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Tax Cases - Section 703 revisited

14 March 2001
Issue: 3798 / Categories:
Tax Cases

Section 703 revisited
On 12 June 1990, Laird Group agreed to buy the entire share capital of S Ltd. On 5 December, Laird declared a dividend on its own shares of £3.484 million, and on 17 December S Ltd paid a dividend of £3 million to Laird. Advance corporation tax of £1 million was payable on the S Ltd dividend as it was paid outside a group election, and the company set it against its own corporation tax for the current and past years, thus enabling it to reclaim corporation tax of £1 million.
Tax Cases

Section 703 revisited
On 12 June 1990, Laird Group agreed to buy the entire share capital of S Ltd. On 5 December, Laird declared a dividend on its own shares of £3.484 million, and on 17 December S Ltd paid a dividend of £3 million to Laird. Advance corporation tax of £1 million was payable on the S Ltd dividend as it was paid outside a group election, and the company set it against its own corporation tax for the current and past years, thus enabling it to reclaim corporation tax of £1 million.
The S Ltd dividend was franked income in the hands of Laird. This allowed Laird to set off the advance corporation tax paid on the S Ltd dividend against the advance corporation tax payable on its dividend. Laird's acquisition of the share capital was accepted as being within section 703(1), Taxes Act 1988. It was also agreed that the S Ltd dividend was an 'abnormal amount by way of dividend', and that Laird's advance corporation tax saving was a tax advantage.
The Revenue issued a notice under section 703(3) and assessed the £1 million. The Special Commissioners dismissed Laird's appeal against the assessment, so Laird exercised its right to a rehearing under section 706. This tribunal allowed Laird's appeal. The Revenue therefore appealed, saying that the dividend was a transaction in securities within the meaning of section 703)(1)(b).
Mr Justice Lightman in the Chancery Division said that the term transaction meant some form of dealing which affected the rights or obligations of at least two parties. This dealing could be effected by a bilateral act, e.g., the making of a contract, or a unilateral act, e.g., the exercise of an option or the right to subscribe for shares. Section 709(2) said that transaction in securities embraced both: a dealing with securities and a dealing affecting the rights attached to the securities. The unilateral redemption by a mortgagor company of a debenture was a transaction in securities because it extinguished the security held by the debenture holder, but a 'pure' liquidation was not a transaction in securities because it did not effect any form of dealing with, or have any effect on the rights attaching to, the securities held by the member.
Neither the declaration nor the payment of a final or interim dividend constituted a transaction in securities, because they involved no dealing with securities and they altered no rights attaching to securities. They rather gave effect to pre-existing rights attaching to the securities.
The Revenue's appeal was dismissed.
This is an important case which overturns established thinking derived from some comments in Greenberg v Commissioners of Inland Revenue [1971] 3 All ER 136, and also casts considerable doubt on the Revenue's views on the topic in its fifth Tax Bulletin.
(Commissioners of Inland Revenue v Laird Group plc, Chancery Division, 28 February 2001.)


European victory for Hoechst
More aspects of the United Kingdom's corporate tax system, prior to the reforms in 1999 and 2000 have been held to be in contravention of European law. Imperial Chemical Industries succeeded with its claim in relation to the group relief rules before the European Court in 1998 and Hoechst has now succeeded with its case concerning the advance corporation tax system.
In a nutshell, the complaint by the company was that it suffered unfair discrimination in that dividends paid between United Kingdom subsidiaries and their resident parent companies could be paid without liability to advance corporation tax under the group income rules. The same facility was not on offer where the parent company was outside the United Kingdom, and in particular elsewhere in the European Union. The company claimed that this disadvantage was contrary to Article 52 of the EC Treaty which prohibits 'restrictions on the freedom of establishment' of nationals of Member States.
As there was clearly an element of discrimination between United Kingdom parent companies and their European counterparts, the Government's argument that the European Court was basically that the discrimination was justified because one was not comparing like with like and also because the different treatment was necessary to preserve the cohesion of our tax system. The Court has, however, now held that these were not valid defences and the system was unfairly discriminatory.
The Court also upheld the company's claim for interest to be paid by the United Kingdom Government on the amounts of advance corporation tax wrongfully required in contravention of Article 52.
A third procedural point was raised before the European Court and this concerned whether the company should have made an application for group income treatment and then appealed against the rejection of the application. The Court similarly rejected this argument.
The advance corporation tax system has of course been abolished and the international aspects of the corporation tax system were the subject of major reforms in the second 1997 Finance Act and in the Finance Act 2000, some of which went further than strictly necessary to deal with European law. Nevertheless it would seem that the consequences of this latest decision will have wide significance to the advantage of many international groups.
(Metallgesellschaft Ltd v Commissioners of Inland Revenue; Hoechst v Commissioners of Inland Revenue, European Court of Justice, 8 March 2001.)

No legal privilege
Morgan Grenfell devised a tax-related scheme which the Revenue suspected involved capital rather than trading transactions, and in order to investigate the position, served a precursor notice on Morgan Grenfell under section 20B(1), Taxes Management Act 1970. This said that if specific documents were not produced within a certain time, then the Revenue would apply to the Special Commissioner for permission to issue a section 20(1) notice. Morgan Grenfell claimed that among the documents required by the Revenue were some which were protected from disclosure by legal professional privilege.
The Special Commissioner, however, agreed to the issue of a section 20(1) notice, so Morgan Grenfell applied for a judicial review. This was dismissed, so Morgan Grenfell appealed.
In the Court of Appeal, Lord Justices Schiemann and Sedley and Mr Justice Blackburne said that the Revenue was authorised under section 20(1) to require disclosure of documents subject to legal professional privilege. Taken as a whole, the Act implied that the rule of legal professional privilege was excluded except where it was expressly preserved. The Act was designed to counter tax abuse, and it could not be assumed that it was a fundamental right to withhold documents which were subject to legal professional privilege. Article 8(2) of the European Convention on Human Rights also recognised this.
Furthermore, the Special Commissioner was right to conclude that he had no power to allow the taxpayer to make oral representations against the issue of a section 20(1) notice. A right to be heard was self-evidently worth little without knowledge of the case. The Revenue therefore had to show its hand which was destructive of the whole procedure, or the taxpayer had to be content to make submissions in the dark, which would create pressure for disclosure. The taxpayer would either learn nothing or the Revenue might unintentionally disclose information which the taxpayer was not entitled to know.
The appeal was dismissed.
(R (on the application of Morgan Grenfell & Co Ltd) v Special Commissioner, Court of Appeal, 2 March 2001.)



Issue: 3798 / Categories:
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