Bird and Others Commissioners of Inland Revenue and Another Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | THE VICE-CHANCELLOR,LORD JUSTICE BALCOMBE,LORD JUSTICE BINGHAM |
| Judgment Date | 30 January 1987 |
| Judgment citation (vLex) | [1987] EWCA Civ J0130-2 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | 87/0064 |
| Date | 30 January 1987 |
[1987] EWCA Civ J0130-2
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
The Vice-Chancellor
(Sir Nicolas Browne-Wilkinson)
Lord Justice Balcombe
Lord Justice Bingham
87/0064
and
MR C. N. BEATTIE, Q.C., and MR D. S. BRANDON, instructed by Messrs Wedlake Bell, appeared for the Appellants.
MR D. K. RATTEE, Q.C., and MR C. H. McCALL, instructed by The Solicitor of Inland Revenue, appeared for the Respondents.
These are two appeals from Mr Justice Vinelott who upheld assessments against the appellants under Section 460 of the Income and Corporation Tax Act 1970 ("the 1970 Act"). The case raises yet again the impact of that section on a "Bradman" Scheme and, even by the standards of such a scheme, the facts are exceptionally complicated. The cases stated by the Special Commissioners are very full. The judgment of the learned judge contains a masterly summary of those facts. Both are reported in 1985 S.T.C. 584 and references in this judgment are (unless otherwise stated) to that report. It is pointless for me to repeat the facts in full: I will merely state the outline of the scheme.
Prior to 1971, a valuable property in Croydon belonged to a company called Croydon Centre Development Limited ("CCD"). It was thought to be worth £10.2 million. The Croydon property was charged to an American bank to secure a debt of £5.8 million. The share capital of CCD belonged as to 70% (A shares) to a company, Ilmarish Investments Limited ("Ilmarish"), and as to 30% (B shares) to a company, Church Estates Development and Improvement Company Limited ("CEDIC"). CEDIC was wholly owned by the Church Commissioners. The shares in Ilmarish belonged as to 10% to a Mr Ellis, as to 40% to his wife, Mrs Ellis, as to a further 40% to trustees of a settlement made by Mrs Ellis and as to the remaining 10% to a Mr Lindgren. Therefore, if the company structure is ignored, Mr and Mrs Ellis and the Trustees together owned 90% of 70% of the Croydon property.
It was desired to realise the Croydon property and to distribute the net proceeds of sale. However, if this had been done in the conventional manner by selling the property and distributing the net proceeds in the winding-up of CCD and Ilmarish, it would have given rise to three cumulative charges to tax, viz. CCD would have paid corporation tax at 40% on the gain accruing on the sale of the property; Ilmarish would have borne corporation tax at 40% on the gain arising from the deemed disposal of its shares in CCD; and the Ellises, the trustees and Mr Lindgren would have borne capital gains tax on the deemed disposal of their shares in Ilmarish. This cumulative tax burden would have absorbed the majority of the proceeds of sale.
The parties went to the Bradman and Faber organisation ("Bradman") for advice as to the avoidance of this tax liability. For a fee of £300,000, Bradman devised a scheme made up of a number of constituent elements. If successful, the scheme would have given the Ellises, the trustees and (at Mr Lindgren's direction) Mr Lindgren's children a sum roughly equal to 70% of the sale price of the property free of any liability to tax. The taxpayers agreed to enter into the scheme which was duly implemented. It was immensely complicated and fell into four parts.
On 22nd March 1971, CCD granted a lease of the Croydon property to a Bradman company, "Development", for 250 years at a premium of £9,926,500, the payment of the bulk of such premium being postponed for 248 years. Taken in isolation, this disposal did not give rise to a charge to tax under the law as it then stood. On the same day, CCD sold the freehold reversion in the Croydon property to another Bradman company, "Aromeg", for £10,000. Two days later:
(a) Development paid £9,925,000 to another Bradman company, "Tishmear", in consideration of Tishmear assuming liability to pay the premium to CCD;
"(b) Development transferred the lease of the Croydon property to Aromeg for £9,929,500;
"(c) Tishmear lent to CCD £5.8 million to pay off the American bank which held a charge on the Croydon property.
This series of transactions was financed by Aromeg borrowing £10 million from a subsidiary of First National Finance Company ("FNFC"), such borrowing being secured on the Croydon property.
At the end of this stage, therefore, the leasehold and freehold in the Croydon property had merged in the hands of Aromeg, but subject to a charge for £10 million to the FNFC subsidiary. CCD had substituted for the Croydon property a postponed debt of £9,926,500, the effective debtor being Tishmear.
On 24th March 1971, Ilmarish sold its shares in CCD to a new company, "Jergil", in return for the allotment of shares in Jergil. On the same day, Jergil sold the A shares in CCD to Tishmear for £2,862,950. Out of this purchase money, £2.5 million was deposited by Jergil with FNFC. CEDIC also sold its B shares in CCD to another Bradman company and out of the proceeds of sale deposited £1,071,430 with FNFC. The purpose of these deposits was to secure the position of FNFC's subsidiary if the net proceeds of sale of the Croydon property were insufficient to discharge the debt of £10 million owed to it by Aromeg.
At the end of this stage, nothing but borrowed money had been circulated in order, so far as CCD was concerned, to substitute the right to the premium in the place of the Croydon property, and so far as Ilmarish was concerned, to substitute shares in Jergil (a company holding £2,862,950 in cash) for the A shares in CCD. The remaining problem was to substitute real cash for the money borrowed from FNFC.
Approximately one year later, on 20th March 1972, the sale of the Croydon property by Aromeg was completed at a price of £9.8 million. The real cash had arrived. Out of the proceeds, Aromeg pro tanto discharged its debt to the FNFC subsidiary. The balance of the £10 million owed to the FNFC subsidiary was made good out of the sums deposited by Jergil and CEDIC with FNFC. Those deposited monies were therefore released from further liability. Accordingly Jergil became entitled to the balance, £2.4 million, free from any fetter.
On the Bradman side of the fence, if things had rested at this stage, Tishmear would have remained liable to CCD for the premium of £9,926,500, and CCD would have remained liable to Tishmear for the loan of £5.8 million. Another piece of Bradman magic enabled CCD to sell to another Bradman company for £8,925,500 approximately 90% of its right to receive the premium for the lease. The source of this money was a new outside borrowing: the borrowed cash circulated entirely within the Bradman Group.
CCD now had cash. As a result of steps which had previously been taken (to which I will refer later) CCD was able to distribute some of this cash by way of gross dividend to its shareholders without payment of tax. On 17th March 1972 CCD paid a gross dividend of £2,399,600 to Tishmear as holder of the A shares. I will refer to this as "the abnormal dividend". CCD also repaid to Tishmear the £5.8 million it had borrowed from Tishmear to pay off the American bank.
Pausing again at this stage, Jergil, the wholly-owned subsidiary of Ilmarish, had £2.4 million in cash. The Bradman organisation had discharged its debts to outsiders and CCD was left, ostensibly, with enough assets (in the form of the right to the remaining 10% of the premium for the lease) to back its share capital. What remained to be done was to get the cash in Jergil into the hands of the Ellises, the trustees and Mr Lindgren's children.
Section 286 of the 1970 Act imposes tax on a close company (as both Ilmarish and Jergil were) which makes loans to its "participators". The Ellises, the trustees and Mr Lindgren were all "participators". Under the loan scheme, on 3rd October 1972 a Bradman company, "Interlude", borrowed £2,369,250 from FNFC. Then, on 5th October 1972, Interlude lent £972,000 each to Mrs Ellis and the trustees, £243,000 to Mr Ellis and £243,000 to Mr Lindgren's children. At the date of those loans, none of the borrowers were "participators" in Interlude, which was a wholly Bradman company. On 12th October 1972, further shares in Interlude were issued to the Bradman shareholders for £2,419,000. Then Jergil bought all the shares in Interlude from the Bradman shareholders. The end result was that monies were owed by the Ellises, the trustees and the Lindgren children to a company, Interlude, which was wholly owned, via Jergil, by Ilmarish, which in turn the borrowers themselves controlled. It was thought that liability to tax under Section 286 had been avoided.
This scheme gave rise to the following actions by the Inland Revenue:
(1) On 11th April 1974 Ilmarish was assessed to corporation tax on the disposal of the A shares in CCD in the sum of £2,855,347. An appeal by Ilmarish against that assessment was allowed by the Special Commissioners. The Revenue appealed and the appeal came before Mr Justice Vinelott at the same time as the present case. In the light of the decision of the House of Lords in Furniss v Dawson (1984) A.C. 474, Ilmarish conceded that the appeal was bound to succeed and an assessment in an agreed sum was determined by the learned judge. We were told that Ilmarish has in fact paid this tax.
(2) On 16th December 1974 CCD was assessed to corporation tax on the chargeable gain arising on the sale of the Croydon property. The Revenue's claim against CCD was apparently...
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