United Kingdom Special Commissioners of Income Tax Decisions

Limitgood Ltd & Anor v Revenue & Customs [2007] UKSPC SPC00612 (16 May 2007)

SPC00612

CAPITAL GAINS – corporation tax – groups – pre-entry losses – restriction on set-off against group gains – relevant group – whether gains pre-entry gains – whether assets held immediately before joining relevant group – TCGA 1992 Sch 7A – appeals allowed (by Chairman's casting vote)

THE SPECIAL COMMISSIONERS

LIMITGOOD LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

PRIZEDOME LIMITED Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents Special Commissioners: THEODORE WALLACE DR JOHN F AVERY JONES CBE

Sitting in public in London on 14 and 15 March 2007

Graham Aaronson QC and James Henderson, instructed by PwC Legal for the Appellant

Malcolm Gammie QC and David Ewart QC, instructed by the Acting Solicitor for the HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007
DECISION
1. These are appeals by Limitgood Ltd and Prizedome Ltd against amendments to their corporation tax self assessments for the periods ended 30 September 2001 and 2002 and 31 December 2003, and, for Limitgood Ltd only, 31 December 2004.
2. The issue in the appeals concerns the interpretation of the pre-entry loss legislation in Sch 7A to the Taxation of Chargeable Gains Act 1992, in particular para 1(6) thereof. The issue is essentially the same as in Five Oaks v HMRC [2006] STC (SCD) 769, which is under appeal to the High Court, however the submissions before us were much more extensive.

The facts

3. There were no witnesses. There was an agreed statement of facts and a bundle of documents. The facts relevant to this decision are as follows.
4. On 26 September 2000 Limitgood Ltd ("Limitgood") and Prizedome Ltd ("Prizedome") each acquired one-half of the issued share capital of Coalite Group Ltd ("Coalite") from Anglo United plc ("Anglo") for a consideration of £1 each. As at that date Coalite was worthless. Both Limitgood and Prizedome were wholly-owned subsidiaries of Anglo. The capital gains tax base cost for Anglo of the Coalite shares was £486,949,498. Under s 171(1) of the 1992 Act the deemed acquisition cost for Limitgood and Prizedome was £243,474,749 each.
5. On 27 September 2000, a wholly-owned subsidiary of Grantchester Holdings plc (which changed its name to Grantchester Limited on 19 December 2000 and to which we refer as "GL") acquired the shares in Limitgood and Prizedome for a combined consideration of £4 million. On ceasing to be members of the Anglo group, Limitgood and Prizedome were each deemed to have disposed of their holdings in Coalite at market value under s 179(3) and thus realised capital gains tax losses under s 179(4). Those losses were pre-entry losses of Limitgood and Prizedome in relation to the GL group within Sch 7A, para 1(2). Losses of £113,921,249 were claimed by each of Limitgood and Prizedome in their corporation tax self-assessment returns for the accounting period to 30 September 2000, being limited by reason of depreciatory dividends and sections 176 and 177.
6. On 12 October 2000 other companies in the GL capital gains tax group made gains totalling £28,956,478 which were treated as accruing to Limitgood by reason of elections under s 171A.
7. On 19 December 2000 the issued share capital of GL was acquired by Grantchester plc under a Scheme of Arrangement under section 425 of the Companies Act 1985. Grantchester plc changed its name to Grantchester Holdings plc and we refer to it as "GH".
8. GH and all members of its group, now including GL, Limitgood and Prizedome, prepared accounts for the year to 30 September 2001. Limitgood claimed to set off losses of £28,956,478 against the gains referred to at paragraph 6 above. Prizedome claimed to set losses of £8,371,301 against gains elected under section 171A on assets owned by companies which joined the GH group at the same time as Prizedome.
9. In their returns to 30 September 2002 Limitgood and Prizedome claimed to set off losses of £33,084,006 and £56,323,703 respectively against further gains elected under s 171A on assets owned by companies which also joined the GH group at the same time as they did, 19 December 2000.
10. In 2002 Hammerson plc ("Hammerson") acquired the entire share capital of GH following a public offer. As a result of Hammerson buying in excess of 29.9% of GH's shares in the market, Hammerson was obliged under the takeover code rules to declare its bid unconditional when it received acceptances from over 50% of shareholders and it did so on 19 September 2002. Hammerson therefore controlled GH for a short period before GH became a member of the Hammerson group for capital gains tax purposes.
11. Following the Hammerson takeover Limitgood prepared accounts for the 12 months to 31 December 2003 and 2004. In its return to December 2004 Limitgood claimed to set off £2,295,034 against gains (the "Catford gains") elected to it by companies which joined the GH group at the same time as Limitgood.
12. The above facts may be summarised as follows. When the two Appellants left the Anglo group on being acquired by a subsidiary of GL, losses of £113.9 million each crystallised under s 179. Shortly afterwards, but in the following accounting period, gains of £29m were realised by other companies in the GL group and were elected to Limitgood. The GL group including the two Appellants was acquired by GH on 19 December 2000, which then held another subsidiary; the companies in the GL group thus became members of the GH group. In their returns to September 2001 Limitgood set off part of its loss against the £29m gain and Prizedome set off losses of £8.4 million. In the year to September 2002 further gains totalling £89.4m were made by other GH subsidiaries on the disposal of assets held by companies when previously in the GL group; those gains were elected to the Appellants who claimed to set off part of the losses. Following the takeover of GH by Hammerson, Limitgood claimed to set off £2.3m of its loss against the Catford gain which had been elected to it in 2004 by companies which also joined the GH group on 19 December 2000 and which were controlled by Hammerson before becoming part of the Hammerson group.
13. The issues for determination were (a) whether Limitgood is entitled to claim that gains of £29m in the year to September 2001 were realised on assets deemed to be sold by Limitgood before the GL group was acquired by the GH group on 19 December 2000 so that Limitgood could deduct its losses under paras 6(1)(a) and 7(1)(a) of Sch 7A; (b) whether the Appellants are entitled to claim in the case of £35.4m gains elected to Limitgood and £64.7m in the case of Prizedome that the gains were realised in the years to September 2001 and 2002 on assets deemed under para 7(3)(a) to be held by them immediately before they joined the GH group so that para 7(1)(b) applies and para 6(1)(b) requires that their pre-entry losses from earlier periods must be set off against those gains, and (c) whether Limitgood is entitled to set its losses against the Catford gains of £2.3m realised by members of the GH group and elected to Limitgood in the period to 31 December 2004 so that para 7(1)(b) again applies.

The legislation

14. The general scope and effect of the pre-entry loss legislation in Sch 7A Taxation of Chargeable Gains Act 1992, which takes effect under s 177A, is not in dispute. Under s 170(3) a principal company and all its 75 per cent owned subsidiaries form a group for capital gains tax purposes. Section 170(10) provides,

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

Accordingly, from 27 September 2000 GL was the principal company of a group which included the two Appellants, from 19 December 2000 the GL and GH groups were to be regarded as the same group ("the GL/GH group") of which GH was the principal company and subsequently that group and Hammerson plc ("the GL/GH/Hammerson group") were to be regarded as the same group of which Hammerson plc was the principal company.

15. Paragraphs 7(1) and (3)(a) of Sch 7A provide:

"7?(1) A pre-entry loss that accrued to a company before it became a member of the relevant group shall be deductible from a chargeable gain accruing to that company if the gain is one accruing?

(a) on a disposal made by that company before the date on which it became a member of the relevant group ('the entry date');

(b) on the disposal of an asset which was held by that company immediately before the entry date; or

(c) …

(3) Where two or more companies become members of the relevant group at the same time and those companies were all members of the same group of companies immediately before they became members of the relevant group, then, without prejudice to paragraph 9 below?

(a) an asset shall be treated for the purposes of sub-paragraph (1)(b) above as held, immediately before it became a member of the relevant group, by the company to which the pre-entry loss in question accrued if that company is one of those companies and the asset was in fact so held by another of those companies; …"

Pre-entry loss is defined by paragraph 1(2):

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

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

(b) the pre-entry proportion of any allowable loss accruing to that company on the disposal of a pre-entry asset; …"

An asset held by a company immediately before becoming a member of the relevant group is a pre-entry asset, see para 1(3). Relevant group is not directly defined. However the use of the term is explained in para 1(1):

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

16. Accordingly a pre-entry loss, which is first, a loss accruing, that is to say realised, before the entry date of a company into a group of companies, or secondly, the pre-entry proportion of unrealised losses on later disposal of a pre-entry asset, is available for set-off against gains on a disposal of an asset made before the entry date under para 7(1)(a), or on the disposal of an asset held immediately before the entry date under para 7(1)(b). By para 7(3) when two or more members of an existing group of companies become members of another group at the same time, para 7(1)(b) applies to assets held by another such company.
17. The entry date of a company into the relevant group is therefore important. The entry date may be affected by para 1(6), which is central to the dispute in this appeal:

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

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

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

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

It is common ground that neither para 9(6) nor 1(7) applies here.

18. Paragraphs 9(1) to (6) provide as follows:

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

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

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

(b) that group, in a case where there is no group falling within paragraph (a)…[not applicable] [or]

(c) that group, in a case where there is a group falling within paragraph (a) or (b) above, is a group of which that company was a member at any time in the accounting period of that company in which it became a member of the group falling within that paragraph;

…

and sub-paragraphs (3) to (5) below shall apply in the case of any loss accruing on the disposal of any asset where, by virtue of this sub-paragraph, there are two or more groups ('connected groups') by reference to which this Schedule applies.

(3) This Schedule shall apply separately in relation to each of the connected groups (so far as they are not groups in relation to which the loss is a pre-entry loss by virtue of paragraph 1(2)(a) above) for the purpose of—

(a) determining whether the loss on the disposal of any asset is a loss on the disposal of a pre-entry asset; and

(b) calculating the pre-entry proportion of that loss.

(4) Subject to sub-paragraph (5) below, paragraph 6 above shall have effect—

(a) as if the pre-entry proportion of any loss accruing on the disposal of an asset which is a pre-entry asset in the case of more than one of the connected groups were the largest pre-entry proportion of that loss calculated in accordance with sub-paragraph (3) above; and

(b) so that, where the loss accruing on the disposal of any asset is a pre-entry loss by virtue of paragraph l(2)(a) above in the case of any of the connected groups, that loss shall be the pre-entry loss for the purposes of paragraph 6 above, and not any amount which is the pre-entry proportion of that loss in relation to any of the other groups.

(5) Where, on the separate application of this Schedule in the case of each of the groups by reference to which this Schedule applies, there is, in the case of the disposal of any asset, a pre-entry loss by reference to each of two or more of the connected groups, no amount in respect of the loss accruing on the disposal shall be deductible under paragraph 7 above from any chargeable gain if any of the connected groups is a group in the case of which, on separate applications of that paragraph in relation to each group, the amount deductible from that gain in respect of that loss is nil.

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

(a)…; or

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

If para 9 applies, the effect of para 9(2)(a) is that Sch 7A applies by reference to the group of which the Appellants most recently became members.

19. The significance of para 1(6) is that, if as the Revenue contend it does not apply, apart from para 9(2)(a), the entry date of the Appellants into the GL/GH group of which GH was the principal company (treated as a single group by s 170(10)) was the date on which they became members of the GL group (27 September 2000) with the result that the loss realised immediately before that date was a pre-entry loss of the GL group and cannot be set off against the subsequent gains made by other members of the GL group and elected to have been made by Limitgood Limited on 12 October 2000 or against the gains made subsequently. On the other hand, if as the Appellants contend, para 1(6) applies so that entry date of the Appellants into the GL/GH group was when the GL became part of the GL/GH group on 19 December 2000, the losses are available for set off against the gains made by members of the GL group before that date and against gains subsequently made by them on assets held by such members on that date, which covers all the gains in issue in this appeal (except for the Catford gain with which we shall deal separately later as it raises additional issues).

Appellants' submissions

20. Mr Aaronson accepted at the outset that the broad purpose of Sch 7A was to prevent losses being brought into a group and set-off against group gains. He accepted that the arrangements in this case had been contrived in order to obtain relief and that the legislation should be interpreted to stop the relief if that is possible without straining the clear meaning of the statute. However, he said that this is not possible.
21. He said that the "relevant group" in para 1(6)(b) prior to the Hammerson takeover was the GH group, together in pursuance of s 170(10) with the GL group, making the whole GL/GH group. Under para 1(6) the Appellants were treated as having become members of the relevant group when they became members of the GH group. He submitted that para 1(6)(b) is a consequence of para 1(6)(a) rather than a second requirement but that if it is a separate requirement it is directed to a situation where a company which has been a member of the relevant group has left the relevant group at the material time. He said that para 1(6) had the effect of including more losses in pre-entry losses by deferring the time at which a company becomes a member of the relevant group; however this also had the effect of treating more gains as pre-entry gains against which pre-entry losses could be offset.
22. Paragraph 1(6) and (7) were added at the Committee stage following representations by the Institute of Chartered Accountants of England and Wales in relation to pre-entry gains and reconstructions when a new holding company is inserted. Paragraph 1(6)(b) specifically brought in pre-entry losses where the merged group is not the relevant group so that pre-entry losses are not identified by reference to that group but the second group alone is the relevant group. Paragraph 1(6)(b) modifies the time of entry in those limited circumstances. In para 1(7)(a) the relevant group is distinguished from the second group and refers to the merged group.
23. He said that under para 7(1)(a) Limitgood could deduct its losses from the £29m gains treated as accruing to it on 12 October 2000 by reason of the election under s 171A before Limitgood became a member of the GL/GH group. Under para 7(1)(b) both Appellants were entitled to deduct their losses from gains elected to them under s 171A in respect of assets treated as held by the Appellants under para 7(3)(a) because they were held by other companies in the GL group which became members of the GL/GH group at the same time as the Appellants.
24. Mr Aaronson said that para 9 is the key paragraph for identifying the relevant group and identifies the GL/GH group as the relevant group. It applies where there is more than one potential group; it would be clearer if "would" in para 9(1) read "could". "Would be" shows that not all potential groups are identified as the relevant group. The word "would" must be referring to the situations covered by the later sub-paragraphs of para 9. Paragraph 9(2)(a) applies to identify the GL/GH group since it is the group in relation to which the losses are pre-entry losses of which the Appellants most recently became members. This is in line with the natural reading of para 1(6) which echoes para 9(6).
25. He submitted that Five Oaks Properties Ltd v Revenue and Customs Commissioners [2006] STC (SCD) 769 was wrongly decided. It was not legitimate to start by assuming that para 1(6)(b) was necessary so as to achieve the purpose of the statute. It is not appropriate to micro interpret a statute so as to implement a macro intention. The legislation was very detailed and specific. In para 9(6) the draftsman did dispense with the effect of s 170(10), however he did not do so in para 1(6)(b). It would have been simple to cover the present problem if this had been the intention. The Tribunal has to apply the language used unless it is clear that it must be corrected, see Inco Europe Ltd v First Choice Distribution [2000] 1 WLR 586, HL.

Revenue submissions

26. Mr Gammie said that Sch 7A and in particular para 1(6) must be construed having regard to their evident purpose. The objective of Sch 7A is to confine loss relief to gains in the same economic ownership; to do this it was necessary to restrict relief for losses realised pre-entry and to cover losses on assets coming into a group. Paragraphs 1 to 5 of Sch 7A identify the losses to be restricted. Paragraphs 6 and 7 contain the restrictions and specify the gains from which pre-entry losses are deductible.
27. He said that if the Appellants are correct sub-para (b) adds nothing to para 1(6)(a) and the result in the present case is contrary to the evident purpose of the statute. He said that faced with a highly complicated problem the draftsman had achieved his purpose. He said that "would" is the correct word in para 9(1): "could" did not convey the correct meaning. Paragraph 9 only applies when there are two or more groups by reference to which Sch 7A applies: here there is only one group in relation to the pre-entry losses of each Appellant, namely the GL group which ultimately became the GL/GH/Hammerson group.
28. Mr Gammie submitted that in the absence of any provision to the contrary the Appellant companies joined the relevant group, the GL group, on 27 September 2000 when a subsidiary of GL acquired their shares from Anglo. Section 170(10) applied when the GL group became members first of the GH group and then of the Hammerson group, so that all the groups were treated as the same group. There is therefore only one group to consider, the GL/GH group which became the GL/GH/Hammerson group. The closing words of para 1(6) show that, unless it applies to change the entry date, a company becomes a member of a relevant group when it joins the first group, here 27 September 2000. Paragraph 1(6) only changes the entry date if the conditions in both sub-paras (6)(a) and (b) are satisfied. Here sub-para (6)(a) was satisfied when GL became part of the GL/GH group; however sub-para (6)(b) was not satisfied. Sub-para (6)(b) must have been intended to add to (6)(a) and could not simply apply whenever s 170(10) applies.
29. Mr Gammie and Mr Ewart said this at paragraph 26 of their skeleton argument:

"The GH group is not the relevant group in relation to particular losses and assets if the GL/GH group is the relevant group. Or, put the other way, the GH group is the relevant group when the GL/GH group is not the relevant group."

At paragraph 31 of their skeleton argument they said this,

"… in the context of paragraph 1(6) the first group (GL) and the second group (GH) are being considered in their capacities as separate groups and not as the same group by virtue of section 170(10). Paragraph 1(6) only applies where section 170(10) regards the first group (GL) and the second group (GH) as the same group (that is what the condition in sub-paragraph (a) requires). Sub-paragraph (a) identifies the two groups as separate groups and then, in applying sub-paragraph (b) and the concluding words of paragraph 1(6), it considers the first group and the second group as separate groups. That is why in sub-paragraph (6) Parliament introduces the words 'together in pursuance of that subsection with the first group'."

30. Mr Gammie submitted that if losses or assets are pre-entry losses or assets of the first group, here the GL group, s 170(10) provides that the merged group, here the GL/GH group, is the same group as the first group and Sch 7A automatically applies to pre-entry losses and assets of the first group. In that situation the merged group and not the second group is the relevant group and para 1(6)(b) is not satisfied. Without para 1(6)(b) the combined GL/GH would not be the relevant group in respect of losses and assets of the GL group which were not pre-entry losses and assets of the GL group but would be pre-entry losses and assets of the GH group considered alone as the second group; in that situation para 1(6)(a) and (b) would both be satisfied.
31. Mr Gammie said that the words "together in pursuance of that subsection with the first group" are used in para 1(6)(b) to make it explicit that, although the sub-para is considering the second group as a separate group (here the GH group) in order to answer the question whether the second group is the relevant group in relation to particular losses and assets of the first group as a separate group, it has to consider the second group with the addition of the first group companies (here the GL group companies) which were acquired on the merger, and not the second group alone.
32. He said that here the losses of the Appellant companies were pre-entry losses of the GL group. Because para 1(6)(b) did not apply, when GH acquired GL on 19 December 2000 the losses remained pre-entry losses of the merged GL/GH group which the Appellant companies joined on 27 September 2000. The same reasoning applied when the GL/GH group became the GL/GH/Hammerson group in December 2002.

Submissions on Catford gain

33. Mr Henderson, following for the Appellant, said that a different analysis arises in respect of the Catford gain by reason of the fact that Hammerson controlled GH for a period before GH became a member of the Hammerson capital gains tax group so that para 9(6)(b) applied under which the Hammerson group and the GH group were not by reason of s 170(10) to be treated as the same group for the purposes of para 9.
34. He said that para 9(2)(a) identified the Hammerson group as the relevant group and para 9(2)(c) identified the GH group. The groups were therefore "connected groups" and paras 9(3) to (5) fell to be applied. Paragraphs 9(3) and (4) were not in point because all the losses were realised pre-entry losses under para 1(2)(a); for the same reason para 9(5) did not apply. Further, para 9(5) did not apply in any event since neither group produced a nil result since the same losses and assets that gave rise to the gain were pre-entry to each group. Paragraph 9(6) did not therefore affect the result and led back to the issue under para 1(6).
35. Mr Gammie said that the entry date for the loss claimed against the Catford gain remained the date of entry of Limitgood into the GL group. The GL/GH group and the Hammerson group were connected groups. He agreed with the Appellant that paras 9(3)-(5) did not apply in this case.

Conclusions

36. We have been unable to agree the decision and by virtue of the Chairman's casting vote the decision of the Tribunal is that set out in paragraphs 37 to 62 below. Dr Avery Jones has set out his reasons for disagreeing in paragraphs 63 to 76 below.
37. These appeals concern the identification of the gains from which the pre-entry losses of the two Appellants can be deducted under para 7 of Sch 7A.
38. It is accepted that each of the two Appellants had pre-entry losses within Sch 7A both on becoming a member of the GL group on 27 September 2000 and on GL becoming a member of the GH group, which we refer to as the GL/GH group, on 19 December 2000. It is also not in dispute that, when the GL/GH group became a member of the Hammerson group in December 2004, Limitgood had unused pre-entry losses.
39. The appeals turn on the interpretation of para 1(6)(b) and more specifically on whether sub-para (6)(b) refers to "the second group" separately as "the relevant group" or both "the second group" and "the first group" and on the applicability of para 9(2)(a). It is easier to state the question than to arrive at the answer.
40. It is clear that Sch 7A was enacted in 1993 to limit the deductibility of capital losses which have accrued before a company joins a group for capital gains tax purposes or which accrue subsequently on assets held when it joins a group and to specify the gains from which such losses are deductible. The legislation is complex and covers a variety of different factual situations. The problem before us is to decide whether the terms of Sch 7A have the effect that the admitted pre-entry losses of the two Appellants cannot be deducted from the gains otherwise chargeable on the Appellants which accrued after the Appellants became members of the GL group following elections under section 171A.
41. The deductibility of the losses from the gains depends on the date or dates on which the Appellants became members of "the relevant group" within Sch 7A in relation to each gain. This depends on the identification of "the relevant group" which in turn depends on the applicability or otherwise of para 1(6)(b) and para 9(2)(a).
42. If as the Revenue contend "the relevant group" refers to the second group alone, namely the GH group from 19 December 2000 and the Hammerson group from December 2004, then para 1(6) has no application to these appeals and both Appellants are treated as having become members of the relevant group on 27 September 2000 when they became members of the GL group. In that case the losses cannot be deducted from any of the gains, none of which were pre-entry gains.
43. However, if as the Appellants contend "the relevant group" refers to the second group combined with the first group when the first group has become a member of the second group, then para 1(6)(b) applies on the facts of these appeals so that both Appellants are treated as having become members of "the relevant group" at the time when GL, the principal member of the first group, became a member of the GH group and in relation to the Catford gains Limitgood is treated as having become a member of the relevant group when GH became a member of the Hammerson group.
44. As a matter of pure language para 1(6)(b) specifically applies when the second group and the first group together are the relevant group. As a matter of language it is quite impossible to regard the words of para 1(6)(b) as applying when the second group without the first group is the relevant group. Such an interpretation would be the very reverse of the natural meaning of the words of the statute. The "second group" and the "first group" clearly have the same meaning in para 1(6)(b) as in para 1(6)(a). The "second group" is a group of which "the first group" has become a member so that s 170(10) applies.
45. Mr Gammie is correct in pointing that para 1(6) is structured so as to require both paras 1(6)(a) and 1(6)(b) to be satisfied if it is to apply. The word "if" imports a condition and (a) and (b) are separate.
46. He also submitted that, if para 1(6)(b) applies whenever two groups are treated as the same group by reason of s 170(10), para 1(6)(b) would add nothing to para 1(6)(a) being merely a consequence of the situation posited in para 1(6)(a).
47. Mr Aaronson submitted that para 1(6)(b) is not a separate condition being merely a consequence. If he is correct in this, it is very badly expressed. Alternatively he suggested that para 1(6)(b) would not apply if the company had ceased to be a member of the second group at the material time. This concentrates on the use of the present tense in para 1(6)(b). The difficulty with this is that para 1(6)(a) also employs the present tense in the words "the two groups are treated as the same." It is not easy to see how paras 1(6)(a) and (b) could be directed at different points in time.
48. Analysis of the wording of para 1(6)(b) therefore produces the conclusion that on its natural meaning it appears to add nothing to para 1(6)(a), but that the interpretation advanced by the Revenue conflicts with the wording used.
49. The extract from paragraph 31 of the Revenue skeleton is wholly unconvincing. If the two groups are to be considered separately when applying para 1(6)(b), there is no apparent reason why the words "together in pursuance of that subsection with the first group" should be included; far from clarifying matters, those words have the opposite effect because they provide expressly for the groups to be considered together.
50. In deciding whether para 1(6)(b) is satisfied it is necessary to see whether the group referred to in para 1(6)(b) is the relevant group. The group referred to is "the second group, together in pursuance of [s 170(10)] with the first group." Those are the words appearing before "is the relevant group." In effect the Revenue submission involves reading the sub-para as saying "the second group would but for the application of that subsection be the relevant group." It is impossible to extract from the words actually used a test that involves considering the first group and the second groups as separate groups. Nor is it apparent how the words can be read as asking whether before applying s 170(10) the second group is the relevant group. Such an interpretation would not merely strain the language of the statute: it would give a wholly different meaning to the words used. It is significant that Mr Gammie did not attempt to match his interpretation to the actual words of para 1(6)(b). The alteration in language to achieve the result for which the Revenue contend is "too much at variance with the language used by the legislature," see Inco Europe [2000] 1 WLR 586 at 590H.
51. We heard considerable submissions from both parties as to the legislative history of Sch 7A. However although it is a historical fact that paras 1(6) and (7) were introduced by amendment at the Committee stage, none of the submissions shed any light on the meaning of para 1(6)(b). Although that sub-para produces a result in the present case which may not have been intended, there is nothing ambiguous about the wording used and the brief explanation given in Committee gives no assistance. It appears that facts such as those in these appeals were not considered by the draftsman with the result that they were not covered by the very detailed and specific provisions enacted.
52. Mr Aaronson candidly accepted that the broad purpose of Sch 7A was to prevent pre-entry losses being set against group gains such as those in issue. Our task however is to interpret and apply the words used in the statute. Before reaching a conclusion on para 1(6)(b) it is necessary to consider para 9.
53. Both parties agreed that para 9 does not affect the result of the Catford appeal separately. However it is relevant to the interpretation of para 1(6), although the proviso to para 1(6) does not apply.
54. The proviso at the beginning of para 1(6) would make no sense whatever unless the conditions of para 1(6)(a) and (b) were capable of being satisfied in circumstances when para 9(6) applies. Paragraph 9(6) can only apply if para 9(1) applies, because if para 9(1) does not apply para 9 as a whole does not apply. Paragraph 9(1) requires there to be more than one company which would be the relevant group. The effect of para 9(6) is to disapply s 170(10). This indicates that para 9(1) covers a situation where two groups are treated as the same group under s 170(10), notwithstanding that s 170(10) requires them to be regarded as the same. Paragraph 9(6) of course only disapplies para 9 for the purposes of para 9. However it cannot have that effect unless para 9(1) applies apart from the disapplication.
55. No real assistance is to be derived from the use of the words "would be" in para 9(1). In the context, the words clearly assume circumstances in which para 9 has the effect that there is not more than one relevant group, although without that paragraph there would be more than one such group. It would be clearer if "otherwise" appeared after "would".
56. If there can be more than one relevant group for para 9(1) when s 170(10) applies, this suggests that the position is the same under para 1(6)(b).
57. The reference to para 9(6) in para 1(6) and the analysis of when para 9(1) and para 9(6) can apply, therefore, lend support to the submission of Mr Aaronson that para 1(6)(b) does apply when (as here) the second group is the relevant group by reason of the effect of s 170(10). The result is that the members of the first group are treated under para 1(6) as having become members of the relevant group when GL became a member of the GH group and, in relation to the Catford gain, when GH became a member of the Hammerson group.
58. As a matter of English usage, the use of the word "would" in the context of para 9(1) is not normal. It usually imports conditionality. If this was intended the word "is" should also read "would". If both "is" and "would" are correct, one would expect para 9(1) to continue to specify in what circumstances more than one group would be the relevant group. It does not do so.
59. It would seem that Mr Gammie's submission at paragraph 26 above in fact equates "would" with "is". If that is so then it would seem that para 9(1) and hence para 9 as a whole would apply whenever one group becomes a member of another group by reason of s 170(10). Indeed that would be the case if Mr Aaronson is correct in reading "would" as "could".
60. Paragraph 9(1) must apply when there is more than one group which in some or all circumstances would be the relevant group. If the effect of s 170(10) is that at any one time there is only the one group, successive groups being regarded as the same group, then it is impossible to see when para 9 would ever apply. Paragraph 9(2)(a) clearly contemplates the possibility of two contemporaneous groups. Since s 170(3) applies when there are 75 per cent subsidiaries, it would seem that there can only be contemporaneous groups when the principal company of one group is a 75 per cent owned subsidiary of a company in another group. Paragraph 9(6) can only apply when the principal company of one group has become a member of another group.
61. On balance, although awkwardly worded, para 9(1) does apply in this case and therefore para 9(2)(a) applies. The result of applying para 9(2)(a) to the facts of this case is as follows. All the losses in question accrued to the Appellants on the deemed disposal of their shares in Coalite. For the purposes of para 9(1) there is more than one group in relation to which the losses in question are pre-entry losses. Schedule 7A does not apply by reference to any group in relation to those losses unless the group is that of which the Appellant in question most recently became a member. In relation to the Catford gain that group is the Hammerson group (or the GL/GH/Hammerson group). In relation to the other gains that group is the GH group (or the GL/GH group). The result is therefore the same as that reached on Mr Aaronson's interpretation of para 1(6))(b).
62. Consideration of para 9(1) reinforces concerns as to the clarity in drafting of Sch 7A including para 1(6). The drafting of para 9(1) singularly fails to achieve a clear result. The wording of para 1(6)(b) is clear while apparently adding nothing to para 1(6)(a). The interpretation for which the Revenue contend no doubt conforms with the broad intention of Sch 7A, however it seems clear that the words used were not selected with the present facts in mind and cannot be interpreted as the Revenue contend without doing undue violence to the language used. Furthermore, the Revenue's interpretation conflicts with para 9(2)(a). The same reasoning applies to the Catford appeals. The appeals therefore succeed.

Dr Avery Jones' reasons

63. I shall set out briefly my reasons for disagreeing with the decision recorded above. In the circumstances in which s 170(10) applies, there are two groups of companies in the real world which, in the deemed world of s 170(10), have no separate existence and are treated as the same group. Paragraph 1(6) starts in the real world:

"…if—

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

Having stated that in the deemed world the two groups are treated as the same, it does not, as one might expect, continue on that basis in the deemed world. Leaving aside sub-para (b) for a moment, instead, the operative part continues in the real world with two references to the first group:

"then,…the members of the first group shall be treated for the purposes of this Schedule as having become members of the relevant group at that time, and not by virtue of that subsection at the times when they became members of the first group."

Reverting to sub-para (b), this also starts in the real world by referring initially to the second group and later to the first group:

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

The inclusion of the first group is purely as a result of moving to the deemed world ("together in pursuance of [s 170(10)]").

64. The problem is that the legislation recognises as the relevant group only a deemed world group because it is built on the existence of s 170(10), but the operative part of para 1(6) (apart from the reference to the relevant group) operates in the real world to define the time a company joins the relevant group to be the time of the merger of the two groups, which is a non-event in the deemed world. The issue being addressed by sub-para (b) is not whether in the deemed world the combined group is the relevant group—that is the only possible relevant group in the deemed world—but whether in the real world it is the second group or the first group that is the relevant group. If the answer is the former, then in the deemed world it must be taken together with the first group in pursuance of s 170(10); and if the latter, then in the deemed world it must be taken together with the second group in pursuance of s 170(10).
65. There are three reasons which seem to me support this interpretation. If the draftsman had intended sub-para (b) to say solely something to the effect that "if the combined group is the relevant group," a more natural wording, following immediately from sub-para (a) would have been something like "that same group is the relevant group." Secondly, it explains why the draftsman has put the second group first. It hardly seems likely given the style of drafting of the whole Schedule that this was done for poetic effect. Thirdly, it means that sub-para (b) operates as a genuine condition. Given the context of changing the time of a company joining the combined group it does not seem likely that sub-para (b) was included merely to confirm that one is dealing with the situation of the company still being in the combined group rather than in a wholly separate group.
66. This reading gives the legislation the effect one would expect: if in the real world the second group is the relevant group (that is, in relation to a realised loss, the loss was realised while the company was in the first group and before it joined the second group) the legislation applies as if the members of the first group had become members of the relevant group at the time of the merger of the two groups; but if in the real world the first group is the relevant group (that is, in relation to a realised loss, the loss was realised before the company joined the first group) the legislation applies as if the members of the first group became members at the time they actually joined the first group. With regard to Mr Wallace's suggestion (paragraph 50 above) that the Revenue's submission involves reading the sub-para as saying "the second group would but for the application of that subsection be the relevant group," I consider that this is exactly what the legislation says, except that it does it the other way round since the draftsman starts in the real world from the position that s 170(10) does not apply, and then adds the effect of its applying by the words "together in pursuance of [s 170(10)] with the first group".
67. Another odd feature of sub-para (b) is that it is circular because one cannot tell if a particular group is the relevant group without knowing the date of entry of the company into the group so as to determine whether a realised loss is a pre-entry loss or an asset is a pre-entry asset; and if sub-para (b) applies, the effect of para 1(6) is to change the entry date into the relevant group. On this interpretation this circularity does not matter because either sub-para (b) applies and regards the second group (in the real world) as the relevant group in which case the entry date is the date of merger of the two groups, or sub-para (b) does not apply and the entry date remains that of entry into the first group.
68. This interpretation fits the background to paras 1(6) and (7) as a Committee Stage amendment following representations from the Institute of Chartered Accountants in England and Wales, which is helpful in looking for a purpose. We know first, that initially the draftsman had in para 9(6) disapplied s 170(10) in one narrow circumstance in relation to group mergers, but he chose not to do the same when adding para 1(6) which is made subject to para 9(6) to some extent. Secondly, we know that the Revenue had expressed the view that on the introduction of a pure holding company the legislation applied at that time to restrict losses. The amendment containing what is now para 1(7) is a strict definition of a pure holding company being put on top of an existing group so that there is effectively no real change in the group. In these circumstances the draftsman allowed the date of entry into the group to remain as the time of becoming a member of the first group (which suggests that the Revenue's expressed view was wrong). Thirdly, we know that in some other (but not all, because para 1(6)(b) is expressed as a condition) group mergers the draftsman changed the entry date to the date of the merger of the two groups, which gives effect to the Revenue's expressed view. Given that the draftsman wanted s 170(10) to continue to apply (which may be for reasons connected with pre-entry assets) para 1(6) did the equivalent in moving the entry date to the date it would have been if the two groups had been treated separately, while still treating the two groups as the same group.
69. I do not find any assistance from the rest of the Schedule. Paragraph 9(1) deals with the case where more than one group would be the relevant group; here there is only one combined group by virtue of s 170(10). Para 9(2)(a) applies the Schedule to the group of which the company most recently became a member, and defines connected groups; this is inapplicable because there is only one combined group. The Schedule applies separately in relation to each of the connected groups but according to para 9(3)(a) and (b) only for determining whether the loss is a loss on the disposal of a pre-entry asset (and for calculating the pre-entry proportion of that loss); it has no effect on a realised pre-entry loss. According to the words in brackets in para 9(3) the Schedule is not applied separately where both the connected groups are groups in relation to which the loss is a loss that accrued before the company became a member of the group. Even if there were more than one group this provision would be inapplicable because we are dealing with a realised loss. By para 9(4)(b) where there is a realised loss in relation to one connected group and a loss on a pre-entry asset in relation to another, the former is the pre-entry loss applied in determining what profits can be set against it. If the separate application of the Schedule to one of the connected groups results in no loss being set against the gain, that applies to all groups, according to para 9(5).
70. Paragraph 9(6) is potentially important to understanding para 1(6) as it also applies where s 170(10) applies. It originally provided before its amendment in 1998:

"(6) Notwithstanding that the principal company of one group ('the first group') has become a member of another ('the second group'), those two groups shall not by virtue of section 170(10) be treated the purposes of this paragraph as the same group if the principal company of the first group was under the control, immediately before it became a member of the second group, of a company which at that time was already a member of the second group."

This provision existed in the Bill before the amendment adding para 1(6). It demonstrates that the draftsman excluded s 170(10) in one circumstance, namely 50% control of the first group by the second group before the first group becoming a member of the second by its obtaining 75%. Where para 9(6) applies, each of the groups is treated separately for the purposes of para 9. While I see Mr Wallace's point (paragraph 54 above) that logically para 9(6) should apply only when one knows that there is more one relevant group when starting with para 9(1), I consider that it is permissible to start with para 9(6), which, like para 1(6), starts in the real world before the application of s 170(10) ("…those two groups shall not by virtue of s 170(10) be treated…as the same group for the purposes of this paragraph…"), to find that there is more than one relevant group and then start again in para 9(1) to see the consequences. On that basis, the two groups will be connected groups, the first group by virtue of para 9(2)(c) and the second by para 9(2)(a) as the most recent group. The treatment of groups as separate groups will affect pre-entry losses by paras 9(3) to (5). But para 1(6) is "subject to so much of sub-paragraph (6) of paragraph 9 below as requires groups of companies to be treated as separate groups for the purposes of that paragraph." I read this as saying that the para 9 provisions take priority over para 1(6) so that where there are two connected groups by virtue of para 9(6) requiring separate application of para 9 to each of the groups, para 1(6) does not have the effect of determining the time a member of the first group became a member of the second group. However, if one of those separate groups is itself the result of a merger of two groups to which para 9(6) did not apply, para 1(6) would itself apply to determine the time when a company became a member of that separate group. Apart from that circumstance, in order to apply the Schedule to the separate groups one therefore takes the time of becoming a member of each as the time of actually becoming a member of the group, and not the time that would be determined by para 1(6).

71. In the circumstances of this case (apart from the Catford gain dealt with below) para 9(6) is inapplicable and the effect of s 170(10) is that we are dealing with only one combined group. There is nothing in para 9 that affects the application of para 1(6) or helps to construe that paragraph.
72. Applying this interpretation to the facts of the main part of this case, the loss was realised before the Appellants became members of the first group (the GL group). That group is accordingly the relevant group; and the second group (the GH group) is not the relevant group (before applying s 170(10)). The condition in para 1(6)(b) is not satisfied and so the time of entry of the Appellants into the relevant group is the date they became members of the first (GL) group. I would therefore decide that the losses are not available for offset against the gains made by other members of the GL group.

The Catford gain

73. The significance of the Catford gain is that when Hammerson acquired the GH group it did it as a result of a general offer which became unconditional when it had acquired over 50% so that there was a time when it had control of the GH group before that group became part of the combined group on its obtaining 75%. Accordingly para 9(6) is in point because sub-para (b) is satisfied.
74. The effect of para 9(6) is that s 170(10) does not apply in relation to the Hammerson merger so that the GL/GH and the Hammerson groups are treated as separate groups for the purposes of para 9. In addition, this may affect para 1(6) because para 1(6) is subject to so much of para 9(6) as requires groups of companies to be treated as separate groups for the purposes of para 9. This means that so far as the GL/GH group is concerned, which is unaffected by para 9(6), one still applies para 1(6) to determine the time when the Appellants became a member of that combined group. The time of their becoming a member of the Hammerson group is affected by para 9(6) having priority over para 1(6) and is when the Appellants became members of the Hammerson group.
75. One purpose of para 9 is by para 9(1) to deal with the situation that more than one group would be the relevant group. Here there is more than one group in relation to which the Appellants' loss is a pre-entry loss. The first is that by para 9(2)(a) one takes the group of which the company has most recently become a member, the Hammerson group. The second is that by para 9(2)(c) the Schedule also applies to the GL/GH group. These are connected groups defined by the tailpiece of para 9(2) and so paras 9(3) to (5) apply.
76. It is common ground that both of the Hammerson and GL/GH groups are groups in relation to which the loss is a pre-entry loss by virtue of para 1(2)(a) and so the words in brackets in para 9(3) mean that one is not required to apply the Schedule separately to them for the purpose of determining whether the loss is a loss on a pre-entry asset (or the pre-entry proportion of that loss). Para 9(4) applies only when there are two pre-entry proportions of a loss, or there is a realised loss in relation to one of the groups and a pre-entry proportion in relation to the other, neither of which is the case here. Para 9(5) provides that if in relation to one group no amount of the loss is deductible, then no loss is deductible in respect of either group. That provision is drafted in terms of a pre-entry loss and, unlike paras 9(3) and (4), it can therefore apply to realised losses in relation to both groups. It seems to me that it applies because I have decided that no part of the loss is deductible against the gains of the GL/GH group and so no loss is deductible against the gains of the Hammerson group either.
77. So far as the Catford gain is concerned, while para 9(6) applies to treat the Hammerson group separately, this has no effect because the loss available is nil in relation to the GL/GH group and para 9(5) treats the loss available against the Hammerson group's gains as nil. I would therefore decide that the result for the Catford gain is the same as for the main part, that the losses are not deductible against the Catford gain.

Result

78. Our decision, by virtue of the Chairman's casting vote, is therefore that the losses of the Appellant companies are available to set against any of the gains claimed, and the appeals are allowed in principle.
79. In accordance with section 56A(2) of the Taxes Management Act 1970 we hereby unanimously certify that this decision involves a point of law relating wholly or mainly to the construction of an enactment that has been fully argued before us and fully considered by us. This means that if both parties consent, and if the leave of the Court of Appeal is obtained, the Appellant may appeal from our decision directly to the Court of Appeal.
THEODORE WALLACE
JOHN F. AVERY JONES SPECIAL COMMISSIONERS RELEASED: 16 May 2007

SC 3187/2006

SC 3188/2006