UT (Tax & Chancery) UT/2023/000062 - [2024] UKUT 00273 (TCC)

This appeal turns on the correct interpretation of a statute. In that regard, the decision of the Supreme Court in Rossendale Borough Council v Hurstwood Properties (A) Ltd [2021] UKSC 16at ([10]) emphasises “the central importance” of identifying the legislation’s purpose.

The purpose of the statutory provision is also of central importance in a more specific context. Section 1259(3) CTA 2009 requires the fiction or deeming of a notional UK resident company. When interpreting the scope of a statutory deeming provision, the Supreme Court in Fowler v HMRC [2020] UKSC 22 (per Lord Briggs at [27]) cited with approval a number of propositions that had been collated from the authorities and summarised by Lord Walker in DCC Holdings (UK) Ltd v IRC [2011] 1 WLR 44 at [37-39]. These included the following guidance:

“(1)

The extent of the fiction created by a deeming provision is primarily a matter of construction of the statute in which it appears.

(2)

For that purpose, the court should ascertain, if it can, the purposes for which and the persons between whom the statutory fiction is to be resorted to, and then apply the deeming provision that far, but not where it would produce effects clearly outside those purposes.

(3)

But those purposes may be difficult to ascertain, and Parliament may not find it easy to prescribe with precision the intended limits of the artificial assumption which the deeming provision requires to be made.

(4)

A deeming provision should not be applied so far as to produce unjust, absurd or anomalous results, unless the court is compelled to do so by clear language.

(5)

But the court should not shrink from applying the fiction created by the deeming provision to the consequences which would inevitably flow from the fiction being real. As Lord Asquith memorably put it in East End Dwellings Co Ltd v Finsbury Borough Council [1952] AC 109, at 133:

“The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.””

We also have in mind the general principle, that in construing the legislation, it is necessary to have regard to the statute as a whole. Mr Tidmarsh KC, who appeared for the Respondents, referred us to R(O) v Home Secretary (SC(E)) [2022] UKSC 3 at [29] where the Supreme Court explained:

“The courts in conducting statutory interpretation are seeking the meaning of the words which Parliament used: …Words and passages in a statute derive their meaning from their context. A phrase or passage must be read in the context of the section as a whole and in the wider context of a relevant group of sections. Other provisions in a statute and the statute as a whole may provide the relevant context. They are the words which Parliament has chosen to enact as an expression of the purpose of the legislation and are therefore the primary source by which meaning is ascertained.”

In this case, the general purpose behind s1259 is common ground and was helpfully explained in the appellants’ skeleton argument prepared by Mr Trevett KC and Mr Fitzpatrick KC.

In summary, s1259 and its statutory predecessors (including s114 TA 1988) date back to the introduction of CT in 1965. Calculation of profits for the purposes of CT differed in some respects from the calculation of profits for the purposes of Income Tax (“IT”) (for instance differing basis year periods). An issue arose where a partnership had both corporate members subject to CT and individual members subject to IT. If, when computing the partnership profits and attributing those to the members, the corporate member’s profits were computed under IT rules those members would be taxed under the IT rules rather than the CT rules despite the fact the members were companies. To address that, the statutory direction in s1259(3) provided for it to be determined what the profits of the trade chargeable to CT would be if a UK resident company carried on the trade. A share of those profits would then be attributed to the corporate member in accordance with the partnership profit sharing ratios.

Against that background, there is no dispute that the specific purpose of the provision, consistent with its aim and its wording is to calculate the profits and losses of the firm. As will be seen the parties disagree however on what is included within the concept of calculation.

Section 1259 does not address the specific mechanics of how a UK resident company will calculate its profits and losses. For that it is necessary to turn to various other provisions within CTA 2009, the relevant ones being those in Part 8 in respect of intangibles and goodwill, and in particular the exception to the application of those provided in the rules concerning “related parties”. As Mr Trevett’s oral submissions acknowledged, these provisions, are basically “anti-avoidance”. They have the effect of disallowing deductions “for obvious reasons so you cannot engineer deductions by transactions between companies under common control”.

Those provisions are drafted with companies in mind and the definition of “company” specifically excludes partnerships. In that context, it is not surprising that, in describing what amounts to control, there is a focus on the classic case of a company limited by shares and with a memorandum and articles of association. However, it is important to recognise, that a limited company with a share capital is only one, albeit well-understood, instance where control can be demonstrated. The concept of control is formulated in a much broader way in the relevant provisions. The concept captures not only control arising out of holding shares but also control arising out of “voting power”, in circumstances in which such holding or power results not only from “articles of association” but also from any “other document regulating the company or any other company”. That breadth of scope is deliberate, given the definition of “company” is not limited to companies limited by shares, but extends to “any body corporate or unincorporated association”, which therefore may be regulated by any number of different forms of document.

In short, a company with a share capital is no more than the principal example which the statute has in mind as the type of entity in respect of which control may have to be established for the purposes of identifying its related parties. The fundamental point as regards control is that it arises where a person is able to “secure that the company's affairs are conducted in accordance with the person's wishes” pursuant to rights which arise out of the circumstances identified in s836(a) and/or (b) CTA 2009.

It follows that, although in general terms a partnership is specifically excluded from being a “company”, there is no reason in principle why the concept of control, given the high level at which it is stated, cannot be applied to the relationship between members of a partnership and the partnership in circumstances in which some other provision treats a partnership as if it were a company for a particular purpose. It also follows that we do not accept that the language used in s836 CTA 2009 to describe the concept of control is not capable of encapsulating the relationship between a limited liability partnership and its members, in a context in which s1259 directs that such limited liability partnership be treated as if it were a company for the purpose of computing its profits.

Mr Trevett, noting how the FTT had balked at attributing share capital to the notional company, criticised the FTT’s interpretation as not explaining how to map the ownership and control rights of a partnership onto a notional company. He emphasised that s1259 does not make any attribution of memorandum, articles of association or voting control to the notional company. However, in our view, that misses the point. The task is to see if the control requirements are satisfied (which is possible in respect of a partnership given the broad way in which “control” is drafted). What matters is the outcome, i.e. whether the broad concept of control is established, itself leading to a conclusion on whether the related party requirement is or is not satisfied. It does not involve any determination of whether or how holdings of membership units under an LLP agreement might translate into some kind of corporate analogue of shareholding or guarantee rights.

The next question is whether, on this basis, the related party provisions (and more particularly s835) are capable of extending to the notional company. In other words the issue between the parties is the extent to which, if at all, the elements which establish ownership or control of the partnership can be attributed to the ownership of the notional company. In agreement with HMRC, and for the reasons we explain, we do not regard the absence of specific words treating the notional company as having the ownership attributes of the relevant partnership to mean that those related party provisions are somehow incapable of applying.

The extent of deeming will be commensurate to the statutory purpose. As discussed, that purpose is calculation of the profits. Calculation in this context is not simply an exercise of identifying the arithmetic process to be applied to given amounts, but may also include rules on what, or the extent to which, amounts are to be included within that process. Checking that the related party exception does not apply in order to know whether debits for amortisation of intangibles may be deducted is just as much part of the calculation as the subtraction of the amortised amount in order to derive the profits figure from which the appellants’ profit shares can be derived.

One of the points the appellants make is that calculation will still be possible on their interpretation; it will just be that the “related party” exception would never be breached. However, in our view, that would not give effect to the purpose of applying all of the calculation rules. These rules (s882 of CTA 2009) contemplate an enquiry into whether a control relationship exists between the person from whom the assets were acquired and the person who is seeking the deduction (and, if it does, denies the deduction on anti-avoidance grounds). If it were not to be determined whether a relationship of control existed between the Corporate Members and the notional company - that aspect of the calculation would not be applied in a partnership context and a standard but crucial piece of the calculation process would be missing.

Reaching this view does not, as the appellants suggest amount to judicial legislation by reading in words which are not there. The legislative mandate is to calculate profits by reference to a UK-resident company carrying on the trade. As Mr Tidmarsh rightly pointed out, a literal reading of the provision, whose terms only require that the notional company is carrying on the trade would not imply that assets used in the trade were acquired in the same way and at the same time and from the same person as they were actually acquired by the partnership. To that extent the notional company mirrors reality for that purpose. Consistent with that and in order to make the calculation provisions work, it is, we consider necessary to attribute the ownership characteristics of the partnership (and the outcome on whether they result in the requisite control) to the ownership of the notional company. This does not mean making assumptions about every kind of attribute a company might have, for instance whether it is public or private; crucially it is only the characteristics necessary to calculate profits which require attribution.

For these reasons, we do not consider that the FTT erred in its conclusion. Given the notional company was there to fulfil a calculation purpose its characteristics could not be viewed in isolation but had to be considered in the context of the particular calculation provision sought to be applied. In reaching that conclusion, we have taken into account other arguments on which the appellants also relied in support of their submission that the FTT was wrong. We explain our views on these points below.