Eastern Power Networks Plc & Ors v Revenue And Customs

For anti-avoidance provisions limiting consortium relief, an arrangement may consist of a single provision in a company’s articles, including a voting threshold. The statutory “but for” comparison asks whether the link company would control the claimant without that arrangement. It does not require proof that existing control was lost or a speculative reconstruction of how the arrangement arose. A threshold may enable other shareholders collectively to prevent control even where no single shareholder can block it alone. The tribunal may decide an incidental question of law in a closure-notice application, but that jurisdiction should be exercised sparingly where an enquiry contains cumulative factual and legal issues.

The four appellant companies claimed consortium relief against losses surrendered by a company in the same corporate group. HMRC opened enquiries into their corporation tax returns and issued information notices. The enquiries concerned whether voting arrangements and a 75% voting threshold engaged the anti-avoidance provision in section 146B of the Corporation Tax Act 2010.

The First-tier Tribunal held that the arrangements did not fall within section 146B and directed HMRC to issue a closure notice: [2017] UKFTT 494 (TC). The Upper Tribunal allowed HMRC’s appeal, dismissed the taxpayers’ cross-appeal and set aside that direction: [2019] UKUT 0367 (TCC). The central issues were the identity of the relevant arrangement, the construction of the statutory control tests, and whether the enquiry could continue to investigate purpose.

The Court of Appeal unanimously dismissed the appeal and upheld the Upper Tribunal’s decision.

1. Relevant arrangement. An arrangement for section 146B of the Corporation Tax Act 2010 may consist of a single item. It may be a provision in the claimant company’s articles of association. The relevant arrangement was the continuing 75% voting threshold in article 7.5, not the historical act of increasing the threshold and not a combination of the threshold with the minority shareholders’ voting rights.
2. Section 146B(3)(a). The statutory comparison requires the court to postulate the absence of the arrangement and ask whether the link companies would then control the claimant company. It was unnecessary to establish a more complex causal connection or that the link companies had previously possessed and lost control. The December increase in the CKI Companies’ voting rights was not part of the arrangement being tested and therefore remained in the counterfactual.
3. Section 146B(2)(b). The 75% threshold enabled the other shareholders, by aggregating their voting rights, to prevent the CKI Companies from controlling the company. The provision does not require a single blocking shareholder, an agreement between the shareholders, or an inquiry into the likelihood that they would vote together. Nor does it require proof that pre-existing control was lost. The anti-avoidance provision must be capable of applying to different mechanisms producing the same practical allocation of control.
4. Purpose and continuation of the enquiry. The same arrangement satisfied both statutory gateways. HMRC were therefore entitled to continue investigating whether it formed part of a scheme whose main purpose, or one of its main purposes, was obtaining a tax advantage. The closure-notice direction was consequently premature.
5. Closure-notice procedure. The jurisdiction recognised in Vodafone 2 v HM Revenue and Customs, [2006] EWCA Civ 1132, to decide an incidental legal question in a closure-notice application is useful, but should be exercised sparingly. Such an application is generally unsuitable for resolving points of law during a complex, cumulative enquiry. The court firmly discouraged the First-tier Tribunal from undertaking a hearing of this kind.

• Court of Appeal (Civil Division): [2021] EWCA Civ 283. Appeal dismissed and the Upper Tribunal’s decision upheld.
• Upper Tribunal (Tax and Chancery Chamber): [2019] UKUT 0367 (TCC). HMRC’s appeal allowed, the taxpayers’ cross-appeal dismissed and the closure-notice direction set aside.
• First-tier Tribunal (Tax): [2017] UKFTT 494 (TC). Held that section 146B was not engaged and directed HMRC to issue a closure notice.