The parent company (Brixton plc) of the taxpayer (Vocalspruce) subscribed for zero coupon notes of group companies, and transferred the notes to Vocalspruce in consideration for the issuance by Vocalspruce of shares whose nominal value was equal to the notes' discounted value, but with the shares being issued at a premium which would be paid up by capitalizing the profit to be realized by Vocalspruce on the notes, with such sums to be appropriated to Vocalspruce's share premium account.
After finding that such profits (i.e., realized discounts on the notes) were otherwise exempted from income tax under a provision which excluded "any amounts required to be transferred to the company's share premium account," Lewison LJ went on to find that this exemption did not apply by virtue of a further provision (para. 12 of Sched. 12 of the Finance Act 1996) which (in s. 12(1)) referenced transactions in which one group company "directly or indirectly replaces the other…as a party to a loan relationship," and provided (in s. 12(2)) that "the transaction , or series of transactions, by virtue of which the replacement takes place shall be disregarded." He stated:
Mr Peacock [for Vocalspruce] said that because paragraph 12 (1) refers to a "related transaction" and a related transaction is narrowly defined as the acquisition of rights under the loan relationship, all that is required to be disregarded is the fact of Vocalspruce's replacement of Brixton plc. …
I cannot accept this argument. The term defined is a related transaction; and the defined term may itself colour the meaning of the definition. A transaction is (at least) a bilateral arrangement. It makes no sense to disregard part of the transaction, when the statute clearly requires the whole transaction to be disregarded, except for very limited purposes. … In addition it is a well-known method of interpreting deeming provisions that one must treat as real the inevitable consequences flowing from the deemed state of affairs: DCC Holdings Ltd v HMRC [2010] UKSC 58, [2011] 1 WLR 44 at [38]. If the acquisition by Vocalspruce had not taken place, the inevitable consequence would have been that the shares would not have been issued for a premium, and there would have been no requirement to transfer anything to the share premium account. The rights under the loan relationship would have remained with Brixton plc, which was under no obligation to transfer any amount to a share premium account, and that company would have been liable to pay tax on the gain.