Sema Group Pension Scheme v Commissioners of Inland Revenue

The anti-avoidance provisions in Part XVII of the Income and Corporation Taxes Act 1988 require a wide construction. Their application is not confined to contrived transactions or to forward dividend-stripping arrangements.

For a share buyback, the statutory question is whether the amount received by way of the relevant qualifying distribution substantially exceeds a normal return on the consideration provided for the securities. The assessment must reflect the transaction as it occurred and must take account of the period of ownership and earlier distributions. An approved pension scheme’s exemption from tax may constitute a tax advantage. Whether obtaining that advantage was a main object is a subjective question of fact for the Commissioners, subject to limited appellate review.

The trustees of an approved occupational pension scheme participated in two PowerGen share buybacks in 1996. The purchase price included amounts treated as qualifying distributions, and the trustees claimed tax credits. The Revenue later issued a notice under section 703(3) of the Income and Corporation Taxes Act 1988 and made an assessment to counteract the alleged tax advantage.

The Special Commissioners cancelled the notice and assessment, finding that the distributions were not abnormal, although they found that the trustees obtained a tax advantage and that obtaining it was one of the main objects of the transactions. Lightman J allowed the Revenue’s appeal. The central issues were whether the distributions were abnormal, whether the scheme’s exemption was a tax advantage, and whether the main-object finding was open to the Commissioners.

1. Appeal allowed. The notice and assessment were set aside. The appeal was allowed with costs below and in the Court of Appeal. Permission to appeal to the House of Lords was refused.
2. The relevant anti-avoidance provisions were to be given the wide interpretation required by IRC v. Joiner [1975] 1 WLR 1701, consistently with IRC v. Parker [1966] AC 141 and Greenberg v. IRC [1972] AC 109. Section 703 was not confined to forward dividend stripping or to transactions that were artificial or conducted otherwise than on the open market.
3. Under sections 704A and 709(2) of the Income and Corporation Taxes Act 1988, the relevant inquiry was the normality of the amount received by way of the qualifying distribution which actually occurred. The court should not treat the buyback proceeds as if they were ordinary dividends. Section 709(4)(b) supplied an exhaustive test of abnormality: whether the amount substantially exceeded a normal return on the consideration provided for the securities. Section 709(6)(b) required regard to the period of ownership and prior dividends or distributions.
4. The Special Commissioners had directed themselves correctly and were entitled to find that the proceeds did not substantially exceed a normal return. Lightman J had asked the wrong question by treating the issue as whether the dividend was abnormal qua dividend. The Court expressed no view on whether the tax credit itself formed part of the amount received for the normality assessment, because that issue was obiter.
5. The exemption from income tax under section 592 was a relief from tax within section 709(1), and therefore an improvement in the trustees’ position vis-à-vis the Revenue constituted a tax advantage. The court accepted part of the reasoning in Sheppard & Anor. (Trustees of the Woodlands Trust) v. IRC (No 2) [1993] STC 240, but rejected the suggested comparison with taxpayers of a similar class.
6. Following IRC v. Brebner [1967] 2 AC 18, whether obtaining a tax advantage was one of the main objects was subjective and principally a question for the Special Commissioners. Their finding that the tax credits were crucial to the decision to sell into the buybacks was properly open to them. The contextual observations in IRC v. Kleinwort Benson Ltd [1969] 2 Ch 221 did not justify interference with that conclusion.

• Court of Appeal (Civil Division): appeal from the decision of Lightman J allowed; the Revenue’s notice and assessment were set aside.
• High Court, Chancery Division: Lightman J allowed the Revenue’s appeal from the Special Commissioners and upheld the notice and assessment.
• Special Commissioners: trustees’ appeal allowed; the notice under section 703(3) and the assessment were cancelled.