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

The other issue of interpretation concerns the fact, accepted by both parties and identified by the FTT, that on a literal reading of s882(5B) it has no effect. The provision is stated to apply “where, for section 1259 purposes, references in this section to a company are read as references to the firm”. The problem with this form of words is that s1259 does not make any provision that references to a company are to be read as references to a firm. The condition thus has nothing to bite on because of a misunderstanding of the way s1259 operates.

Nevertheless, in agreement with HMRC, the FTT considered the drafting defect could be remedied under the principles set out in Inco Europe Ltd v First Choice Distribution [2000] 1 WLR 586(“Inco Europe”) and Pollen Estate Trustee Co Ltd v HMRC [2013] EWCA Civ 753 (“Pollen”). In Inco Europe the House of Lords explained that before exercising the court’s power to correct obvious drafting errors the court should “exercise considerable caution before adding or omitting or substituting words” and should be “abundantly sure of three matters”:

The FTT considered the three conditions mentioned in those principles were satisfied: the intended purpose of the provision was clear both from the provisions and the explanatory notes, the failure to achieve the intended purpose inadvertent, and the substance of the provisions which Parliament would have made in the absence of that error was readily apparent ([148]). The appellants submit the FTT erred in its reliance on the explanatory notes and wrongly applied the principles explained in Inco Europe. The FTT should instead have accepted that the FA 2016 amendments had a result contrary to that which the executive had hoped for and the defect could only be corrected by Parliament.

In Pollen, the Court of Appeal (Lewison LJ with whose judgment the other LLJs agreed) applied the Inco Europe approach to tax provisions, in that case an SDLT relief provision. On its terms, the relief in respect of SDLT liability on a property purchase, while available if a charity alone was the purchaser, did not apply where a non-charity also had a beneficial interest. No relief was thus available even in respect of the charity’s share of the beneficial interest. Applying Inco Europe the Court read the provision such that the relief would apply to the extent of the charity’s beneficial interest. The Court considered (at [49]) the reading “necessary in order to give effect to what must have been Parliament’s intention as regards the taxation of charities”. As regards the need to formulate new wording the Court earlier noted it was sufficient “…to be confident of the gist or substance of the alteration, rather than its precise language”.