It is often overlooked that there is a separate system of tribunals to hear disputes about tax avoidance involving securities. This tribunal is commonly known as a “section 706 tribunal”, as it is set up under Income and Corporation Taxes Act 1988 s706. It is an alternative to the appeal system of General Commissioners and Special Commissioners.
The tribunal does not sit often. There was only one reported case in 1999. The recent case illustrates how useful the body can be.
A company had a progressive dividends policy, under which it undertook to increase its dividend payment each year. By 1990, 86% of its profits came from overseas subsidiaries so there was insufficient profit against which to offset advance corporation tax. In 1990, the company decided to expand its presence in the UK automotive industry, and so made arrangements to acquire a private company.
This company had sufficient profits to offset the acquirer’s advance corporation tax, so the acquisition was effected in a manner to achieve this. The acquirer acquired the share company of the private company, then the private company paid a dividend of £3 million to the acquirer. No group election was then in force, so this created a corporation tax liability for the acquirer which could be used to offset the otherwise irrecoverable advance corporation tax. The private company funded this huge dividend from an interest-free loan made by the acquiring company. The acquiring company was able to pay a larger dividend, in accordance with its progressive dividends policy, because of the reduced tax liability.
There was no disagreement that the dividend from the private company was of an abnormal amount to obtain a tax advantage. The issue was whether this arrangement was caught by any anti-avoidance provision.
Inland Revenue issued a notice under s703(3) cancelling the tax advantage. This section allows a tax advantage to be cancelled if it arose from an abnormal dividend. The company unsuccessfully appealed to the Special Commissioners.
The company then demanded its right for the matter to be heard by a section 706 tribunal. This tribunal had to answer four questions:
- whether the dividends were “transactions in securities” under s703;
- if they were transactions in securities, whether they were for bona fide commercial reasons;
- whether the main objective in acquiring the shares was to obtain a tax advantage; and
- whether a tax advantage was obtained.
The section 706 tribunal concluded that, although the acquiring company’s dividend could not have been paid at the same amount without the tax benefit from the private company’s dividend, the payment of a dividend was not in itself a transaction in securities. That expression referred to the creation or extinguishment of rights in securities. There was no such creation or extinguishment here. The shares remained ordinary shares. All that the companies had done was to pay dividends which is a routine right of shareholding. There are separate anti-avoidance provisions relating to dividends. A dividend is not “abnormal” just because it is very big.
The second question was only relevant if the first question was answered yes (which it was not). Nevertheless the tribunal dealt with this question. The transaction to acquire the company was for a bona fide commercial reason, namely to expand its UK market. The acquiring company saw an opportunity to effect that commercial reason in a tax-advantageous way, but that did not invalidate the commercial reason for the acquisition. The acquiring company would have paid a dividend whether or not it had acquired the private company, and whether or not it obtained the tax advantage.
The third answer was similarly affirmative.
For the fourth question, there had to be a clear chain of cause and effect for the anti-avoidance provision to apply. In this case, the acquisition of the shares was not to obtain a tax advantage but to improve the company’s trading position. The company saw a tax planning opportunity and took it. That is within the scope of tax law.
Accordingly the appeal was accepted and the assessment discharged.
Laird Group plc v IRC. S706 tribunal [2000]
[2000]