The Court of Appeal held that a chargeable gain accrued to a company under TCGA 1992, s. 179 when it left a group in respect of assets previously acquired from another company by way of an intra-group transfer, since exemption from the degrouping charge by virtue of s. 179(2) was not available to companies associated when they left the group but not at the time of the intra-group transfer.

Facts

The taxpayer company had been acquired as an off-the-shelf company and became a member of a group (‘the UNM group’) within the meaning of TCGA 1992, s. 170. In a series of transactions another member of the group (‘UPN Ltd’) transferred shares in its operating subsidiaries to the taxpayer. At that stage the taxpayer and UPN were not associated. However, by the time it was sold to another group (‘YPG’), the taxpayer owned the transferor company as its subsidiary and they had become associated companies within s. 179(10). The Revenue considered that on the sale to YPG a charge under s. 179 arose on the taxpayer in respect of the operating subsidiaries it had acquired from UPN when both companies were members of the UNM Group. The taxpayer appealed unsuccessfully to a special commissioner who concluded that it was appropriate to construe strictly the exemption contained in s. 179(2).

The High Court rejected the taxpayer's appeal against that decision, holding that, on the proper construction of s. 179(2), companies leaving a group had to have been associated at the time the acquisition took place, and not just at the time they left the group ([2007] BTC 405). The taxpayer appealed.

Issue

Whether the judge was wrong to construe TGCA 1992, s. 179(2) as requiring that not only should the companies leaving the group be associated companies (within the meaning of s. 179(10)) at the time when they left the group but also when the one acquired from the other the relevant asset in a previous intra- group transfer.

Decision

Sir John Chadwick (Tuckey LJ agreeing, Toulson LJ dissenting) (dismissing the appeal) said that the expression ‘associated companies’ was not a defined term which the draftsman could be expected to use when referring (in the second limb of s. 179(2)) to the companies which he had identified in the first limb of that section.

It was clear from an examination of s. 179 as a whole that, when the draftsman wished to identify a company, or group of companies, by a description which he could use later in the section (so as to avoid repetition), he did so by placing that description in parenthesis (and within inverted commas) after the first reference to that company or group. The draftsman had not adopted that technique in s. 179(2). Even where he did so, the draftsman did not find it necessary to use the description which he had attached to the company or group when referring to that company or group later in the same subsection. Accordingly, the judge and the special commissioner were correct to hold that, if the taxpayer's contention as to the meaning of s. 179(2) was correct, then the word ‘associated’ in the second limb of that section was redundant: the taxpayer had provided no explanation for the inclusion of that word. That conclusion did not mean that the taxpayer's contention as to the meaning of s. 179(2) had to be rejected. The legislature might have chosen to include the redundant word to emphasise the obvious, but it was necessary to consider whether the section could be construed so as to give purpose and effect to that word. Section 179(1) and (2) had to be construed together and in conjunction with s. 179(10)(a). The special commissioner was correct to appreciate that that paragraph identified as a ‘subgroup’ the group of companies which, taken together and by themselves, the associate companies would comprise. Although the decision of the Court of Appeal in Dunlop International AG v Pardoe (HMIT) [1999] BTC 392 was not determinative of the outcome in the present case, the question which arose in that case illustrated that, even on the construction advanced by the taxpayer in the present case, there would be two distinct points of time, immediately before and immediately after the sub-group of which they were members left the principal group, at which the requirement that A and B be associated companies had to be satisfied. The proviso invited the question whether it was necessary that the two companies were associated companies both immediately before and immediately after the sub-group of which they were members left the principal group; it also invited the further question whether it was necessary that the two companies were associated both at the time when the sub-group of which they were members left the principal group and at the time of the acquisition of the relevant asset.

Section 171(1) provided for the deferral of tax on gains arising on a transfer between companies within the same group. Section 179(3) brought to an end that deferral when the company which owned the asset left the group. The object was to prevent the transferee from taking the asset out of the group without crystallising the gain (and the liability to tax) which would have arisen (had the transferor and transferee not been members of the same group) at the time when the transferee acquired the asset. The effect of the exit charge was that, in practice, the group would bear a loss equal to the amount of the tax which would have been chargeable if the original acquisition had not been the subject of an intra-group transfer: because it could be expected that the tax liability which would crystallise by reason of the transferee ceasing to be a member of the group, and so deplete its net assets, would be taken into account in determining the price which a purchase would pay for its shares.

There was no reason to expect that the in-group rule would continue to apply to a transfer between companies which, at the time, were not members of a sub-group, but which subsequently became members of a sub-group, when that new sub-group left the principal group.

The question whether the mischief to which TCGA 1992, s. 179(1) was addressed did or did not arise in a case where the transferor and transferee companies were associated companies at the time of leaving the group was not determinative of the legislature's intention when it enacted the proviso which was now s. 179(2). That intention was to be found in the words which it used. The construction advanced by the Revenue provided a plausible explanation for the use of the word ‘associated’ and, in all the circumstances, it would be wrong to reject that construction. (Per Toulson LJ dissenting) On their natural meaning, the words ‘associated companies’ at the end of s. 179(2) were no more than a reference back to the opening words of the subsection. The alternative construction of s. 179(2) was that the penultimate word ‘associated’ was pregnant with the silent requirement that the companies must have been associated at the time of the acquisition of the relevant asset. If the drafter had positively intended that meaning, he had dealt with it in an uncharacteristically laconic manner. There was nothing to indicate that he had had that point in mind at all or that it would be right to infer an intention that the word should be so construed.

Court of Appeal (Civil Division).
Judgment delivered 23 July 2008.