Aberdeen Construction Group Ltd v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | Lord Wilberforce,Viscount Dilhorne,Lord Fraser of Tullybelton,Lord Russell of Killowen,Lord Keith of Kinkel |
| Judgment Date | 15 February 1978 |
| Judgment citation (vLex) | [1978] UKHL J0215-1 |
| Court | House of Lords |
| Docket Number | No. 3. |
| Date | 15 February 1978 |
[1978] UKHL J0215-1
Lord Wilberforce
Viscount Dilhorne
Lord Fraser of Tullybelton
Lord Russell of Killowen
Lord Keith of Kinkel
House of Lords
Upon Report from the Appellate Committee, to whom was referred the Cause Aberdeen Construction Group Limited against Commissioners of Inland Revenue, That the Committee had heard Counsel, as well on Wednesday the 11th as on Thursday the 12th, days of January last, upon the Petition and Appeal of Aberdeen Construction Group Limited, Nine Queen's Terrace, Aberdeen, praying, That the matter of the Interlocutor set forth in the Schedule thereto, namely, an Interlocutor of the Lords of Session in Scotland, of the First Division, of the 1st of April 1977, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Interlocutor might be reversed, varied or altered, or that the Petitioners might have such other relief in the premises as to Her Majesty the Queen in Her Court of Parliament, might seem meet; as also upon the case of the Commissioners of Inland Revenue, lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Interlocutor of the 1st day of April 1977, complained of in the said Appeal, be, and the same is hereby, Varied and the question of law in the case stated for the opinion of the Court of Session as the Court of Exchequer in Scotland answered in the affirmative: And it is further Ordered, That the cause be, And the same is hereby, remitted back to the Court of Session in Scotland with a Direction that they instruct the Commissioners for the special purposes of the Income Tax Acts to make an apportionment of the purchase price of £250,000 paid by Westminster Dredging Group Limited to the Appellants between the transfer of shares and the waiving of the loan and to adjust the assessment to Corporation Tax accordingly and that they make such Order for expenses in that Court as they may think fit: And it is further Ordered, That the Respondents do pay, or cause to be paid, to the said Appellents the Costs incurred by them in respect of the said Appeal to this House, the amount of such last-mentioned Costs to be certified by the Clerk of the Parliaments: And it is also further Ordered, That unless the Costs, certified as aforesaid shall be paid to the party entitled to the same within one calendar month from the date of the Certificate thereof, the Cause shall be, and the same is hereby, remitted back to the Court of Session in Scotland, or to the Judge acting as Vacation Judge, to issue such Summary Process or Diligence for the recovery of such Costs as shall be lawful and necessary.
My Lords,
This appeal concerns the application of certain provisions of the Finance Act 1965 relating to capital gains tax. The actual tax assessment which is in issue is for corporation tax for the appellants' accounting period ended 31st December 1971, but this depends on whether the appellants in that period incurred a chargeable gain.
The appellants at the relevant time were a holding company with interests in a number of other companies. One such company was Rock Fall Ltd. Rock Fall was formed in 1957 to carry on specialist work involving drilling and blasting of rock. It was successful, but was short of the capital needed to acquire expensive equipment. The appellants were customers of Rock Fall. In June 1960 they decided to take an interest in that company; they subscribed for 4,600 shares at par and made a loan to it. In February 1961 the appellants acquired its remaining issued share capital—35,400 shares—so that Rock Fall became a wholly owned subsidiary. Later the issued capital of Rock Fall was increased to 125,000 shares, the appellants subscribing the newly issued shares at par. In all, the appellants spent £114,024 for the shares in Rock Fall purchased and subscribed for.
Rock Fall's business expanded in the 1960's and needed more money for plant and working capital. Its requirements were met through unsecured loans from the appellants. At 31st December 1970 these loans totalled £500,000 and were shown at this figure in the appellants' balance sheet under the heading Capital Employed—Loan. Thus the appellants' total investment in Rock Fall amounted to £614,024. With the prospect of having to provide further capital if the interest in Rock Fall were to be retained, the appellants decided to seek a purchaser for Rock Fall and in 1971 entered into negotiations and ultimately an agreement with Bos Kalis Westminster Dredging Group N.V. ("Westminster"). The agreement was recorded in a letter dated 10th March 1971 from Westminster to the appellants, the terms of which the appellants accepted. It is necessary to reproduce this in full:
"Dear Sirs,
We hereby offer on behalf of Westminster Dredging Group Ltd., subject to the undernoted conditions to purchase the whole issued share capital of Rock Fall Co. Ltd. of Barrhead, Scotland, for the sum of £250,000.
The conditions are:
1. Aberdeen Construction Group Ltd. waive the loan to Rock Fall Co. Ltd. which presently stands at £500,000.
2. Taxation losses accumulated as at this date remain for the benefit of the purchaser.
3. Net Current Assets of £58,732 as shown in the draft Balance Sheet as at 31st December 1970 which is attached and initialled by representatives of both companies are guaranteed by the Vendors.
Any variation in the said sum shall be made good by the Vendors or paid over by the Purchaser as at 31st December 1971 without any adjustment for interest.
The said sum of £250,000 is due and payable as at 10th April 1971.
Notwithstanding the date hereof the effective date of transfer of the shares is to be at 31st December 1970, and the Vendors will procure that the transfer of the shares will be properly effected into such names as will be notified."
In accordance with this the appellants wrote off the loan of £500,000 in their balance sheet as at 31st December 1970. Thus, in financial or economic terms, the result of the appellants' "investment" in Rock Fall turned out as follows:
| Cost of shares bought and subscribed for … … … | £114,024 |
| Loan written off … … … … … … | £500,000 |
| £614,024 | |
| Proceeds of disposal of shares … … … … | £250,000 |
| £364,024 |
the appellants debited this amount to Capital Reserve in their balance sheet at 31st December 1970.
In this situation it may seem surprising that any question should arise of the appellants having to pay tax on the basis of a capital gain. They had made an unfortunate investment. They had lost £364,024. But the Commissioners of Inland Revenue contend that the appellants made a chargeable gain on the disposal of the shares in Rock Fall of £135,976, representing the difference between £250,000 received under the agreement of 10th March 1971 and £114,024, the cost of the shares. Again it seems surprising that the shares in Rock Fall should have appreciated to such an extent after their acquisition by the appellants, and in the light of Rock Fall's balance sheet as at 31st December 1970, which showed net current assets of only £58,732.
The capital gains tax is of comparatively recent origin. The legislation imposing it, mainly the Finance Act 1965, is necessarily complicated, and the detailed provisions, as they affect this or any other case, must of course be looked at with care. But a guiding principle must underlie any interpretation of the Act, namely, that its purpose is to tax capital gains and to make allowance for capital losses, each of which ought to be arrived at upon normal business principles. No doubt anomalies may occur, but in straightforward situations, such as this, the courts should hesitate before accepting results which are paradoxical and contrary to business sense. To paraphrase a famous cliché, the capital gains tax is a tax upon gains: it is not a tax upon arithmetical differences.
The business reality of the present case is that the appellants made an investment in Rock Fall—the word "investment" is not mine but is that used by the Special Commissioners: "Aberdeen's investment in Rock Fall amounted to £614,024". This took the form partly of subscription of share capital (plus a small amount for purchase of shares), partly of a loan. Whichever it was represented capital made available to Rock Fall: in Rock Fall's draft balance sheet as at 31st December 1970 there was shown under a heading "Capital Employed" first the share capital (£125,000), secondly the loan (£500,000). Those managing the affairs of the appellants would undoubtedly consider any proposition to "get out" of Rock Fall in the light of this total investment: when they had done so—and obtained £250.000 from Westminster—they so recorded the result in their balance sheet. It is clear however that the capital gains tax legislation prevents the matter being looked at in so simple a manner as this because it imposes the tax on disposals of "assets" (Finance Act 1965, section 19). So it is necessary to consider separately each asset disposed of, in the light of rules which apply to that asset.
The asset on which, on the Revenue's claim, the chargeable gain was made was the shares in Rock Fall owned by the appellants. There is no doubt that these shares were acquired for £114,024 but for what were they disposed of? The answer to this question must be found in the contract of 10th March 1971, interpreted, as any contract must be, against its background.
At 10th March 1971, on the basis of Rock Fall's draft balance sheet at 31st December 1970, the Rock Fall shares had little or no value: certainly they could not be worth par; still...
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