Advance corporation tax - franked investment income received by taxpayer company set off against advance corporation tax - tax advantage not counteracted by payment of dividend

Inland Revenue Commissioners v Laird Group plc: HL (Lord Nicholls of Birkenhead, Lord Hoffmann, Lord Millett, Lord Rodger of Earlsferry and Lord Walker of Gestingthorpe): 16 October 2003

In June 1990, the taxpayer company acquired the entire share capital of S Ltd.

On 5 December 1990, the taxpayer declared a dividend on its own shares.

On 17 December 1990, S Ltd paid an interim dividend to the taxpayer which was received as franked investment income, so that 1 million of advance corporation tax paid by S Ltd could be set off against the advance corporation tax payable by the taxpayer on its own dividend.

The Board of Inland Revenue issued a notice under section 703 of the Income and Corporation Taxes Act 1988 to counteract the tax advantage obtained by the taxpayer, on the ground that the payment of the dividends by the taxpayer and S Ltd were transactions in, or relating to, securities which were not carried out for bona fide commercial reasons or in the course of making or managing investments and had, as one of their main objects, the obtaining of a tax advantage.

The special commissioners upheld the notice but the tribunal, established under section 706 of the Act, discharged it.

Mr Justice Lightman [2001] Gazette, 20 April, 35; [2001] STC 689, upheld the tribunal but the Court of Appeal [2002] EWCA Civ 576; [2002] Gazette, 30 May, 34; [2002] STC 722, allowed an appeal by the Inland Revenue.

The taxpayer appealed.

Andrew Thornhill QC and James Henderson (instructed by Ashurst Morris Crisp) for the taxpayer; Michael Furness QC and David Ewart (instructed by the Inland Revenue Solicitor) for the Inland Revenue.

Held, allowing the appeal, that section 703(2) showed that Parliament did not regard the liquidation of a company in itself as a transaction relating to its shares; that the distribution of the undistributed profits of a company in liquidation to its shareholders was not a transaction relating to securities because neither the shares themselves nor the rights attached to them were affected by a payment which merely gave effect to the shareholders' rights in that they received only what was already theirs; that the position was not materially different if part of the undistributed profits was paid to the shareholders by way of dividend while the company was a going concern; that whether the company was in liquidation or continuing to carry on business as a going concern, the distribution of the undistributed profits of a company to the shareholders entitled thereto merely gave effect to the rights attached to the shares; that the funds were released in the one case from the liquidator's discretion to retain them for the purpose of the winding-up, and in the other from the directors' discretion to retain them for the purposes of the undertaking; and that since the former was not a 'transaction...

relating to securities', neither was the latter, for the relationship between the payment and the shares in respect of which it was paid was the same in both cases.

(WLR)