The High Court held that, on the true construction of TCGA 1992, Sch. 7A, para. 1(6), the losses of two companies before they became members of one group could not be set off against chargeable gains made by other companies on disposals made after those companies and the taxpayers had all become members of a second group.

Facts

On 26 September 2000, the two taxpayer companies (‘L’) and (‘P’) each acquired one-half of the issued share capital of C Ltd from A Ltd for a consideration of £1 each. As at that date, C Ltd was worthless. Both L and P were wholly-owned subsidiaries of A Ltd. The capital gains tax base cost for A Ltd of the C Ltd shares was £486,949,498. Under TCGA 1992, s. 171(1), the deemed acquisition cost for L and P was £243,474,749 each.

On the following day, a wholly-owned subsidiary of GL acquired the shares in L and P for a combined consideration of £4m. When L and P left the A group, losses of £113.9m each crystallised under TCGA 1992, 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 L. The GL group, including L and P, 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, L set off part of its loss against the £29m gain and P set off losses of £8.4m. 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 taxpayers who claimed to set off part of the losses. Following the takeover of GH by H, L claimed to set off £2.3m of its loss against a 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 H before becoming part of the H group.

Revenue and Customs rejected those claims and made amendments to the taxpayers’ corporation tax self assessments. The special commissioners allowed the taxpayers’ appeals in principle, by the chairman's casting vote, who accepted that TCGA 1992, Sch. 7A, para. 1(6) applied so that the members of the GL group should be treated as having joined the GL/GH group on 19 December as regards the taxpayers’ pre- entry losses ((2007) Sp C 612).

Revenue and Customs appealed, contending broadly that the losses of the taxpayers were pre-entry losses of the GL group, that they remained pre-entry losses of the GL/GH group and that they could not therefore be set against the chargeable gains in question.

Issues

Whether the special commissioners were correct in concluding that L was entitled to claim that gains of £29m in the year to September 2001 were realised on assets deemed to be sold by L before the GL group was acquired by the GH group so that L could deduct its losses under TCGA 1992, Sch. 7 A, para. 1(6)(a) and 7(1)(a); and that L and P were entitled to claim, in the case of £35.4m gains elected to L and £64.7m in the case of P, 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) applied and para. 1(6)(b) required their pre-entry losses from earlier periods to be set off against those gains.

Decision

Blackburne J (allowing the appeal) said that the appeals concerned the proper construction of provisions contained in TCGA 1992, Sch. 7A which was inserted by FA 1993, s. 88 and Sch. 8. The correct approach to statutory construction in the field of taxing statutes was first, to decide, on a purposive construction, exactly what transaction would answer to the statutory description and, secondly, to decide whether the transaction in question did so. The ultimate question was whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically (Barclays Mercantile Business Finance Ltd v Mawson (HMIT) [2004] BTC 414; [2004] UKHL 51 applied).

As the heading to Sch. 7A indicated, and as para. 1(1) and para. 1(2) made clear, the Schedule was concerned with ‘pre-entry losses’ and the relationship of a company having such losses to a group of companies (‘the relevant group’) of which the company in question was or had been a member. The object of the Schedule was to restrict the extent to which such losses might be applied to reduce chargeable gains accruing, or made available, to the company. The chargeable gains had to derive from an asset which was disposed of by the company in question before the date of the company's entry to the relevant group or was held by that company immediately before such entry date or was acquired by that company on or after such entry date from a person outside the group at the time of the asset's acquisition. The prohibition was against allowing the losses to reduce the chargeable gains (on the disposal of assets transferred or ‘elected’ to that company) of any members of the group which the company had joined.

Since the composition of a group of companies might change and the group itself might cease to be identifiable as a distinct group when it was acquired by another company or group, the legislation took care to ensure that a relevant group, once identified as such, did not cease to be the relevant group merely because other companies might join or leave it or the group was acquired by another group. That required a clear definition of what was meant by ‘a group of companies’, a matter dealt with by s. 170(3)–(6), and a mechanism to ensure that the scope of the restriction against deductibility was not undermined by alterations in the make-up of the relevantgroup. That was achieved by s. 170(10) providing that a group remained the same group so long as the same company remained the principal company of the group and that if at any time the principal company of a group became a member of another group, the first group and the other group should be regarded as the same.

The subsection then stated that the question whether or not a company had ceased to be a member of a group should be determined accordingly. The effect, so far as it was made to apply to Sch. 7A, was to ensure that once a loss had been identified as pre-entry in respect of a group of companies identified as ‘the relevant group’ it remained a pre-entry loss in respect of that group, notwithstanding changes in the composition of the group or the takeover of the group by another group. Unless modified, however, s. 170(10) would operate to enable losses realised by a company in one group (‘the first group’) to be set against gains realised by members of another group (‘the second group’) where the second group had later taken over the first group. The members of the first group would, by force of s. 170(10), be treated as having joined the merged group not at the time of the merger but when they each became members of the first group. The losses in question would not therefore be pre-entry in relation to the merged group with the result that, as regards those losses, the merged group would not qualify as the relevant group and the losses would not be subject to any restrictions against deductibility.

The losses to which para. 1(6)(b) was directed were losses which were pre-entry in relation to the second group; they were not the losses which were pre-entry in relation to the first group. If it were the latter, there would be no need to disapply the operation of s. 170(10) since para. 1(6) would add nothing to the scheme of the Schedule. It was precisely because, as regards losses which had accrued to members of a group while members of that group, there was a need, if the aim of the Schedule was to be achieved, to disapply s. 170(10), that para. 1(6) was enacted. It operated to put losses accruing to companies in a group which was subsequently taken over by another group on the same footing as losses accruing to a single company which was subsequently taken over by a group. That being the purpose of the provision, there was no reason to construe it as having an effect which went beyond that purpose.

Chancery Division.

Judgment delivered 18 January 2008.