Eastern Power Networks Plc & Ors v Revenue And Customs

The Court of Appeal considered whether arrangements within the meaning of section 146B of the Corporation Tax Act 2010 existed so as to permit HMRC to continue enquiries into consortium relief claims. The dispositive arrangement identified was the 75% voting threshold in the claimant group's articles (article 7.5). Applying the statutory "but for" test in section 146B(3)(a), the court held that, but for the 75% threshold, the link companies (the CKI companies) would have had sufficient votes to control the claimant company. The court also held that section 146B(2)(b) is satisfied because the 75% threshold enables other shareholders (aggregated together) to prevent that control. The court rejected a requirement that the link company must have lost pre-existing control and accepted that articles of association can constitute "arrangements" for the purpose of section 146B. Accordingly HMRC is entitled to continue enquiries to determine whether the arrangement forms part of a scheme with the prohibited purpose under section 146B(3)(b).

Background and parties. The four appellants are UK trading companies within the UK Power Networks group that claimed consortium relief in their 2011–2013 corporation tax returns. HMRC opened enquiries under Part IV of Schedule 18 to the Finance Act 1998 and served information notices under Schedule 36 to the Finance Act 2008. The appellants applied to the tribunal for a direction that HMRC issue closure notices under paragraph 33 of Schedule 18 on the basis that HMRC had no reasonable grounds to continue their enquiries.

Factual matrix. The relevant structure post-acquisition included three CKI group companies (the CKI companies) that between them held 74.6% of the votes, and two minority shareholders (Devin and Eagle) holding 25.4% together. The articles included article 7.5 imposing a 75% voting threshold for resolutions. Hutchison group companies had losses to be surrendered; the CKI companies were the link companies relied on for consortium condition 3 in section 133 CTA. HMRC contended that the 75% threshold was an arrangement caught by section 146B which could limit relief to 50% of the claimant's overlapping period profits unless HMRC could be satisfied the arrangement did not have the tax-advantage purpose in section 146B(3)(b).

Procedural history. The First-tier Tribunal directed HMRC to issue closure notices ([2017] UKFTT 494 (TC)). HMRC appealed to the Upper Tribunal which allowed HMRC’s appeal ([2019] UKUT 0367 (TCC)). The appellants obtained permission and appealed to the Court of Appeal.

Nature of the application and issues. (i) The appellants sought directions that HMRC issue closure notices. (ii) The principal legal questions were whether (a) the 75% voting threshold and related rights are "arrangements" under section 146B, (b) the section 146B(3)(a) "but for" test is satisfied, and (c) the section 146B(2)(b) gateway (that the arrangements enable a person to prevent the link company controlling the claimant) is satisfied. A subsidiary procedural question was whether the tribunal should decide such a point of law in a closure-notice application.

Court's reasoning. The court accepted that a company article (the 75% voting threshold) can constitute an "arrangement". For section 146B(3)(a) the correct inquiry is a straightforward counterfactual comparison: would the link companies have control in the absence of the arrangement? The court rejected an additional causation requirement or a need for pre-existing control to have been lost. It held that in the counterfactual (absence of the 75% threshold) the CKI companies would have control because they held 74.6% of votes and the default voting threshold would be 50%. On section 146B(2)(b) the court held that "a person" may be one or more persons whose votes aggregated have the effect of preventing control; it is not necessary that a single other shareholder alone be capable of blocking control. Aggregating Devin and Eagle’s votes satisfied the gateway. The court therefore concluded that the arrangements identified pass through the section 146B gateway and HMRC were entitled to continue enquiries into whether the arrangement formed part of a scheme whose main purpose (or one of the main purposes) was to obtain a tax advantage under section 146B(3)(b).

Miscellaneous. The court emphasised that tribunals should use their discretion to decide incidental points of law in closure notice applications sparingly and noted the potential for inefficient stop-start enquiries.

Appeal dismissed. The Court of Appeal upheld the Upper Tribunal's decision that the 75% voting threshold in the claimant company's articles constituted an "arrangement" for the purposes of section 146B CTA, that the section 146B(3)(a) "but for" test was satisfied (the CKI companies would control the claimant but for the 75% threshold), and that section 146B(2)(b) was satisfied because the threshold enables other shareholders (whose votes can be aggregated) to prevent that control. Consequently HMRC may continue enquiries to determine whether the arrangement forms part of a scheme with the proscribed tax-advantage purpose under section 146B(3)(b).

First-tier Tribunal: direction to HMRC to issue closure notices ([2017] UKFTT 494 (TC)); Upper Tribunal (Tax and Chancery Chamber) allowed HMRC's appeal ([2019] UKUT 0367 (TCC)); Court of Appeal dismissed the appellants' appeal ([2021] EWCA Civ 283).