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

Logically, the first question to ask before engaging with the IncoEurope principles is whether the language works without amending the wording. For the reasons both parties identified and we have already set out, we do not consider it does. The next step is to identify the intended purpose of the provision. Mr Trevett’s submission was that, contrary to the FTT’s view, neither the provision nor the explanatory notes make that clear.

Paragraph 13 of the explanatory notes for the clause which was enacted as s52 explained that HMRC had:

“identified arrangements that use bodies such as partnerships or LLPs to transfer assets in ways that aim to bring the assets within the new rules without an effective change of economic ownership” [i.e. those applying to assets created on or after April 1 2002].

HMRC submitted that this is relevant as it identifies the mischief sought to be addressed by the legislation and that (per Westminster City Council v National Asylum Support Service [2002]UKHL 38 (at [5])) it is admissible as an aid to construction. In our view it is possible to discern the purpose of s882(5B) from its own terms when viewed in the context of the wider provisions themselves (and without recourse to the explanatory notes).

It appears from s52(1) itself that Parliament was concerned to amend s882 by changing the definition of a person who is a related party in relation to another person so as to encompass the participation condition (as defined in TIOPA). The drafting of the opening words of the new s882(5B) (viz. “References in subsection 5A to a person include a firm in a case where”) demonstrates an intention to specify that firms can be regarded as a person to whom the section applies when considering whether a person is a related party in a specified circumstance. The defective part in the following words relates to specification of that circumstance but the words still reveal something of the intention. They point to a conclusion that the circumstance concerns “s1259 purposes” and in turn s882(5C) makes it apparent that those purposes are “the purposes of determining under section 1259 the amount of profits or losses to be allocated to a partner in a firm”. The words “references in this section to a company are read as references to the firm” in regard to the function of s1259 indicate that the drafter appreciated that s1259 is carrying out some kind of deeming; the problem is that they failed accurately to reflect the proper nature of the deeming with which the provision was concerned.

Accordingly, standing back Parliament’s purpose was to:

In our view the simple problem is that, when describing the function of s1259, the drafter has misdescribed it and thereby failed to give effect to the intention. As to the second Inco Europe principle, the lack of effect ensuing from that misdescription is plainly inadvertent. The drafting fails to give effect to the purpose of applying a participation condition when the issue of the related party exception applied and fails to ensure that a party was not excluded from falling within the remit of the related party exception because it was a firm rather than a company.

In respect of the third Inco Europe condition we can accordingly be satisfied as to the provision Parliament would have made. We agree with Mr Tidmarsh, the clear gist of the provision is that, where s1259 applies, the provision is to be taken as requiring references in s882 to a company as if they were references to a firm.

Although Mr Tidmarsh reminds us that we only need be satisfied of the gist of the substance, at our invitation he did provide a formulation (added words underlined) which we think it is helpful to expose as it shows how the misdescription of s1259 can be corrected straightforwardly.

“References in subsection (5A) to a person include a firm, where for s1259 purposes, a company is taken to be carrying on the trade of the firm and in such a case references in this section to a company are read as references to the firm.”

We acknowledge that other drafting formulations may be possible and note the observation in Pollen that judges are not Parliamentary drafters. Ultimately, and adopting the formulation used in Pollen, we are satisfied that reading the legislation in the way we have explained above is necessary in order to give effect to what must have been Parliament’s intention.

While Mr Trevett’s submissions emphasised that the facts of this case were a long way from those in Inco Europe (where a consequential provision had inadvertently removed a statutory jurisdiction), it is the principles from that case which are relevant. But, in any case we do not see that the misdescription of a statutory provision in circumstances where the surrounding context makes clear what was intended is such a long way from the drafting defect in Inco Europe. Moreover the facts of Pollen well illustrate the way in which the Inco Europe principles might have wider application beyond the particular sort of error with which that case was concerned.

We therefore agree that the FTT was correct in its view that the appellants’ appeals, in respect of the relevant accounting periods would fall to be dismissed even if the appellants had been successful on the first question. If it had become necessary to do so we too would have dismissed the appellants’ appeals in relation to those periods for the reasons we have explained.