Johnston Publishing (North) Ltd v Revenue and Customs

The majority held that the exemption in section 179(2) of the Taxation of Chargeable Gains Act 1992 applies only where the transferor and transferee were associated companies both when the asset was acquired and when they left the group. It does not protect a transfer between group companies that became associated only after the transfer. The provision protects transfers within an existing sub-group, consistently with the in-group rule in section 171(1). A court should try to give effect to every statutory word and should not treat wording as redundant where a plausible construction gives it a distinct purpose.

Johnston Publishing (North) Ltd appealed against an assessment to corporation tax on chargeable gains arising under section 179 of the Taxation of Chargeable Gains Act 1992. The Special Commissioner dismissed the appeal: [2006] UKSPC 00564. The High Court dismissed the taxpayer’s appeal: [2007] EWHC 512 (Ch).

The taxpayer had acquired assets from a group company when the two companies were members of the same wider group but were not yet associated companies. They became associated before both companies later left the group. The central issue was whether section 179(2) required association at the time of acquisition as well as at the time of leaving the group.

1. By a majority, the appeal was dismissed. Sir John Chadwick and Lord Justice Tuckey held that section 179(2) of the Taxation of Chargeable Gains Act 1992 required the transferor and transferee to have been associated companies when the relevant acquisition occurred, as well as when they ceased to be members of the group. Lord Justice Toulson dissented and would have allowed the appeal.

2. Sections 171(1), 179(1) and 179(3) had to be read together. Section 171(1) applied the in-group no-gain/no-loss rule. Section 179(1) and (3) imposed an exit charge intended to prevent the deferral of tax through envelope schemes. Section 179(2) created a limited exemption for transfers within an existing associated sub-group, where the in-group rule could properly continue to operate.

3. The majority rejected the argument that the second use of the word associated merely identified the companies mentioned at the beginning of the subsection. The drafting structure of section 179 showed that descriptions intended for later reference were ordinarily defined expressly. Although statutory surplusage was possible, the court should first consider whether the words could be given purpose and effect. The Revenue’s construction provided a plausible explanation for the second use of associated.

4. The statutory purpose supported that construction. A transfer between companies that were not associated at the time of acquisition could inflate the value of a sub-group formed later. The exemption therefore did not extend to such a transfer. The decision in Dunlop International AG v Pardoe (Inspector of Taxes) [1999] STC 909 illustrated that the statutory condition could involve more than one relevant time when association was assessed, although it was not determinative of the present issue.

5. Toulson LJ considered that the natural meaning of those associated companies was merely a reference back to the opening words. In his view, tax legislation frequently contained unnecessary words, and the court should not infer an additional requirement that the companies had been associated at acquisition.

• Court of Appeal (Civil Division) dismissed the appeal by a majority.
• High Court, Chancery Division dismissed the appeal from the Special Commissioners: [2007] EWHC 512 (Ch).
• Special Commissioners dismissed the taxpayer’s appeal against the assessment: [2006] UKSPC 00564.