Introduction

The case of South Eastern Power Networks PLC & Ors v. Revenue and Customs ([2017] UKFTT 494 (TC)) was adjudicated by the First-tier Tribunal (Tax) on June 13, 2017. This case involves four applicant companies, which are trading subsidiaries of UK Power Networks Holdings Limited (UKPNHL), challenging the continuation of Revenue and Customs (HMRC) enquiries into their Corporation Tax returns for the periods ending December 31, 2011, 2012, and 2013.

The core issue revolves around the Applicants' claims for consortium relief, a specific form of group relief under the Corporation Tax Act 2010, which allows certain companies within a consortium to claim tax relief based on their interconnected ownership structures.

HMRC had initiated enquiries in December 2013, July 2014, and November 2015, suspecting discrepancies between the economic interests of the consortium members and the relief amounts claimed. Despite some information notices being invalidated through prior closure notices, two significant information notices remained outstanding: a Group Notice issued to UKPNHL and Third Party Notices issued to CKI Number 1 Limited (CKI1), CKI Number 2 Limited (CKI2), and CKI3.

The Applicants sought closure notices, arguing that HMRC's continued enquiries lacked reasonable grounds, primarily contending that the information requested was irrelevant to the tax positions in dispute.

Summary of the Judgment

The Tribunal meticulously examined the legal framework governing consortium relief, specifically Sections 144, 146B, and 155 of the Corporation Tax Act 2010. The central determination hinged on whether HMRC had reasonable grounds to continue its enquiries, necessitating the provision of additional information.

After a thorough analysis, the Tribunal concluded that HMRC did not possess reasonable grounds to sustain the enquiries. The arguments surrounding Sections 144(3)(d), 146B, and 155 Effect 2 were pivotal. Notably, the Tribunal found that the arrangements in question, including changes to voting thresholds and voting agreements, did not meet the stringent conditions required under Section 146B to justify continued investigation.

Consequently, the Tribunal directed HMRC to issue closure notices within 30 days, thereby terminating the enquiries into the specified accounting periods.

Analysis

Precedents Cited

The Tribunal referenced several key cases that significantly influenced its decision:

• BUPA Insurance Ltd v HMRC [2014] UKUT 262 (TCC): Emphasized that consortium relief is governed strictly by the statutory conditions without an overarching purpose or economic substance test.
• Gemsupa Ltd v The Commissioners for HMRC [2015] UKFTT 97 (TC): Reinforced the notion that group relief rules are confined to the literal interpretation of the statutory language.
• Vodafone 2 [2005] EWHC 3040 (Ch): Highlighted the Tribunal's jurisdiction to address incidental points of law essential for determining the reasonableness of HMRC's grounds to continue enquiries.
• Estate 4: Served as a catalyst for the Tribunal to deem the necessary nature of resolving points of law within the context of closure notice applications.
• Various House of Lords cases such as Russell v Northern Bank Development Corp Ltd [1992] 3 All E R 161 and J Bibby & Sons Ltd v Commissioners of Inland Revenue [Year]: Clarified that external voting agreements do not negate the legal capacity of shareholders to exercise control.

Legal Reasoning

The Tribunal's analysis focused on the statutory provisions governing consortium relief and the specific anti-avoidance measures:

• Section 144(3)(d): Comprises a series of tests to cap the amount of consortium relief based on various ownership and control metrics. The Tribunal determined that the contested aspect, the voting power, did not warrant HMRC's continued enquiries.
• Section 146B: Targets arrangements that allow parties to circumvent consortium relief through specific schemes. The Tribunal found that, in this case, the arrangements did not satisfy the necessary conditions to trigger Section 146B.
• Section 155 Effect 2: Addresses scenarios where control is inadvertently transferred outside the consortium, further limiting consortium relief claims. Again, the Tribunal concluded that the arrangements in question did not meet the criteria for this provision to apply.

Central to the Tribunal's reasoning was the interpretation of the but for test under Section 146B(3)(a). The Tribunal agreed with the Respondents that the arrangements, even if they affected voting thresholds, did not effectively transfer control in a manner that would justify the application of anti-avoidance measures.

Furthermore, the Tribunal assessed the necessity of the information notices. It held that the remaining queries were either addressed by established facts or did not hold sufficient relevance under the statutory framework to sustain HMRC's position.

Impact

This judgment reinforces the strict adherence to statutory provisions governing consortium relief. It underscores the precedence that ancillary arrangements, such as voting agreements, must meet explicit criteria before they can influence tax relief claims. The decision also clarifies the Tribunal's role in balancing taxpayer rights and HMRC's investigatory powers, particularly in complex corporate structures.

Future cases involving consortium relief will likely reference this judgment to delineate the boundaries of allowable arrangements and the necessity of explicit statutory conditions. Additionally, it serves as a precedent for taxpayers seeking closure notices, affirming that not all information requests by HMRC are justifiable under the law.

Complex Concepts Simplified

Conclusion

The Tribunal's decision in South Eastern Power Networks PLC & Ors v. Revenue and Customs serves as a definitive elucidation of the constraints and requirements surrounding consortium relief claims. By meticulously analyzing statutory provisions and relying on established precedents, the Tribunal underscored the necessity for taxpayers to adhere strictly to the legislative framework when structuring their corporate arrangements for tax purposes.

Moreover, the judgment reinforces the judiciary's role in ensuring that HMRC's investigatory powers do not overshadow the rights of taxpayers seeking closure on their tax affairs. It affirms that unless HMRC can demonstrably establish reasonable grounds grounded in statutory conditions, their enquiries should not impede taxpayers from obtaining the certainty and finality provided by closure notices.

Ultimately, this case exemplifies the balance the legal system strives to maintain between effective tax administration and protecting taxpayers from unwarranted or excessive regulatory probing, ensuring fairness and clarity in corporate tax law interpretations and applications.