Introduction

The case of Eastern Power Networks Plc & Ors v. Revenue And Customs ([2021] EWCA Civ 283) addresses critical issues surrounding consortium relief under the Corporation Tax Act 2010, specifically focusing on anti-avoidance provisions. The appellants, subsidiaries of UK Power Networks Holdings Ltd (UKPNHL), challenged HMRC's extensive enquiries into their tax returns for 2011-2013. Central to the dispute was whether the arrangements made by the appellants fell within the anti-avoidance measures outlined in section 146B of the Corporation Tax Act, which are designed to prevent the misuse of consortium relief for tax advantages.

Summary of the Judgment

The Court of Appeal upheld the decision of the Upper Tribunal, allowing HMRC to continue its enquiries into the appellants' claims for consortium relief. The core issue revolved around whether the appellants' arrangements, particularly the increase in the voting threshold to 75%, constituted a scheme aimed at obtaining tax advantages, thereby triggering the anti-avoidance provisions of section 146B. The court concluded that the increase in the voting threshold did indeed enable minority shareholders to prevent the consortium from controlling UKPNHL, satisfying both subsections 146B(2)(b) and 146B(3)(a). Consequently, HMRC was permitted to investigate further into the purpose behind these arrangements.

Analysis

Precedents Cited

The judgment extensively referenced Vodafone 2 v HM Revenue and Customs [2006] EWCA Civ 1132, a pivotal case that established the court's jurisdiction to decide incidental points of law in closure notice applications. This precedent underscored the tribunal's ability to halt HMRC's enquiries when foundational legal questions arise, particularly those pertaining to compliance with higher laws such as EU directives.

Legal Reasoning

The court meticulously dissected the statutory language of section 146B, focusing on whether the appellants' arrangements met the dual criteria of enabling persons to prevent consortium control and satisfying the 'but for' test regarding control. The increase in the voting threshold from 50% to 75% was scrutinized to determine if it allowed minority shareholders to obstruct the consortium's control, thereby constituting an anti-avoidance scheme. The appellate court affirmed the Upper Tribunal's stance that the 75% threshold, in combination with the minority shareholders' votes, effectively prevented the naming consortium from exerting control, thus invoking the anti-avoidance provisions.

Impact

This judgment reinforces the robustness of anti-avoidance measures within consortium relief claims. By upholding HMRC's right to investigate the purpose behind structural arrangements, the court signals a stringent approach towards preventing tax avoidance through complex corporate structures. Future cases involving consortium relief will need to demonstrate the bona fide nature of arrangements without the intent of securing tax advantages to withstand similar scrutiny.

Complex Concepts Simplified

Consortium Relief

Consortium relief allows companies within the same corporate group to offset profits and losses against each other, provided certain ownership and control conditions are met. This mechanism prevents double taxation and ensures that group performance is reflected accurately in corporate taxes.

Section 146B of the Corporation Tax Act 2010

This section serves as an anti-avoidance measure, targeting arrangements that grant tax advantages contrary to the spirit of consortium relief. It scrutinizes whether structural changes, like altering voting thresholds, are made primarily for tax benefits rather than legitimate business reasons.

'But For' Test

The 'but for' test assesses whether, in the absence of a specific arrangement, the consortium would have control over a company. It helps determine if the arrangement is a genuine business practice or a tactic to secure tax advantages.

Conclusion

The Eastern Power Networks case underscores the judiciary's commitment to upholding anti-avoidance provisions within UK tax law. By validating the Upper Tribunal’s decision to permit HMRC's continued investigation, the Court of Appeal has clarified the boundaries of legitimate consortium relief and the extent to which structural arrangements can be scrutinized for tax avoidance. This judgment serves as a cautionary tale for corporate groups seeking to optimize tax liabilities through intricate ownership and voting structures, emphasizing the necessity for transparency and genuine business intent in such arrangements.