HM Inspector of Taxes v Strand Options and Futures Ltd.

Section 208 of the Income and Corporation Taxes Act 1988 exempts corporation tax directly chargeable on company distributions and prevents distributions being taken into account in computing income. It does not exclude a distribution from the consideration used to compute a chargeable gain on a disposal of shares. A payment for a company’s purchase of its own shares may be both a distribution and consideration for disposal, but the exemption does not extend to the latter function unless a specific provision requires it. The contrast with an individual recipient, who may be taxed on the distribution as income and protected from double taxation by section 37(1) of the Taxation of Chargeable Gains Act 1992, supports that construction.

Strand Futures and Options Ltd sold half its shareholding in City of London Options Ltd to that company and the remaining half to another purchaser. The Revenue assessed the respondent to corporation tax on the basis that the consideration received from the company buy-back formed part of its chargeable gain. The Special Commissioners dismissed the respondent’s appeal, but Etherton J upheld it. The central issue before the Court of Appeal was whether section 208 of the Income and Corporation Taxes Act 1988 exempted the distribution element from corporation tax when it also formed part of the consideration for a disposal.

Appeal allowed unanimously. Carnwath LJ delivered the leading judgment, with Rix LJ and Potter LJ agreeing. The assessment was restored and the determination of the Special Commissioners reinstated.

1. Construction of section 208. The first limb of section 208 is directed to corporation tax charged directly on dividends and other distributions. Its second limb expressly concerns the computation of income. A distribution forming part of the consideration for a disposal is instead an element in the computation of a chargeable gain. The absence of a specific reference to chargeable gains therefore supports the Revenue’s construction.
2. Application to the buy-back. Under ordinary capital gains principles and section 38 of the Taxation of Chargeable Gains Act 1992, the consideration for the disposal included the whole payment, subject only to specific statutory exclusions. The payment was a distribution under section 209, except for the part representing repayment of capital, but that classification did not prevent it also being consideration for the disposal. The identical payment received for the shares sold to the other purchaser was treated in the same way.
3. Individual recipients and double taxation. An individual recipient would have been taxed under Schedule F, with section 37(1) excluding the income-taxed amount from the capital-gains computation. That statutory protection did not justify an equivalent exclusion for a company recipient where the distribution was not otherwise charged to corporation tax.
4. Authorities and anomalies. Hughes v Bank of New Zealand [1938] AC 366 (HL) was of marginal assistance because it concerned different statutes, subject matter and legislative context. The alleged anomaly under section 13 was insufficient to control the construction; argument from anomaly is rarely useful in tax cases where practical significance is unclear, as illustrated by Pearson v IRC [1981] AC 753. The predecessor legislation was unnecessary to resolve the issue, and section 55(3) of the Finance Act 1965, now reflected in section 8(4) of the 1992 Act, specifically addressed overlapping income and gains charges.

The respondent was ordered to pay the appellant’s High Court and Court of Appeal costs, summarily assessed and agreed at £30,000. Leave to appeal to the House of Lords was to be dealt with in writing.

1. Court of Appeal (Civil Division): [2003] EWCA Civ 1457, appeal allowed; the assessment and the Special Commissioners’ determination were restored.
2. Chancery Division: Etherton J upheld the respondent’s appeal and construed section 208 of the Income and Corporation Taxes Act 1988 as exempting distributions whether treated as income or as giving rise to a capital gain.
3. Special Commissioners: dismissed the respondent’s appeal and supported the Revenue’s interpretation.