Judgment summary
This is an appeal against a decision of the First-tier Tribunal (Tax Chamber) released on 12 May 2025, reported as [2025] UKFTT 538 (TC) (1). The appeal concerns counteraction notices issued by HMRC under Chapter 1, Part 13 Income Tax Act 2007 (the transactions in securities or TIS legislation) in relation to consideration received by the Appellants as part of a reduction of capital of Golf Holdings Ltd (GHL) on 22 April 2015 (2).
The FTT had decided that the Capital Reduction met the conditions in section 685(2) ITA and that section 685(6) ITA, as it was at the time, did not apply to exclude the Capital Reduction from the TIS legislation (3). The Appellants appealed on five grounds, the FTT granted permission on four, and the UT granted permission on the remaining ground (4).
The UT dismissed the appeal, agreeing with the FTT's conclusions on both questions before it, although reaching them by different reasoning (131-132). The UT also rejected HMRC's Respondents' Notice argument that section 685(6) contained a drafting error which should be corrected (132).
Background
GHL was incorporated in 2001 and was at all material times a close company for TIS purposes (FTT 7(1)). In 2002 GHL acquired 100% of the shares in three subsidiaries, Wine Inns Ltd, James McCabe Ltd and City of Belfast Warehousing Ltd, via share for share exchanges with the three Appellants, crediting £32,944,500 in total to the share premium account (FTT 7(2)-(3)).
In early 2010 Paul Hunt owned approximately 78.4% of GHL and James Hunt and Robert Davis each owned approximately 10.8% (FTT 7(4)). In March 2010 GHL undertook an earlier capital reduction, cancelling 1,000,000 shares and repaying £10 per share (FTT 7(5)).
The Capital Reduction under appeal occurred on 22 April 2015, when GHL cancelled a further 1,000,000 shares and credited £10 per share to the Appellants' loan accounts, proportionate to their shareholdings (FTT 7(6)). The consideration paid was £7,841,000 to Paul Hunt and £1,079,500 each to James Hunt and Robert Davis (FTT 2). The Appellants returned this as capital, subject to Capital Gains Tax (FTT 2). GHL's balance sheets as at 31 December 2014 and 2015 showed distributable reserves in excess of £10,000,000 (FTT 7(8)).
On 28 June 2018 HMRC wrote to each Appellant stating the TIS legislation might apply. Following correspondence, on 3 December 2021 HMRC sent section 695 notices, and on 4 April 2022 HMRC issued counteraction notices and assessments (FTT 7(9)-(11)). The appeals were joined and stayed pending the earlier decision in Osmond and Allen v HMRC [2024] UKFTT 00378 (TC), with the stay lifted on 25 September 2024 (FTT 7(12)).
Core dispute
The only issue before the FTT was whether section 685(6) ITA excluded the repayment of capital forming part of the Capital Reduction from the circumstances in section 685(2)(a), so that condition A could not be met (14).
This turned on two questions: first, whether section 685(6), which refers to section 685(2)(a) and (b), contained a drafting error and should instead be read as referring to section 685(4)(a)(i) and (ii); and second, whether section 685(6), as drafted, excluded all returns of subscribed capital from section 685(2), or only returns of subscribed capital where those sums were legally distributable by way of dividend under the law of the company's place of incorporation (15).
Before the Upper Tribunal, the overall issue was whether section 685(6) applies to exclude the Capital Reduction from the circumstances of condition A in section 685(2)(a) (21). HMRC, by Respondents' Notice, maintained that section 685(6) contained a drafting error, contrary to the FTT's conclusion, while agreeing with the FTT's outcome on the scope question. The Appellants agreed with the FTT that there was no drafting error but disagreed with the FTT's conclusion on the scope of section 685(6) (26-29).
Court findings
The Upper Tribunal reviewed the relevant principles of statutory construction, drawing on R(on the application of O (a child)) v Secretary of State for the Home Department [2023] AC 255 and the guidance of Lord Hodge, emphasising that the words Parliament used, read in context, are the primary source of meaning, with external aids playing a secondary role (32-34, 42).
On the drafting error issue, the Tribunal applied the criteria from Inco Europe Limited v First Choice Distribution [2000] 1 WLR 586, requiring the tribunal to be abundantly sure of the intended purpose, that the draftsman inadvertently failed to give effect to that purpose, and the substance of the provision Parliament would have made (102). The Tribunal agreed with the FTT that it was not abundantly clear that the reference to subsection (2)(a) and (b) was an inadvertent failure to give effect to the legislative purpose of replicating and simplifying the earlier law (109, 114). The Tribunal noted that the change appeared in the draft legislation in Annex C to the 2009 Consultation Document throughout the Parliamentary process and was not a last-minute change (112).
On the scope of section 685(6), the Tribunal agreed with the FTT that the words "despite the fact that" should be read as meaning "where" rather than "even where", so that section 685(6) is confined to repayments of capital by companies that can lawfully distribute subscribed capital by way of dividend under the law of their place of incorporation (116, 124-126). This conclusion was supported by the legislative history, in particular the wording as first enacted in section 689(5) ITA, and by the case law, including Inland Revenue Commissioners v Brown, Addy v IRC, and Bamberg v HMRC (125).
The Tribunal rejected an additional argument raised for the Appellants that, even on the FTT's more restrictive construction, section 685(6) applied on the facts because GHL had sufficient distributable reserves to have paid the sums as dividends. The Tribunal held that the reference to "assets of that description" in the tailpiece of section 685(6) refers back to assets representing a return of sums paid by subscribers, not simply to the cash itself, and that the provision asks whether the company could lawfully pay a dividend out of share capital and premium under the law of its place of incorporation (120).
The Tribunal also rejected the Appellants' submission that the FTT's construction produced double taxation, finding that the legislation simply determines how each of two separate transactions, the Capital Reduction and any subsequent distribution, is taxed (130).
The Tribunal reviewed four principal authorities on earlier versions of the TIS legislation: Inland Revenue Commissioners v Hague 44 TC 619, Inland Revenue Commissioners v Brown [1971] 1 WLR 11 and [1971] 1 WLR 1495, Addy v IRC 51 TC 71, and Bamberg v HMRC [2010] UKFTT 333 TC, finding that these cases provided some support for HMRC's position on the historic scope of the exclusion but did not provide a clear answer to the construction of section 685(6) following the FA 2010 changes (96-99).
Outcome
The Upper Tribunal dismissed the Appellants' appeal (132). The Tribunal agreed with the FTT's conclusions that section 685(6) ITA does not contain an obvious drafting error correctable by the tribunal, and that section 685(6) is confined to returns of subscribed capital by companies that can lawfully distribute such capital by way of dividend under the law of their place of incorporation, such that it did not exclude the Capital Reduction from condition A in section 685(2)(a) (131-132).
The Tribunal also rejected the arguments raised by HMRC in their Respondents' Notice seeking correction of an alleged drafting error in section 685(6) (132). The Tribunal acknowledged that its conclusions did not achieve either party's preferred "level playing field" but held this was the effect of the legislation as enacted for the relevant period (131).
Major issues / areas of contention
- Whether section 685(6) Income Tax Act 2007, referring to section 685(2)(a) and (b), contained an obvious drafting error that should instead refer to section 685(4)(a)(i) and (ii)
- Whether the tribunal had power under the Inco Europe criteria to correct any such error
- Whether section 685(6), as drafted, excluded all returns of subscribed capital from section 685(2)(a), or only returns of subscribed capital by companies legally able to distribute such capital by way of dividend under the law of their place of incorporation
- Whether the phrase 'despite the fact that' in section 685(6) meant 'even where' (concessive) or 'where' (conditional)
- Whether the cash paid to the Appellants as part of the Capital Reduction fell within section 685(6) on the facts, given GHL's distributable reserves
- Whether the FTT's construction of section 685(6) resulted in impermissible double taxation of the Appellants
- The relevance of the legislative history of the transactions in securities legislation, including FA 1960, ICTA 1970, ICTA 1988, ITA 2007 as enacted, FA 2010 and FA 2016, to the construction of section 685(6)
- The relevance and weight of prior case law, including Hague, Brown, Addy and Bamberg, decided under earlier versions of the transactions in securities legislation