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

The second of the appellants’ specific points is that the FTT erred in failing to give weight to the statutory history of s1259. Their case starts by noting that, although the wording of the provisions has changed, the law has not, CTA 2009 being the product of a tax law rewrite project. In BCM CA (at [60])it was noted to be common ground that the relevant provisions of CTA 2009 which had included s1259 “merely repeat and clarify legislation which went before”.

The predecessor to s1259, s114 TA 1988, had provided as follows:

“So long as a trade is carried on by persons in partnership, and any of those persons is a company, the profits and losses … of the trade shall be computed for the purposes of corporation tax in like manner, and by reference to the like accounting periods, as if the partnership were a company, and without regard to any change in the persons carrying on the trade…”.

The appellants then relied, in essence, on HMRC’s view, as expressed in a Statement of Practice 4/98 (“SP 4/98”) to the effect that s114 was ineffective in applying provisions analogous to the related party provisions (the connected person rules) contained in other CT subject areas - the loan relationships regime and the derivatives code in Finance Act 1996 (“FA 1996”). The view expressed by HMRC in paragraph 22 of SP 4/98 was that the statutory fiction did not extend to making a partnership a “company” for the purposes of applying the connected person legislation (FA 1996 s87(3)), and a partnership was therefore not connected with any of its members who provided loans to the partnership.

This was regarded as a defect, but it was not until 2002 that the defect was remedied by disapplying s114 and instead applying specific rules to enable the connected person rules to apply in a partnership context (s82 and Sch 25 FA 2002 (loan relationships) and Paragraph 49 Schedule 2 Finance Act 2002 (“FA 2002”)). That, the appellants point out, was the same Finance Act which introduced the intangibles regime but no similar specific provisions or rules were brought in for that regime. In his oral submissions Mr Trevett suggested that the reason why this was not done was “merely a statutory oversight”.

HMRC now accept that their statement in SP 4/98 to the effect that the fiction did not make the notional company a company for the purposes of what is now s835 is wrong. HMRC also point out that SP 4/98, as a statement of practice, was in any case only HMRC’s view of the law and did not reflect what the law in fact was. Moreover neither FA 2002 nor SP 4/98 were part of the legislative history of s114 – the fact that amendments were made premised on one reading of s114 did not change the meaning of that provision.

In our view, the statutory history does not, for a number of reasons, assist one way or the other on the issue of interpretation before us.

The third point was a submission by the appellants that it would be wrong to place reliance on HMRC’s submission that, if an irrational or illogical result arises from a particular interpretation, it is appropriate if possible to find a more rational way of construing the relevant provision. In the result, we do not consider it necessary to rely on HMRC’s arguments to that effect. We merely observe that HMRC’s interpretation is consistent with avoiding the result that the Part 8 deductions would not be available where an acquisition of intangibles was made by one or more corporate members, but would be available where an acquisition was by a partnership controlled by those corporate members. However, the prospect of a peculiar result does not drive us to adopt HMRC’s interpretation. It merely confirms that there is good reason to consider that it is likely to be correct. The appellants’ submission in reply that it goes too far to say that if an irrational or illogical result arises from an interpretation one must find a rational way of construing it does not therefore arise.

The fourth of the appellants’ specific points is their argument that the anti-avoidance provision in s864 CTA 2009 would address HMRC’s concern. Section 864 is an anti-avoidance provision within Part 8 which provides for arrangements to be ignored where they have a tax avoidance purpose as their main or one of their main objects. As HMRC’s concern regarding the consequences of the appellants’ interpretation is not an operative part of our reasoning for rejecting the appellant’s interpretation we do not need to reach a concluded view on the merits of the appellant’s s864 argument.

However, if it were necessary to do so, we do not think that s864 would be a complete answer. It only applies when a tax avoidance purpose is established and therefore leaves open the outcome that the related party rules, which although they have an underlying anti-avoidance purpose do not require a tax avoidance purpose to be established, would not apply, as arguably they ought to, where a partnership was interposed. In other words there would still be an anti-avoidance concern that would not be addressed arising from transactions between related parties even if there were no requisite purpose to trigger s864.