Anysz v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 21 December 1977 |
| Date | 21 December 1977 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income tax and surtax-Tax advantage-Transaction in securities-Counteraction-Exchange of shares in one company for shares in another company-Whether relevant circumstances present-Whether a tax advantage obtained-Whether Special Commissioners had power to confirm consequential income tax and surtax assessments-Income and Corporation Taxes Act 1970, ss 460, 461C and D and 466(1).
The Appellants were the beneficial owners of the whole of the issued share capital of K Ltd. K Ltd. acquired a property for development which it was envisaged would produce a profit of about £500,000. To minimise the expected tax liability the Appellants entered into a tax avoidance scheme. The scheme comprised two series of transactions which were implemented between April 1970 and March 1972.
The first series ("the property transactions") left K Ltd. with a profit of £460,018. The scheme proceeded on the basis that this profit was free from liability to betterment levy, and that it was subject only to a minimal corporation tax liability until the year 2219, when a substantial liability was expected to accrue.
The second series of transactions ("the share transactions") was then undertaken. The Appellants entered into an agreement with P Ltd. to exchange their shares in K Ltd. for shares in P Ltd. (K Ltd. thus became the wholly-owned subsidiary of P Ltd., whilst P Ltd. was owned by the Appellants.) K Ltd. and P Ltd. made an election under s 256(1), Income and Corporation Taxes Act 1970, and K Ltd. paid a gross dividend of £454,000 to P Ltd. The real nature of the share transactions, the Special Commissioners held, was to be found in what they accomplished: and that was to leave K Ltd. hopelessly insolvent if it should be assessed to tax, whilst enabling the Appellants to retain control of the £454,000 in a tax-free form.
The Finance Act 1972 contained provisions which made the substantial corporation tax (which had been postponed until the year 2219) payable immediately. K Ltd. was unable to meet this liability since it had distributed virtually all of its assets to P Ltd.
Notifications under s 460(6), ICTA 1970 and, later, notices under s 460(3) were issued to the Appellants. The Appellants appealed against the notices, and against consequential income tax and surtax assessments. The Special Commissioners dismissed the appeals and confirmed the assessments. The Appellant taxpayers appealed.
On appeal to thé High Court it was contended on behalf of the Appellants (1) that none of the circumstances set out in s 461 was present; (2) that no tax advantage, as defined in s 466(1) had been obtained; and (3) that the Special Commissioners had no powers to confirm the assessments. The Appellants also reserved the argument that the notifications were defective.
It was contended on behalf of the Crown (1) that the circumstances set out in ss 461C and 461D were present; (2) that the Appellants had obtained a tax advantage either (a) because the object of the share exchange and the payment of the dividend was to strip K Ltd. of its assets and the tax free method in which this had been achieved could be compared with a taxable method of achieving the same objective ("the Crown's broader argument") or, alternatively, (b) because if K Ltd. had used its assets to purchase the shares in P Ltd. and had then distributed those shares in specie to the Appellants the receipt of P Ltd. shares (which the Appellants had received in a non-taxable form) could be contrasted with a receipt of those shares in a taxable form ("the Crown's narrower argument"); and (3) that the Special Commissioners had power to confirm the consequential assessments.
The Chancery Division, dismissing the Appellant taxpayers' appeals, held (1) that the circumstance in s 461D was satisfied because the Appellants received the P Ltd. shares "in connection with" the payment of the dividend to P Ltd., the share exchange and the payment of the dividend being parts of the same scheme; (2) that the Appellants obtained a tax advantage for although (a) a receipt received in a non-taxable way could be contrasted only with that same receipt received in a taxable way, so that the Crown's broader argument failed, nevertheless (b) the receipt of the shares in P Ltd. was capable of constituting a tax advantage and the Crown's narrower argument should be upheld; (3) that the Special Commissioners had power to confirm the assessments.
Stated under the Taxes Management Act 1970, s 56, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 24, 25 and 26 May 1976 Mr. Simon Anysz (hereinafter called Mr. Anysz) appealed against the notice set out below issued to him under s 460(3) of the Income and Corporation Taxes Act 1970 (hereinafter "ICTA 1970") and against assessments made upon him to income tax and surtax pursuant thereto:
Section 460 Income and Corporation Taxes Act, 1970. Whereas, on 22 May 1975 the Board of Inland Revenue issued a notification to you, in accordance with subsection (6) of section 460 of the Income and Corporation Taxes Act, 1970, that they had reason to believe that the said section 460 (which relates to the cancellation of tax advantages from certain transactions in securities) might apply to you in respect of the transactions described on the attached sheet: And whereas you have not exercised the right under the said subsection (6) to make a statutory declaration to the effect that the said section 460 does not apply to you in respect of the said transactions: Now therefore the Board, being of the opinion that section 460 of the Income and Corporation Taxes Act, 1970 applies to you in respect of the aforesaid transactions hereby give notice, in accordance with subsection (3) of that section, that the adjustments described are requisite for counteracting the tax advantage thereby obtained or obtainable.
The transactions in question. 1. The transfer by you to Pelkem Investment Co Ltd (hereinafter referred to as Pelkem) on or about 24 March 1971 of 95 ordinary shares of Kenyon Construction Co (Northern) Ltd (hereinafter referred to as Kenyon) in consideration of the issue of 95 ordinary shares of Pelkem at a premium of £433,713.2. The payment by Kenyon of a dividend of £454,000 to Pelkem on or about 15 March 1972.
The adjustments referred to. 1. In accordance with subsection (2) of section 466 Income and Corporation Taxes Act 1970 (hereinafter ICTA 1970) an assessment to income tax under Case VI of Schedule D for the year 1970-71 in the sum of £431,300 tax on which at the standard rate amounts to £177,911.25 being the income tax which would have been payable by Kenyon under section 232(2) ICTA 1970 on a distribution to you of £431,300. 2. The computation or recomputation of your liability to surtax on the basis that the said sum of £431,300 forms part of your total income for the year 1970-71, and any assessment which may be required to give effect to such computation or recomputation.
The said assessment to surtax was in an amount of £431,300 being a further assessment (a first assessment having previously been made). On 21 July 1975 Mr. Anysz's agent appealed against the said notice on the following grounds: (a) that s 460 does not apply to Mr. Anysz in respect of the transactions in question; (b) that the adjustments directed to be made are inappropriate.
2. We heard at the same time an appeal by Mr. V.C. Manolescue against a similar notice issued to him in respect of similar transactions relating to the same companies, and assessments to income tax and surtax made upon him pursuant thereto. All the appeals were heard and argued together and we gave one decision relating to them(1)
3. Shortly stated, the questions for our decision were:
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(2) whether the notice was valid and whether the consequential assessments were valid assessments;
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(3) whether Mr. Anysz was in a position to obtain or had obtained any tax advantage within s 460 in consequence of the specified transactions;
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(4) whether the circumstances referred to in s 460 were present;
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(5) whether in any event we had jurisdiction to deal with the assessment to income tax;
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(6) whether in any event we could, or ought, to determine the assessment to surtax.
4. The hearing took an unusual course in that after the case for Mr. Anysz had closed the Crown sought to adduce evidence of matters which Mr. Anysz claimed were irrelevant and inadmissible: on our ruling that such matters were relevant Mr. Anysz's Counsel and solicitors withdrew from the proceedings. Accordingly we have set out in Part I of this Case the matters which Mr. Anysz agreed were relevant and in Part II and Schedule I the matters of which the relevance and admissibility was disputed. This leads to a certain amount of repetition, as certain matters contained in Part I require to be set out in more detail in Part II, and shown in their chronological sequence.
Part I
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(2) On 22 May 1975 the Board of Inland Revenue issued to Mr. Anysz a notification pursuant to s 460(6) of the ICTA 1970, a copy of which is attached as exhibit A.
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(3) Mr. Anysz did not on receiving such notification make any statutory declaration pursuant to s 460(6).
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(2) The assessment to income tax under appeal was made on 16 September 1975 and on 22 September Mr. Anysz's agent appealed in the following terms:
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On behalf of the above-named we give notice of appeal against the above assessment on the following grounds: That section 460 does not apply in respect of the transactions in question. That the adjustments directed to be made are inappropriate. That the notice under subjection (3) of section 460 is under appeal.
(3) The surtax assessment was made in...
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