The decision related to a dispute between Farnborough Airport Properties Company and Farnborough Properties Company against HMRC over claims for group relief, which HMRC denied because the surrendering company had been placed into receivership. HMRC said that this meant that the surrendering company and Farnborough were no longer under common control.
Section 154 of the Corporation Tax Act 2010 (CTA 2010) says that companies will no longer be in the same group for group relief purposes if there are 'arrangements' with the effect that a person or persons "have or could obtain control of the first company but not of the second company".
Section 1124 CTA 2010 defines control as "the power of a person ("P") to secure (a) by means of the holding of shares or the possession of voting power in relation to that or any other body corporate, or (b) as a result of any powers conferred by the articles of association or other document regulating that or any other body corporate that the affairs of [the] company ...are conducted in accordance with P's wishes".
This definition of control applies in several other contexts, including loan relationships and transfer pricing provisions, but this appears to be the first case to examine its application where a company is in receivership.
Both the First-tier Tribunal and the Upper Tribunal agreed with HMRC that Farnborough could not claim group relief once the surrendering company had been placed into receivership. Farnborough challenged the Upper Tribunal decision on two grounds, claiming that it was wrong to say that from receivership the shareholders did not control the surrendering company, and arguing that receivership does not qualify as the kind of 'arrangement' referred to in the section 154 CTA 2010.
The Court of Appeal agreed with the decision of the Upper Tribunal that the shareholders lost control of the surrendering company on appointment of the receivers.
The Court said that section 154 CTA 2010 can only apply if companies would otherwise be in the same group for group relief and as such must already have underlying common shareholder control. The test must therefore go beyond there just being a constitutional relationship. HMRC argued that this could be satisfied by the need for the affairs of the company to be conducted in accordance with the shareholders' wishes.
The Court looked at whether the receivership should just be viewed as "working out of machinery", which the shareholders of the surrendering company had deliberately put in place in accordance with their wishes. The Court however decided that control needed to be looked at on a continuing basis and found that, while the shareholders could remove or replace the receivers during their appointment, full power to run the business whilst they were in office sat with the receivers alone. Further, the Court noted that there was no basis from the evidence for assuming that the receivership was likely to be of a limited duration.
The Court of Appeal did not need to answer whether the receivers controlled the surrendering company, as its decision on the fact that the shareholders had lost control determined the case. However, this provides for a perhaps odd result that the surrendering company could be viewed to be under no control, not only as a practical matter, for example, where the shareholders are deadlocked, but also conceptually. In its decision, the Upper Tribunal suggested that the receivers and shareholders may together hold control of the surrendering company. However, as a prerequisite of section 1124 CTA 2010 is that control must derive from shares / voting rights or constitutional documents, neither of which gave control to the receivers in this case, this does not seem as though it can be the solution. The Court of Appeal did not consider whether there could have been joint control.
Farnborough's second argument was that the Upper Tribunal and First-tier Tribunal had erred in holding that receivership constitutes an "arrangement" for the purpose of section 154 CTA 2010.
Farnborough claimed that the term should only apply to arrangements which seek to pass the benefit of losses to a company outside of the economic group. It stressed that the circumstances of this case are far removed from the artificial transactions that the provisions were aimed at, with appointment of a receiver arising as a result of a commercial agreement which should not affect the ability to claim group relief.
The Courts are generally reluctant to interpret legislative provisions narrowly and have tended to use purposive construction most typically in tax cases to assist HMRC by ensuring that anti-avoidance provisions are applied so as to catch the mischief they are intended to stop. Farnborough were effectively arguing the reverse in this case - they wanted the Court to limit the application of a provision intended to tackle tax avoidance so that it could not be used to strike down a commercial transaction. It is therefore perhaps unsurprising that the Court of Appeal did not take a purposive approach here and refused to adopt a narrow interpretation of 'arrangements' to benefit Farnborough.
Lauren Redhead is a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.com