HM Revenue & Customs v Prizedome Ltd & Anor

Schedule 7A to the Taxation of Chargeable Gains Act 1992 restricts the use of pre-entry losses against gains arising within a group. Where one group is acquired by another, paragraph 1(6) operates to treat members of the acquired group as joining the merged group at the acquisition date only in relation to losses that are pre-entry losses of the acquiring group. It does not remove restrictions applicable to losses already pre-entry in relation to the acquired group. The court must construe taxing legislation purposively, identifying the statutory description of the transaction and then deciding whether the transaction falls within it. That approach does not permit the court to adopt a meaning inconsistent with the statutory language.

HMRC appealed against a decision of the Special Commissioners allowing appeals by Prizedome Ltd and Limitgood Ltd against corporation tax amendments. Each company had realised substantial capital losses before joining the GL group. After the GL group was acquired by the GH group, the companies sought to set those losses against gains realised by other companies formerly in the GL group and treated as accruing to them under section 171A of the Taxation of Chargeable Gains Act 1992.

The Special Commissioners were divided. The chairman allowed the companies’ appeals, while Dr Avery Jones would have dismissed them. The central issue was whether paragraph 1(6) of Schedule 7A treated the companies as joining the merged GL/GH group on the acquisition date, so that their losses could be set against the gains.

1. Appeal allowed. The respondents’ appeals to the Special Commissioners were dismissed.

2. The proper approach to taxing legislation is purposive. The court must first identify, realistically, the transaction answering the statutory description and then decide whether the transaction falls within it. This does not authorise a construction which departs from the language Parliament used.

3. Schedule 7A is directed to restricting the deduction of losses realised before a company entered the relevant group. Section 170(10), applied to the Schedule by section 177A, ensures that a group remains the same group despite changes in membership or its acquisition by another group. Consequently, a loss already identified as a pre-entry loss remains such a loss despite a later takeover.

4. Paragraph 1(6) modifies section 170(10) where necessary to prevent losses realised by members of an acquired group while they were members of that group from escaping the Schedule after the acquisition. Its purpose is to treat those members as joining the merged group when the acquisition occurred.

5. That provision does not extend to losses which were already pre-entry losses in relation to the acquired group. Such losses remain pre-entry losses of the merged group. Paragraph 1(6) therefore did not make the respondents’ losses available against gains realised by other members of the former GL group. The contrary construction would produce the remarkable result that a takeover could remove restrictions which applied before the takeover.

6. The court agreed with Dr Avery Jones’s conclusion, although for different reasons, and rejected the respondents’ more literal construction of paragraph 1(6).

• High Court (Chancery Division): HMRC’s appeal was allowed and the respondents’ appeals to the Special Commissioners were dismissed.
• Special Commissioners: The respondents’ appeals had been allowed by the chairman’s casting vote. Dr Avery Jones would have dismissed them.