Her Majesty's Commissioners of Inland Revenue (Respondents) v. Laird Group plc (Appellants)

A dividend paid on ordinary shares is not, merely because it is paid in respect of those shares, a transaction relating to securities for the purposes of section 703 of the Income and Corporation Taxes Act 1988. The distribution gives effect to the rights attached to the shares by releasing profits which the directors had been entitled to retain for the undertaking.

Section 703 requires three independent elements: a transaction in securities, circumstances prescribed by section 704, and a tax advantage obtained in consequence of the transaction. Satisfaction of the latter two elements cannot replace the first. Although transactions relating to securities bear a wide meaning and may be unilateral, there must be a sufficient relationship with the securities or the rights attached to them.

Laird acquired the whole share capital of Stanton. Laird subsequently paid a dividend to its shareholders, and Stanton paid an interim dividend of £3 million to Laird without making a group election. Stanton accounted for £1 million in advance corporation tax, while Laird received franked investment income which reduced its own advance corporation tax liability by the same amount.

The Revenue issued a notice under section 703(3) of the Income and Corporation Taxes Act 1988 and assessed Laird to £1 million. The Special Commissioners upheld the notice and assessment. The section 706 Tribunal discharged the assessment, and Lightman J dismissed the Revenue's appeal. The Court of Appeal reversed those decisions in [2002] EWCA Civ 576, reported at [2002] STC 722.

The issue before the House was whether payment of the Stanton dividend was a transaction in securities, or a transaction relating to securities, within sections 703 and 709(2) of the 1988 Act.

1. Appeal allowed unanimously. Lord Millett delivered the leading speech. Lord Nicholls, Lord Hoffmann, Lord Rodger and Lord Walker agreed with his reasons.

2. Per Lord Millett, section 703 of the Income and Corporation Taxes Act 1988 imposes three separate and independent requirements: there must be one or more transactions in securities; the transactions must occur in circumstances described by section 704; and the taxpayer must obtain a tax advantage in consequence of the transaction or their combined effect. It was therefore insufficient that Laird obtained an intended tax advantage in the circumstances described in section 704.

3. Per Lord Millett, the statutory expression extends beyond transactions having securities as their subject matter to transactions relating to securities. It can include unilateral acts and must receive a wide meaning, but some relationship with the securities remains necessary. Section 703(2) demonstrates that Parliament did not regard a company's liquidation, by itself, as a transaction relating to its shares.

4. Per Lord Millett, a share is an interest in the company comprising rights and obligations defined by company law and the company's constitution. It gives proprietary rights in the company, but not in the company's assets. The ordinary shareholder's rights normally include rights to dividends if declared, to vote, and to participate in surplus assets on liquidation.

5. Per Lord Millett, distributing undistributed profits during a liquidation merely gives effect to the shareholders' existing rights and is not a transaction relating to their shares. Payment of a dividend by a going concern is not materially different. The directors' power to retain funds reflects the separation of ownership and management. By declaring or paying a dividend, the directors release funds from that power of retention. The distribution gives effect to the rights attached to the shares without affecting either the shares or those rights.

6. The Stanton dividend was therefore not a transaction in securities within section 703. The House set aside the Court of Appeal's decision and the Board's section 703 notice, discharged the assessment, and awarded Laird its costs in the House and below.

1. House of Lords: In [2003] UKHL 54, unanimously allowed Laird's appeal, set aside the Court of Appeal's decision and the section 703 notice, and discharged the assessment.
2. Court of Appeal: In [2002] EWCA Civ 576, reported at [2002] STC 722, allowed the Revenue's appeal and reinstated the assessment.
3. High Court: Lightman J upheld the section 706 Tribunal's decision and dismissed the Revenue's appeal by way of case stated.
4. Section 706 Tribunal: Held that declaring and paying a dividend did not constitute a transaction in securities and discharged the assessment.
5. Special Commissioners: Dismissed Laird's appeal against the section 703 notice and upheld the £1 million assessment.