Bullivant Holdings Ltd v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 12 June 1998 |
| Date | 12 June 1998 |
| Court | Chancery Division |
Chancery Division.
Ferris J.
Richard Bramwell QC (instructed by Harfield Pickering, Redditch) for Holdings.
Christopher Tidmarsh (instructed by the Solicitor of Inland Revenue) for the Crown.
The following case was referred to in the judgment:
Edwards (HMIT) v BairstowTAX (1954) 36 TC 207
Corporation tax - Chargeable gains - Acquisition cost - The Revenue accepted that half the share capital of a company had a value of £350,000 while two of the shareholders, whose holdings amounted to half of the equity had only received £12,500 each for their holdings - Whether, on a mistake claim, acquisition price of the two shareholders' shares should be deemed to be market value - Taxes Management Act 1970 section 33Taxes Management Act 1970, s. 33;Taxation of Chargeable Gains Act 1992 section 17 subsec-or-para (1)Capital Gains Tax Act 1979, s. 29A(1)(a) (Taxation of Chargeable Gains Act 1992 section 17 subsec-or-para (1)Taxation of Chargeable Gains Act 1992, s. 17(1)(a)).
This was an appeal by the taxpayer ("Holdings") against a decision of a special commissioner that Holdings had acquired certain shares by way of a bargain at arm's length.
In May 1984 Holdings acquired from two shareholders two equal lots of shares in a company, HBH, representing 50 per cent of the company's issued share capital for a total of £25,000. The other 50 per cent of the HBH share capital had been held by a director, but was transferred to Holdings by way of share exchange.
Assessments were made on Holdings in respect of the years ending 31 March 1986 and 1988 on the basis that the acquisition cost of the two shareholders' shares was £25,000. On an error or mistake claim under theTaxes Management Act 1970 section 33Taxes Management Act 1970, s. 33, the Revenue agreed a market value of £350,000 for the director's shares on the basis of a transaction between connected persons pursuant to the Taxation of Chargeable Gains Act 1992 section 18 section 17 subsec-or-para (1)Capital Gains Tax Act 1979, s. 62 and s. 29A(1)(a). But they rejected Holdings' claim that the other two shareholders' shares had been acquired otherwise than by way of a bargain at arm's length and were also to be treated as an acquisition at market value, which could not be so much less than the director's shares.
Held, dismissing Holdings' appeal:
The director as such was a person connected with Holdings to be treated as disposing of his shares at market value, but the other two shareholders had to show as a question of fact that their bargain was otherwise than at arm's length. Thus it had to be asked whether the only true and reasonable conclusion from the evidence was one which contradicted the special commissioner's decision that £25,000 was a price negotiated at arm's length. There were possible explanations for the low price paid for the two shareholders' shares and the answer was in the negative.
By originating motion pursuant to the Taxes Management Act 1970 section 56ATaxes Managment Act 1970, s.56A (as substituted by SI 1994/1813 with effect from 1 September 1994), the taxpayer appealed to the High Court against the following decision Sp C 132 of a special commissioner (Mr Stephen Oliver QC) released on 24 July 1997.
Bullivant Holdings Ltd, the taxpayer, appeals against the part refusal of an "error or mistake" claim for its accounting periods 31 March 1986 and 31 March 1988. The claim concerned the expenditure to be treated as allowed for capital gains tax purposes in respect of three blocks of shares acquired by Bullivant Holdings in HBH Publishing Ltd (HBH). At the time of all three acquisitions, Bullivant Holdings was controlled by Mr Christopher Bullivant.
(2) Acquisition number one was of Mr Christopher Bullivant's 50 per cent shareholding in HBH by way of shelf share exchange on 26 September 1983. This was a "connected persons" transaction: see Taxation of Chargeable Gains Act 1992 section 286Capital Gains Tax Act1979 s. 63. HBH's acquisition cost of these shares had, following the acquisition, been recorded by Bullivant Holdings as £22,500. Following resolution of the error or mistake claim in relation to the acquisition cost of this block of shares, a figure of £350,000 had been agreed with the Revenue.
(3) Acquisition number two was of the 25 per cent shareholding in HBH owned, by a Mr Geoffrey Hickman. This was not a connected person's transaction. The acquisition took place in May 1984 on exercise of an option granted for a consideration of £1 by agreement of 26 September 1983. The cash price payable to Mr Hickman on exercise of the option was £12,500.
(4) Acquisition number three was of Mrs Jeanette Wilde's 25 per cent shareholding in HBH. Again this was not a connected person transaction and the acquisition took place in May 1984 on exercise of the option in the same option agreement (to which Mr Hickman, Mrs Wilde and Bullivant Holdings had been parties) as related to Mr Hickman's 25 per cent holding. The cash price paid to Mrs Wilde was £12,500.
The error or mistake claim sought to ascribe an acquisition consideration equal to market value, in place of the £12,500, to each of the acquisitions from Mr Hickman and Mrs Wilde. The basis on which the claim was founded was that acquisitions two and three were otherwise than by way of bargains made at arm's length. As a result s. 29A ofTaxation of Chargeable Gains Act 1992 section 17Capital Gains Tax Act 1979 applied and Bullivant Holdings was to be treated as having acquired the two 25 per cent holdings at market values and not at £12,500 each. The claim was rejected and Bullivant Holdings appealed. The question for my determination is whether in principle Taxation of Chargeable Gains Act 1992 section 17 subsec-or-para (1)s. 29A(1)(a)applies to acquisitions two and three. I am not at this stage asked to determine any valuation issues, always assuming that I decide the point in favour of Bullivant Holdings.
Taxation of Chargeable Gains Act 1992 section 17 subsec-or-para (1)Section 29A(1)(a) is the only relevant statutory provision. It reads as follows:
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(1) Subject to the provisions of this Act, a person's acquisition or disposal of an asset shall for the purposes of this Act be deemed to be for a consideration equal to the market value of the asset -
(a) where he acquires or, as the case may be, disposes of the asset otherwise than by way of a bargain made at arm's length, and in particular where he acquires or disposes of it by way of gift or on a transfer into settlement by a settlor or by way of distribution from a company in respect of shares in the company …
The issue between the parties is whether, as was claimed for Bullivant Holdings and refuted by the inspector, Bullivant Holdings' acquisitions of the two 25 per cent holdings from Mr Hickman and Mrs Wilde were not in pursuance of bargains at arm's length. The case for Bullivant Holdings in essence is that the two acquisitions were on dictated terms which Mr Hickman and Mrs Wilde were forced to accept in order to secure advantageous sales of shares owned by each of them in Bullman Publishing Ltd to a company called Business Press International Ltd (a subsidiary of Reed International plc). Bullivant Holdings was, as I have mentioned, "connected" with neither Mr Hickman nor Mrs Wilde. The outcome therefore depends essentially on the facts. In Berry v Warnett [1982] BTC 239; 55 TC 92, the issue arose, in circumstances that are not comparable to the present, whether shares had been disposed of and acquired "otherwise than under a bargain made at arm's length" as found in Finance Act 1965 s. 22(4)(a) . The following passage from the judgment of Buckley LJ at 55 TC at p. 124 (which was adopted by Lord Wilberforce when the appeal was heard in the House of Lords ([1982] BTC at p. 242; 55 TC at p. 128) is, however, in point:
It seems to me that the language of sec. 22(4)(a) poses the question whether the acquisition of the asset (in this case the shares and stock) was the subject matter of a bargain between the disponer and the disponee (in this case the taxpayer and the trustees) which was at arm's length. The object of this provision is surely to ensure that market value is treated as the consideration actually given for the disposal of the asset where the circumstances are not such as to demonstrate that a full and fair price was paid for it. The fact that someone other than the disponee can be taken to have paid a full and fair price for something other than the subject matter of the disposal under consideration has no bearing on this.
I heard oral evidence from Mr Christopher Bullivant, director of Bullivant Holdings and a director of HBH and Bullman Publishing. I heard oral evidence from Mr Hickman, a director of Bullman Publishing. I was provided with documentary evidence which included the following:
(2) The option agreement of 26 September 1983.
(3) A clearance application made for the purposes of Income and Corporation Taxes Act 1988 section 707Income and Corporation Taxes Act 1970, s. 464 and Taxation of Chargeable Gains Act 1992 section 138Capital Gains Tax Act 1979, s. 88.
(4) A side letter from Bullivant Holdings to Mr Hickman and Mrs Wilde dated 26 September 1983: this referred to their service agreements for five years at initial salaries of £8,500 (increasing) and contained certain undertakings by Bullivant Holdings designed to protect the positions of Mr Hickman and Mrs Wilde.
(5) A letter of 11 October 1993 from Bullivant Holdings to the Inland Revenue which made submissions as to the value of the holdings acquired by Bullivant Holdings on 26 September 1983.
(6) Annual accounts of HBH for the periods to 30 June 1981, 30 June 1982, 30 June 1983 and for the period from 1 July 1983 to 31 March 1984.
(7) Annual accounts for Bullman Publishing for the period to 31 March 1984.
(8) Accounts for Solihull Publishing Co Ltd for the six month period from 1...
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