Her Majesty's Commissioners of Inland Revenue v Laird Group plc

Key legal principle: A dividend paid by a company does not constitute "a transaction in securities" or "a transaction relating to securities" within the meaning of section 709(2) read with section 703 of the Income and Corporation Taxes Act 1988. The payment of a dividend merely gives effect to shareholders' rights and, as with distributions in liquidation, does not alter the securities or rights attached to them.

The court relied on the statutory language of sections 703, 704 and 709(2) and on the purposive reading indicated by section 703(2) (which treats liquidation as distinct from transactions in securities). Earlier authorities (Parker, Greenberg and Joiner) were considered but did not decide the point; the House preferred the view that a dividend payment is not a transaction in securities.

Because the Stanton dividend was not a transaction in securities, the Board's notice under section 703(3) and the resulting assessment were set aside.

Background and parties: Laird Group plc acquired Stanton Rubber and Plastics Ltd. After the acquisition Laird declared and paid a substantial dividend and, shortly afterwards, Stanton paid an interim dividend to Laird. The tax effect was that Laird obtained a net saving of £1m in advance corporation tax through the receipt of franked investment income from Stanton.

Nature of the claim and procedural history: The Board of Inland Revenue issued a notice under section 703(3) of the Income and Corporation Taxes Act 1988 to counteract the tax advantage. The Special Commissioners upheld the Revenue's assessment. On rehearing, the Tribunal discharged the assessment, holding that the payment of a dividend was not a "transaction in securities". Lightman J in the High Court upheld the Tribunal. The Court of Appeal [2002] EWCA Civ 576 reversed and reinstated the assessment. The matter reached the House of Lords on appeal.

Issues framed:

• Whether the payment of a dividend in respect of shares is "a transaction in securities" or "a transaction relating to securities" within the meaning of section 709(2) and relevant provisions in Chapter VII (sections 703-710) of the 1988 Act.
• Whether the tax advantage obtained by Laird was obtained in consequence of a transaction in securities such that section 703 could be invoked.

Court's reasoning: The House examined the statutory definition in section 709(2) and the surrounding provisions, including section 703(2), which demonstrates that liquidation is not regarded as a transaction in securities. The court analysed the juridical nature of shares and shareholders' rights. It concluded that distributions in liquidation merely give effect to pre-existing rights in the shares and do not alter the securities or rights attached to them; a dividend declared by directors while the company is a going concern likewise releases funds that were already the shareholders' entitlement and so does not amount to a transaction relating to securities. The court considered authorities such as Parker, Greenberg and Joiner, but found that those decisions did not require a contrary conclusion and that the better view is that a dividend is not a transaction in securities. Accordingly the payment of the Stanton dividend could not be treated as the relevant transaction under section 703.

Relief sought and result: The taxpayer sought to resist the Revenue's notice under section 703(3) and to discharge the assessment of £1m advance corporation tax. The House allowed the appeal, set aside the Court of Appeal decision and the Board's notice, and discharged the assessment.

Appeal allowed. The House held that the payment of an ordinary dividend does not constitute a "transaction in securities" or a "transaction relating to securities" within the meaning of section 709(2) read with section 703 of the Income and Corporation Taxes Act 1988. The dividend merely gave effect to shareholders' pre-existing rights in the shares, analogous to distributions in liquidation, and therefore the section 703 counteraction power did not apply to the Stanton dividend; the Board's notice and assessment were set aside.

Tribunal (rehearing under section 706) held dividend not a transaction in securities and discharged assessment; High Court (Lightman J) upheld the Tribunal; Special Commissioners had earlier upheld the Revenue's assessment; Court of Appeal allowed Revenue's appeal and reinstated the assessment ([2002] EWCA Civ 576); House of Lords allowed Laird's appeal ([2003] UKHL 54).