Split decision - Cook v Billings in the Court of Appeal: the Business Expansion Scheme.

Split decision
Cook v Billings in the Court of Appeal: the Business Expansion Scheme.
Seven taxpayers held equal numbers of shares of just under 15 per cent each in a property company. Their claim to business expansion scheme relief was refused on the ground that they were associates of each other and therefore each other's shareholdings had to be counted in to give each more than the permitted 30 per cent of the company's shares. The Court of Appeal upheld this approach.
Background
In 1993, the seven taxpayers were partners in a partnership. They applied for ordinary shares in Fernhead Homes Ltd, a property company. The outcome was that they each held equal numbers of shares amounting to just under 15 per cent each, as well as the voting rights. Thus they owned the entire company.
It was agreed that under section 291(1), Taxes Act 1988 each taxpayer individually satisfied the business expansion scheme relief requirements. However, the Revenue refused tax relief saying that the taxpayers were connected with the company, and did not satisfy section 291(1)(c) to qualify for relief. That is, taken collectively, the taxpayers were associates of each other and therefore deemed to possess directly or indirectly more than 30 per cent of the issued share capital of the company, when the rights of their associates were counted in.
The Revenue lost at first instance and so appealed to the Appeal Court. It contended that although each taxpayer owned less than 30 per cent of the issued ordinary share capital, by reason of the interpretation provisions in section 312(1), each taxpayer was an associate of each other, and therefore section 291(8) applied. Subsection (8) reads: 'For the purposes of this section an individual shall be treated as entitled to acquire anything which he is entitled to acquire at a future date or will at a future date be entitled to acquire, and there shall be attributed to any person any rights or powers of any other person who is an associate of his'. The effect of this was to attribute to each individual shareholder of the company 'any rights or powers of any other person who is an associate of his'.
(M Furness QC for the Revenue; C Sokol for the taxpayers.)
Decision in the Court of Appeal
Lord Justice Mummery said that the first words of subsection (8), 'for the purposes of this section', naturally meant that they governed the whole subsection, and made both parts of the subsection relevant to other subsections in section 291. He agreed that the taxpayers owned their shares directly within the meaning of subsection (4), they were not in the position of being 'entitled to acquire' shares in the company at a future date, the future entitlement being the first part of subsection (8). However, because the first part of subsection (8) did not apply, this did not automatically mean that neither could the second part. There were no words to support the contention that the whole subsection had to apply, not just part.
It followed that by allowing the second part of subsection (8) to apply, it was available for 'the construction of other parts of section 291'. Specifically, it could be related to subsection (4), and it then followed that all the taxpayers could be considered to be associates of each other. They thus should be treated as holding more than 30 per cent each of the shareholding and not qualify for relief.
Lord Justice Ward gave the second judgment. He said that if the Parliamentary draftsman had intended subsection (8) to comprise two separate parts, surely he would have made this clear. Subsection (6) had been drafted in precisely such a way, with (a) and (b) being two separate provisions. He said that the Revenue's interpretation led to some 'bizarre' results; for example if father and son separately, and unknown to each other, put up some money in a new company advertising for backers, they would be surprised to find that the mere family connection disqualified them from any relief. He supported the decisions of the General Commissioners and the High Court, and said that he would dismiss the Revenue's appeal.
Finally Lord Justice Otton gave his judgment. He said that the use of the words 'individual' and 'person' within the same subsection led him to conclude that it had to be read in two parts. Clearly the taxpayers were not within the ambit of the first part of subsection (8): they owned the shares directly within subsection (4), and had never been entitled to acquire shares at a later stage. This undermined counsel for the taxpayers' argument that there was 'conjunction' or 'subordination' between the two parts, and it followed that once the first part of subsection (8) was 'stripped out', there was only the deeming provision, concerning the attribution of rights. Subsections (4), (6) and (7) prevented relief being given to persons connected with the company. He was satisfied that subsection (4) when read to include the deeming provision together with the taxpayers' recognition that the shareholders were associates of each other had the effect of treating all of them as holding more than 30 per cent of the issued shares.
Lord Justice Otton too allowed the Revenue's appeal.
Decision for the Revenue
(Reported at [2001] STC 16.)
Commentary by Allison Plager
The Revenue will be very happy with this decision, close call though it was, as on both previous occasions the decision had gone against it. It will also end any speculation that the taxpayer's argument would work for its replacement, the enterprise investment scheme. Although the outcome may seem harsh, the Revenue was keen to ensure success with its view as otherwise the relief could be claimed by partners simply by incorporating their partnership.