Cook v Billings
| Jurisdiction | England & Wales |
| Judgment Date | 07 December 2000 |
| Date | 07 December 2000 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Otton, Ward and Mummery LJ.
Michael Furness QC (instructed by the Solicitor for Commissioners of Inland Revenue) for the Crown.
Christopher Sokol (instructed by Cripps Harris Hall) for the respondants.
The following cases are referred to in the judgment:
Cadogan Estates v McMahon WLR[2000] 3 WLR 1555
Cook (HMIT) v Billings & Ors TAX[1999] BTC 220
Income tax - Relief - Business expansion scheme - Individuals qualifying for relief - Individuals connected with company - Seven individuals subscribing for ordinary shares in company - Each acquiring just under 15 per cent of issued ordinary share capital of company - All seven associates of each other - Whether each individual qualifying for relief - Whether each individual connected with company - Whether each individual to be regarded with his associates as possessing more than 30 per cent of issued ordinary share capital of company - Income and Corporation Taxes Act 1988, Income and Corporation Taxes Act 1988 section 291 subsec-or-para (4) section 291 subsec-or-para (8)ss. 291(4), (8).
In 1993 seven taxpayers were partners in the same partnership. They applied for ordinary shares in a property company called Fernhead Homes Ltd. They each held equal numbers of shares amounting in each case to just under 15 per cent of the issued share capital of the company and the voting rights. Collectively they owned 100 per cent of the shares and voting rights in the company. When they claimed tax relief under the provisions governing BES it was not in dispute that each taxpayer satisfied certain of the relief requirements in Income and Corporation Taxes Act 1988 section 291s. 291 of the Income and Corporation Taxes Act 1988 ("the 1988 Act"). Tax relief was, however, refused on the ground that in the relevant period the taxpayers did not qualify for relief as they were "connected with" the company and did not therefore satisfy the qualifying condition for relief contained inIncome and Corporation Taxes Act 1988 section 291 subsec-or-para (1)s. 291(1)(c) of the 1988 Act. The general commissioners and judge accepted the taxpayers' contention that none of them were "connected with" the company as each of them possessed less than the upper limit of 30 per cent of the issued share capital of the company set by Income and Corporation Taxes Act 1988 section 291 subsec-or-para (4)s. 291(4)(a).
Whether each of the taxpayers was "connected with" the company so that the relief was not available.
Held, allowing the Revenue's appeal; Ward LJ dissenting:
Income and Corporation Taxes Act 1988 section 291 subsec-or-para (4)Section 291(4) provided that an individual was connected with the company concerned if he directly or indirectly possessed, or was entitled to acquire, more than 30 per cent of the issued ordinary share capital of the company. Income and Corporation Taxes Act 1988 section 291 subsec-or-para (8)Subsection (8) provided:
"For the purposes of this section an individual shall be treated as entitled to acquire anything which he is entitled to acquire at a future date or will at a future time be entitled to acquire, and there shall be attributed to any person any rights or powers of any other person who is an associate of his."
The majority of the Court of Appeal held that the latter part ofIncome and Corporation Taxes Act 1988 section 291 subsec-or-para (8)subs. (8) was available for the construction of Income and Corporation Taxes Act 1988 section 291 subsec-or-para (4)subs. (4). Accordingly, all the shareholders were to be treated as owning more than 30 per cent (in fact 100 per cent) of the ordinary share capital of the company. They therefore failed to qualify for the relief.
Mummery LJ: These are seven appeals from the judgment of Laddie J on 24 May 1999. He affirmed the determinations of the general commissioners on 16 January 1997 that the taxpayers were entitled to tax relief underIncome and Corporation Taxes Act 1988 section 289s. 289 of the Income and Corporation Taxes Act 1988 ("the 1988 Act"). He dismissed the Crown's appeals, but granted unconditional permission to appeal to this court. His judgment is now reported in [1999] BTC 220.
The dispute concerns the eligibility of the taxpayers for relief from income tax in respect of their investment in a Business Expansion Scheme ("BES"). The relevant provisions, which were contained in Chapter III of Pt. VII of the 1988 Act, have been repealed as respects shares issued after 31 December 1993. They have been replaced by a new form of relief in the provisions in the Finance Act 1994 establishing the Enterprise Investment Scheme.
The appeals all involve the same essential facts. In 1993 the seven taxpayers, including Mr Andrew Billings, were partners in the same partnership. They applied for ordinary shares in a property company called Fernhead Homes Ltd ("the Company"). They each held equal numbers of shares amounting in each case to just under 15 per cent of the issued share capital of the Company and the voting rights. Collectively they owned 100 per cent of the shares and voting rights in the company.
When they claimed tax relief under the provisions governing BES it was not in dispute that each taxpayer satisfied certain of the relief requirements in Income and Corporation Taxes Act 1988 section 291 subsec-or-para (1)s. 291(1): each had subscribed for the eligible shares in a qualifying company on his own behalf and was resident and ordinarily resident in the UK at the time when the shares were issued. Tax relief was, however, refused on the ground that in the relevant period the taxpayers did not qualify for relief as they were "connected with" the Company and did not therefore satisfy the qualifying condition for relief contained in Income and Corporation Taxes Act 1988 section 291 subsec-or-para (1)s. 291(1)(c) of the 1988 Act.
Subsections (2) to (10) of Income and Corporation Taxes Act 1988 section 291s. 291 set out various circumstances in which a person is or, as the case may be, is to be regarded as, "connected with" the company. In general terms it is possible to describe those who fall within the "connected with" provisions as people who already have, or come to acquire, a stake in the well being of the company, as director or employee, or a significant degree of ownership of the company. The definition of individuals who are "connected with" the company is expanded by the introduction of references to "associates" of those individuals connected with the company.
Thus,
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(2) An individual is connected with the issuing company if he, or an associate of his, is-
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(a) an employee of the company or of a partner in the company;
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(b) a partner of the company; or
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(c) subject to subsection (3) below, a director of the company, or of another company which is a partner of that company.
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Subsection (3) provides that an individual, or an associate of his, who is a director is not connected with the company in the circumstances which are specified. They are not material to this case.
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(4) An individual is connected with the company if he directly or indirectly possesses or is entitled to acquire more than 30 per cent of-
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(a) the issued ordinary share capital of the company; or
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(b) the loan capital and issued share capital of the company; or
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(c) the voting power in the company.
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Subsection (5) contains provisions concerning the treatment of certain debts incurred by the company as included in the loan capital. They are not material.
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(6) An individual is connected with the company if he directly or indirectly possesses or is entitled to acquire such rights as would, in the event of the winding up of the company or in any other circumstances, entitle him to receive more than 30 per cent of the assets of the company which would then be available for distribution to equity holders of the company…
The remainder of that subsection is concerned with the determination of who are the equity holders of the company and of the percentage of the assets of the company to which the individual would be entitled.
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(7) An individual is connected with a company if he has control of it within the meaning of section 840.
The critical provisions are in subs. (8).
For the purposes of this section an individual shall be treated as entitled to acquire anything which he is entitled to acquire at a future date or will at a future date be entitled to acquire, and there shall be attributed to any person any rights or powers of any other person who is an associate of his.
The general commissioners and the judge accepted the taxpayers' contention that none of them were "connected with" the Company within the meaning of those provisions, as each of them possessed less than the upper limit of 30 per cent of the issued share capital of the Company set by...
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