view Lightman J had been correct for the second of the reasons that he had given.

Accordingly, Chadwick LJ was saying that the object of s 179(3) was preserved where there had been disposals and acquisitions between members of a sub-group such that the gain on those disposals and acquisitions of assets was preserved in that sub-group.

Thus both principle and authority showed that the purpose of s 179(2) was to procure that a sub-group was treated as a single entity so that disposals and acquisitions of an asset within a sub-group did not lead to a charge pursuant to s 179. The gain referable to the asset remained within the sub-group and so a charge should not be imposed when that sub-group left the group.

Reverting to the language of s 179(2) and the meaning of "associated" in the second limb, this should be construed as far as possible within the scheme of the legislation and s 171, ie to treat the group as a single entity. The second limb was looking at the time of the acquisition, and requiring that the companies should be associated at the time of the acquisition. This was a tenable construction, which should be adopted given the underlying scheme and purpose of the legislation. Mr Tidmarsh acknowledged that the drafting of s 179(2) was not perfect and that it did throw up some possible oddities. As Dunlop illustrated, s 179(2) was imperfectly drafted. HMRC contended that the courts should find a rational scheme to the legislation, even if there were imperfections.

Section 179(2) should therefore be construed as meaning that if 2 or more associated companies ceased to be members of a group at the same time and there had been acquisitions between those companies, then s 179(3) did not apply if those companies were associated at the time of the acquisitions.

Such a construction ensured that s 179(3) would not apply where there had been acquisitions between companies that at the time of the acquisitions formed a sub-group and also formed a sub-group when they ceased to be part of the group.

This construction identified the companies that had to be associated and the times at which they had to be associated, and the issues raised in UPNH Ltd's argument (see paragraphs 36-39 above) did not arise.

Mr Tidmarsh conceded that s 179(2) might not work as intended in all circumstances (he referred to the possible exceptions mentioned by Mr Gardiner at paragraphs 41-43 above) but that was no reason to conclude that it had the irrational purpose and effect suggested by UPNH Ltd. Mr Tidmarsh referred to Billingham v Cooper [2001] STC 1177, 1186, at [35], [39]. The legislation ought to be construed to give effect to its manifest purpose. UPNH Ltd's construction did not do so except for the adventitious case of the transfer here; on such construction, the provision could be easily manipulated.

He contended that the application of s 179(2) to the facts in the present case was straightforward. In essence, 2 associated companies, UPNH Ltd and UPN Ltd had left the group and, prior to their leaving, an asset had been acquired by UPNH Ltd from UPN Ltd. At the time of that acquisition UPNH Ltd and UPN Ltd were not associated (in that they did not by themselves form a group). Accordingly, the requirements of s 179(2) were not satisfied and section 179(3) applied.

Discussion and conclusions

The issue in the present case is purely one of statutory construction. It has been made clear by the House of Lords in Barclays Mercantile Business Finance Ltd v Mawson [2005] STC 1 at [33] (Lord Nicholls, giving the report of the Appellate Committee), confirming the view expressed in various earlier cases, that the general rules of statutory interpretation are to be applied in construing tax legislation. Although it was not specifically cited to me, Bennion, Statutory Interpretation (4th edition) is accepted to be a major authority on the subject. An important principle to be taken into account is what Bennion refers to as the "informed interpretation" rule; this states (at page 499) that ". . . the person who construes an enactment must infer that the legislator, when settling its wording, intended it to be given a fully informed, rather than a purely literal, interpretation . . ." In construing s 179(2), it is necessary to look at the context. Section 179 is a provision aimed at counteracting avoidance. It was introduced to prevent groups of companies from taking inappropriate advantage of the intra-group transfer exemption contained in s 171. The effect of s 179(2) is to provide an exemption from the anti-avoidance degrouping charge under s 179(3). Both parties accepted these propositions; the disputed question is the extent of the latter exemption.

Mr Gardiner argues for UPNH that the statutory wording confines attention to the position as at the time when the associated companies leave the group, and that the draftsman has not provided the necessary statutory machinery to identify the concept of an associated collection of companies with a class of companies at any point other than when the associated companies leave the group. I will consider his detailed arguments after referring to HMRC's contentions. He referred to this view being widely accepted; again, I will return to this after setting out the broad contentions of HMRC.

Mr Tidmarsh argues that the exemption in s 179(2) should be construed so as to make a rational scheme; this requires s 179(2) to be construed so that it applies in situations not only consistent with the object of s 179(3) but also consistent with the scheme established by s 171.

The approach taken by HMRC is set out in its Capital Gains Manual, at CG45456:

"The purpose of the exception is to prevent a degrouping charge at the asset tier if the latent asset-tier gain is effectively included as a component in a tax charge at the shareholder tier. If a parent company disposes of a sub-group, and an asset has previously moved around exclusively within the sub-group, any latent asset-tier gain will be reflected in the gain at the shareholder tier when the parent company disposes of the shares in the company heading the sub- group. There is accordingly no need for a separate asset-tier charge on a member of the sub-group which has acquired the asset from another member of the sub-group."

Mr Gardiner suggested (in a footnote to his skeleton argument) that the expressions "asset tier" and "shareholder tier" were not entirely clear in their meaning; in the present case there was a charge triggered on UPNH Ltd as the shareholder of UPN Ltd, and that would appear, at least, to be the relevant "shareholder-tier" charge. He maintained that in any event, in the present case, the sale of UPNH Ltd had triggered a charge under section 179 in respect of its acquisition of UPN Ltd. It followed that account had been taken of the sale proceeds received by UPN Ltd from selling the Operating Subsidiaries to UPNH Ltd.

I accept that an occasion of charge did arise under s 179 in respect of the ownership by UPNH Ltd of the shares in UPN Ltd at the time when UPNH Ltd left the group; this was a consequence of that intra-group transfer having taken place within the previous six years. The result of the previous substantial dividend payment was that no actual gain arose; Mr Gardiner explained to me that the position was not affected by the "depreciatory transactions" provisions. What his argument set out in the preceding paragraph is questioning is whether the basis for HMRC's view is appropriate where the transferor involved in an intra-group transfer subsequently becomes a subsidiary of the transferee. This requires a further analysis of the views held by HMRC. It may assist if another extract from the Capital Gains Manual (not cited to me) is set out:

"45000. Group tax planning: general

There is one very general tax planning point to bear in mind when considering the structure of the group capital gains provisions. This is the choice which a group has to dispose of its interest in a particular asset in two different ways. There may be a direct disposal of the asset by the company which owns the asset (an asset-tier disposal). Alternatively the group can dispose of its interest in the asset by disposing of the shares in the company which owns the asset (a shareholder-tier disposal)."

Thus, taking these two extracts together, the basis for HMRC's position is that no charge needs to fall on a company which made an acquisition from another associated company, because the group member disposing of the associated companies will itself suffer a charge to tax reflecting the gain on that disposal. If, however, the intra-group acquisition was merely from another group member, and the two companies were not "associated companies" at the time of that acquisition, the intra-group transfer remains within the mischief of the charging provisions in s 179, even though the two companies have since become associated. It follows that for the purposes of HMRC's position, it is immaterial whether the transferor becomes a subsidiary of the transferee (as in the present case) or instead the transferee becomes a subsidiary of the transferor.

Mr Gardiner emphasised the size of the amount in dispute; although the disputed gain has not yet been precisely quantified, the tax and interest thereon amount to approximately £100 million. Although I note the significance of this amount, my task is to construe the legislation; in doing so, I acknowledge that large amounts may turn on the precise construction of s 179(2), whether viewed from the point of view of taxpaying groups of companies or from that of HMRC. However, the construction of the sub-section cannot be influenced by the amounts actually or potentially in dispute.

Given the clearly stated views of HMRC as set out in the Capital Gains Manual, it is open to question whether UPNH Ltd's contentions can properly be described as representing a widely accepted view. In the era of self-assessment, those responsible for reporting companies' taxable profits may need to take account of views published by HMRC, indicating as appropriate in the self-assessment where an alternative view has been taken in arriving at the taxable profits. The validity of the respective views has remained untested since the inception of the legislation; this appeal is the first opportunity to consider them.

I will attempt in my own way to analyse the policy underlying the relevant statutory provisions. The simple case of a transfer of an asset from one group member to another, followed by the latter leaving the group, clearly falls within the s 179 charging provisions; the asset has been transferred without any liability falling on the transferor, so that in the absence of s 179, the tax charge in respect of the asset would be deferred until the transferee disposed of it. The s 179 charge falls on the transferee; it has no effect on any normal tax charge falling on the company selling the transferee (in a case where the transferee leaves the group as a result of its parent selling the shares in it to an independent third party). (For this purpose, it is appropriate to ignore any contractual arrangements involving warranties or indemnities imposing the burden of the s 179 charge on the seller.)

As Mr Gardiner pointed out, the concept of a "sub-group" is not contained in the legislation. However, it is a convenient shorthand for a collection of companies which falls within the definition of "associated companies" in s 179(10(a).

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

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

Turning to the wording of s 179(2), I accept that the words up to the comma are setting out a precondition to the application of the sub-section. However, that is not the only precondition required. In the part of s 179(2) falling after the comma, there is the requirement that there should have been "an acquisition by one from another of those associated companies". Leaving aside for the present the question of the interpretation to be placed on the final three words, the provision is conditional on an acquisition having taken place as between the two companies concerned; this simply corresponds to the precondition in s 179(1) to the charge which would normally arise under s 179(3). I therefore regard Mr Gardiner's proposition, that the words in the first part of s 179(2) are the condition and those in the second part are the consequence, as an over-simplification.

Thus, as Mr Tidmarsh argued, the inclusion of a condition in the first part of s 179(2) does not prevent the second part from containing a condition. Apart from the "acquisition" condition, to which I have already referred, the remaining question is whether the final three words in s 179(2), "those associated companies", are to be regarded as imposing a further condition, namely that the acquisition must have been by one of those associated companies from the other at a time when they were associated [my emphasis]. Mr Gardiner contended that the only point in time focused upon was the time when the companies left the group. However, this ignores the fact that the wording in the second part of s 179(2) is concentrating on the circumstances of the acquisition, which inevitably will have been at a point earlier than when the companies in question leave the group. If all the words of the phrase are taken together ("an acquisition by one from another of those associated companies"), it appears more logical to examine all the circumstances comprised in that phrase as at the same time, namely that of the acquisition.

Mr Gardiner contended that to rely on these three final words to establish a requirement that the companies must in some sense be associated at the time of the acquisition was to place on those words an impossibly heavy semantic burden. However, an explanation needs to be found for the inclusion of the word "associated" in that phrase. The sub-section would work in the same way as Mr Gardiner contends if the word were to be omitted from the phrase; the companies have been described as "associated" at the beginning of the sub-section, so why did the draftsman see it as necessary to use the word again? Mr Gardiner's response is to say that the second occurrence, in the "consequence" of s 179(2), is to ensure that the companies referred to in that part of the provision are those referred to in the "condition". As I have already concluded, to regard the two parts of s 179(2) as containing, respectively, a "condition" and a "consequence", is to over-simplify the analysis. The consequence is contained in the words "subsection (1) shall not have effect", and all the rest of the words in s 179(2) contain the conditions to be met in order for the consequence to be achieved. I therefore do not consider that Mr Gardiner has provided a satisfactory explanation for the use of the word "associated" in the second part of s 179(2).

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

Mr Gardiner objected to such a construction on the basis that there was nothing in the adjective "associated" which referred to time, and that it was simply identifying the company. He argued that adjectives did not determine time; verbs did, and therefore it was necessary to refer to the tense used; to attain the construction sought by Mr Tidmarsh, that part of s 179(2) was missing a verb. In my view, the answer to this is that the whole phrase requires to be considered as a single entity, rather than carrying out separate examinations of the constituent words of the phrase. The temporal context is the circumstances as they were at the time of the acquisition. If so, it would appear strange to apply the test of association by reference to the circumstances at another time, namely the point at which the companies in question (which are required by the initial wording of s 179(2) to be associated at that other time) leave the group.

I accept Mr Tidmarsh's submission that s 179(2) is expressed in very "compressed" language, and that this was confirmed by the decision in Dunlop. Mr Gardiner referred to the history of the provision, and explained that it had been introduced in 1968. The approach to drafting tax legislation has evolved considerably since that time, a major factor being the desire to counteract various forms of avoidance. It is not surprising that a provision with such a long history is drafted in a more compressed fashion than more recent legislation. As Mr Tidmarsh indicated, in Dunlop it was considered necessary to "read in" a requirement that the companies in question must be associated both at the point of leaving the group, and immediately after doing so. In the present context, I consider it appropriate to construe the second reference to "associated" in s 179(2) in the manner described above, even though the reasoning behind such a construction may not be immediately apparent from the tersely expressed style employed by the draftsman in 1968.

In his commentary on HMRC's skeleton argument, Mr Gardiner referred to the comments made by the learned authors of Bramwell on Taxation of Companies and Company Reconstructions (8th edition) at paragraph D5.3.2:

"Suppose that before the sale of H1 and H2, there is a transfer of H1 to H2. They are now associated companies. Is that sufficient to secure the exemption? The authors consider that it is: the requirement of section 179(2) being only that association must exist at the time the transferor and the transferee leave the group. Had the draftsman intended that they should be associated (ie that by themselves they should form a group) at the time of the intra-group transfer he would have said so. The Revenue suggest in the Capital Gains Taxation Manual that the purpose of the associated companies exemption requires that a condition for association at the earlier time should be read in:

'45457 Associated companies leaving same time

TCGA 1992, s 178(2) and TCGA 1992 s 179(2) presuppose a shareholder tier charge reflecting the increase in value of the underlying asset while held by the group. This exclusion from the degrouping charge requires that the companies are associated at the time of the intragroup asset transfer referred to in TCGA 1992 s 178(1) and TCGA 1992 s 179(1).'

The authors do not agree that there is any such presupposition or that this is a legitimate approach to statutory interpretation. . . . "

For the reasons which I have set out above, I do not accept this view. I consider that it is necessary to construe s 179(2) in the context of the scheme underlying the legislation, which is that a charge is imposed by s 179(1) and (3), and that a limited exemption from that charge is provided by s 179(2) in circumstances where transactions have taken place within a "sub-group", and the latter entity then leaves the group. To permit exemption in circumstances where the value of the sub-group has been inflated by a transfer from elsewhere within the group, followed by the addition of the transferor to the sub-group and the subsequent cesser of the sub-group's membership of the main group, appears to me to be inconsistent with the whole purpose of the charge imposed by s 179. For this purpose I see no difference between an intra-group transfer to a single company unit, which subsequently leaves the group, and an intra-group transfer to what starts as a single company unit, but is then expanded to a multi-company unit, which in turn leaves the group. The latter situation is entirely different from one in which an intra-group transfer has taken place within a unit consisting of a sub-group, and the latter then leaves the main group. I consider that s 179(2) is to be construed as applying only in this limited circumstance, and not where the association arises only after the intra-group transfer.

Mr Gardiner contended that if UPNH Ltd were to dispose of any of the Operating Subsidiaries, that would trigger a charge to corporation tax on chargeable gains which (assuming UPNH Ltd's view to be correct) would fully take into account any increase in value while the Operating Subsidiaries were owned by members of the UNM Group. As my conclusion is that UPNH Ltd's view is not correct, it is necessary to examine the remainder of Mr Gardiner's contention in greater detail.

My view is that the contention ignores two important aspects of the s 179 charge. The first is that the s 179 charge is additional to the normal capital gains charge arising on the group member which disposes of the sub-group containing the associated companies. The second is that it is imposed on the company leaving the group at the time when it does so, but by reference to the value of the asset at the time of the intra-group acquisition. This is a deliberate acceleration of liability to prevent the charge from being deferred until the company under its new ownership ultimately disposes of the asset in question. (Any element of gain accruing from the time of the intra-group acquisition onwards is left to be charged at that later time.)

Effectively, at least some element of the gain referable to the assets held by the intra-group transferee is being taxed twice, albeit in the hands of different companies. This may be regarded as a normal consequence of the corporate structure, under which there are two assets, namely the asset held by the subsidiary, and the shares held by the parent in that subsidiary. The special element introduced by s 179 is that the liability for the gain previously accrued on the asset acquired by the subsidiary is accelerated. It appears to be an intended result of the section that the subsidiary leaving the group suffers a charge to tax on a deemed gain without being provided with resources in the form of consideration which would enable it to pay the tax falling due. (I am ignoring the significant amendments which have been made to the legislation since the period under review.) The effect is to deter avoidance by penalising the transferee at the point when it leaves the group. Given this penal nature of the section, I regard it as appropriate to construe strictly the exemption contained in s 179(2). I do not consider that the eventual liability to tax which will arise when (if ever) UPNH Ltd eventually disposes of shares in the Operating Subsidiaries is a justification for construing s 179(2) to produce the result for which UPNH Ltd contends.

In Dunlop, Chadwick LJ indicated (at p 920) that

" . . . it is difficult to believe that Parliament could have intended the relieving provisions in s 278(2) [the predecessor to s 179(2)] to have the effect that s 278(3) did not apply to the most obvious target at which they were aimed—the simple two-company group . . . "

Although the position in the present case is more complicated, I have the corresponding difficulty in seeing why the protection of s 179(2) should be available where the asset has been transferred into the sub-group from elsewhere in the group. Mr Gardiner argued that the key distinction in relation to s 179(2) was that in the standard case involving the "envelope trick", the asset was divorced from the transferor, placing the asset in the new group and leaving the transferor in the old; if the transferor and the transferee went out of the group together, this was not within the vice of s 179, and therefore s 179(2) exempted the transferee from the s 179 charge. The analysis is appropriate for the standard case falling within s 179, but I do not think that this "divorce test" is sufficient for the purposes of establishing whether the s 179(2) exemption is available in a case where companies become associated only after the intra-group transfer. If value has been added to the sub-group by means of an intra-group transfer from a non-associated company, the subsequent inclusion of the transferor within that sub-group does not negate that insertion of value.

Mr Gardiner argued that the words of s 179(2) should be construed in relation to s 179(1). I accept that sub-section (2) has to be seen as falling within the context of the charge introduced by sub-section (1) and imposed by sub-section (3). However, I do not regard it as appropriate to use s 179(1) as a means of construing s 179(2), other than by examining the whole statutory context in the way that I have already explained. I do not consider that it is necessary to "read in" the language from other sub-sections of s 179 if sub-section (2) can be construed on its own within that statutory context.

I accept that the construction of s 179(2) which I have arrived at may itself result in anomalies. However, this is not a reason to ignore a construction which in my view recognises the scheme and intention of the legislation. Any anomalies will have to be considered as they arise.

Both Mr Gardiner and Mr Tidmarsh referred briefly to an article by Julian Ghosh entitled "Re: TCGA 1992, Section 179(2)" (The Corporate Tax Review, 2001 3 (4) pp 275-281). I have arrived at my view on the construction of s 179(2) independently of the views expressed in that article, but I note that those views are similar to that which I have reached. Although Mr Gardiner criticised certain points in the article, I do not think, in the light of the independent process of reasoning which I have followed, that I need to deal with his comments.

Summary

I therefore hold that as a result of the sale by UNMG Ltd to YPG Group Ltd in February 1998, a chargeable gain accrued to UPNH Ltd under s 179 in respect of the assets previously acquired by it from UPN Ltd by way of an intra-group transfer. As the figures on which the assessment made on 1 March 2004 have not been agreed, this is a decision in principle, leaving the figures to be agreed before a final determination of this appeal can be made.

JOHN CLARK

SPECIAL COMMISSIONER

RELEASE DATE: 9 October 2006

SC3034/2006