March 3
The claimant taxpayer companies were wholly-owned trading company subsidiaries of U Ltd, a company originally formed as a shell bid vehicle by a consortium of three independent, though interrelated investors, and so treated as owned by the consortium within the meaning of section 153(3) of the Corporation Tax Act 2010. Once the target business had been acquired by the consortium through U Ltd, a new shareholders’ agreement was entered into and new articles of association were adopted. The upshot of that agreement was that three companies in the C Ltd group of companies became the only members of the consortium together holding 97.6% of the ordinary share capital and 74.6% of the votes. The voting threshold in U Ltd was changed so that any resolution of the company or the members required a 75% majority in order to be validly passed. The taxpayers, having made profits during the relevant tax years, made a claim for consortium relief under section 130 of the 2010 Act by which it sought to deduct from its total profits, losses made by H Ltd, a company in the same group as the C Ltd companies which were the “link” companies for the purposes of the claim for relief. The revenue opened enquiries into the taxpayers’ corporation tax returns for the relevant periods, having taken the view that section 146B(4) might apply to reduce the amount of relief available by treating the taxpayers’ total profits for the overlapping periods as if they were 50% of what they would otherwise be on the basis that the changes made in the succession of shareholders agreements and articles of association of U Ltd amounted to “arrangements” which prevented the C Ltd companies from exercising control over the taxpayer companies within the meaning of section 146B(2)(b) and (3)(a). The claimants sought a determination of that question by the First-tier Tribunal, since if there were no “arrangements” within section 146B, there was no need for the revenue to continue their inquiries to determine the purpose of the scheme. The tribunal determined the section 146(2)(b) issue in favour of the taxpayers and directed that the revenue close its enquiry. The Upper Tribunal allowed an appeal by the revenue. The taxpayers appealed, contending that the Upper Tribunal had erred in its construction of section 146B(2)(b) and (3)(a) of the 2010 Act.
On the appeal—
Held, appeal dismissed. The structure of section 146B of the 2010 Act required the two limbs of subsection (3) to be applied to the arrangements in question first, since section 146B(2)(b) only came into play if arrangements within subsection (3) were in place during any part of the overlapping period. Applied to the facts of the present appeal, the question posed by section 146B(3)(a) was whether the C Ltd companies (being the link companies) would control U Ltd but for the existence of the 75% voting threshold. That test required the comparison of the situation with the arrangement in place with the situation where the arrangement did not exist. Absent the 75% voting threshold, the C Ltd companies would have 74.6% of the votes, in accordance with the articles of association, but the voting threshold would remain at 50%. In that counterfactual world, there was no doubt that the C Ltd companies would control U Ltd and hence the taxpayers. There did not need to be a causative link any more complicated than that expressly required by the wording of the provision, namely that in the absence of the 75% voting threshold, the C Ltd companies held enough votes (ie over 50%) to control U Ltd. The question posed by section 146B(2)B) was whether during any part of the overlapping period, the arrangement in question enabled a person to prevent the link companies from controlling the company owned by the consortium. Section 146B(2)(b) of the 2010 Act did not require that the link company at some point had control which was lost as a result of the relevant arrangement being put in place. The paradigm case at which section 146B was aimed might well be one where the link company held a sufficient majority of the votes in the claimant company to pass a resolution itself, but entered into a voting agreement with another shareholder not to exercise those votes otherwise than in accordance with the other shareholder’s wishes. However, anti-avoidance provisions such as section 146B had to be drafted so that they applied not only to the paradigm case but also to the other ways in which the same effect could be achieved. There was no need to identify a particular person who was enabled to prevent the link company from controlling the claimant. The reference to “a person” in section 146B(2)(b) could be read as “persons”, applying section 6(c) of the Interpretation Act 1978. It would not make sense to limit the application of section 146B(2)(b) to a situation where the link company had votes just short of the voting threshold and the blocking share of the vote was held by one single other person. It was not necessary to have an arrangement combining the elements of both section 146B(2)(b) and section 146B(3)(a) in order to get through the section 146B(2)(b) gateway. In the present case there was no difficulty in saying that with the 75% voting threshold in place, the other shareholders in U Ltd were enabled to use their 25.4% of the voting rights to prevent the C Ltd companies from controlling U Ltd. Had the voting threshold stayed at 50% and the C Ltd companies had 74.6% of the votes, the other shareholders would not have been able to prevent that. It followed that the 75% voting threshold was an arrangement which satisfied both section 146B(2)(b) and section 146B(3)(a) (paras 39–41, 44, 46, 52, 58, 59).
Jonathan Peacock QC and Sarah Black (instructed by ADE Tax) for the taxpayers.
David Ewart QC and Marika Lemos (instructed by Solicitor, Revenue and Customs) for the revenue.