Regina v. Commissioners of Inland Revenue, Ex parte Newfield Developments Ltd

For small companies’ corporation tax relief, the word “may” in section 416(6) of the Income and Corporation Taxes Act 1988 expresses conditionality. It does not confer a discretion about attributing an associate’s rights and powers. A person must be treated as controlling a company if any attribution permitted by the subsection gives that person control.

The concluding requirement concerning control by five or fewer participators applies only when determining whether a company is a close company. It does not restrict the general definition of control imported into section 13(4). Accordingly, rights and powers must be attributed when deciding whether companies are associated for small companies’ relief, even though the person concerned is not a participator in one company.

Newfields Developments Ltd claimed small companies’ corporation tax relief under section 13 of the Income and Corporation Taxes Act 1988. The Revenue treated Newfields and Lawrek Properties Ltd as associated companies. It reasoned that the powers of the trustees holding each company’s shares were attributable under section 416(6) to Mrs Walker, so that both companies were under her control.

Newfields sought judicial review, contending that section 416(6) gave the Revenue a discretion which should not be exercised where there was no abusive division of a business. Moses J rejected that contention in [1999] STC 373. The Court of Appeal, by a majority, also rejected the alleged discretion but held in [2000] STC 52 that the concluding words of section 416(6) prevented the attribution because Mrs Walker was not a participator in Lawrek.

The central issue was how section 416(6), including its concluding words, operated when “control” was construed for the associated-company rule in section 13(4).

1. Appeal allowed unanimously. Lord Hoffmann delivered the leading speech. Lord Scott of Foscote agreed with his analysis, while Lord Bingham of Cornhill, Lord Steyn and Lord Cooke of Thorndon agreed with the reasons given by Lord Hoffmann and Lord Scott. The order of Moses J was restored.

2. Per Lord Hoffmann, section 416(6) of the Income and Corporation Taxes Act 1988 did not confer a discretion. Its impersonal use of “may” expressed conditionality. No person was identified as the repository of a discretion, and no criteria were supplied for exercising one. The extended definition was intended to avoid detailed inquiries into the reality of control: paras 19–23.

3. Per Lord Hoffmann, when deciding whether a specified person or group controlled a company under section 416(2) or (3), an attribution permitted by section 416(6) had to be made if it produced control. Other possible attributions which did not answer that particular statutory question need not be made. Treating every possible attribution as mandatory would create contradiction because powers could be attributed in several directions: paras 21–24, 29–32.

4. Per Lord Hoffmann, the concluding words requiring such attributions as would result in control by five or fewer participators were not part of the general definition of control imported into section 13(4). They were a special qualification used only to decide whether the relevant limb of the close-company definition was satisfied. They therefore had no relevance where the preceding provisions already answered whether a person controlled a company: paras 30–32.

5. Lord Scott reached the same construction. Although section 416(6) operated as one provision when identifying a close company, its concluding passage had to be ignored when section 416 was used to construe control for section 13(4). Section 416(2), supplemented by the permitted attributions, required a person to be treated as controlling a company whenever any available attribution gave that person control. The trustees’ powers were consequently attributable to Mrs Walker, and Newfields and Lawrek were associated companies: paras 38–44.

1. House of Lords: In [2001] UKHL 27, the Revenue’s appeal was allowed unanimously and the order of Moses J was restored.

2. Court of Appeal: In [2000] STC 52, the majority held that section 416(6) conferred no discretion, but concluded that its concluding words prevented the proposed attribution because Mrs Walker was not a participator in Lawrek. Sir Christopher Staughton dissented on the existence and exercise of a discretion.

3. High Court: Moses J held in [1999] STC 373 that the Revenue was right. He concluded that attribution should be made where it resulted in the relevant person being treated as controlling the company.