Dawson Group Plc v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Mr Justice Mann |
| Judgment Date | 11 May 2010 |
| Neutral Citation | [2010] EWHC 1061 (Ch) |
| Date | 11 May 2010 |
| Court | Chancery Division |
[2010] EWHC 1061 (Ch)
Before: Mr Justice Mann
IN THE UPPER TRIBUNAL
ON APPEAL FROM THE FIRST-TIER TRIBUNAL (TAX CHAMBER)
(APPEAL REFERENCE SC/3178/2007, [2009] UKFTT 137 (TC))
Felicity Cullen (instructed by Richard Yates LLP(Hons) FCA CTA AHT, Chartered Accountant and Chartered Tax Adviser) for the Appellant
Daniel Margolin(instructed by The Solicitor and General Counsel for HM Revenue and Customs) for the Respondent
Hearing dates: 25 th and 26 th March 2010
Mr Justice Mann:
Introduction
This is an Appeal from a determination of Judge Colin Bishopp, sitting in the First Tier Tribunal (Tax Chamber), dated 9th June 2009, [2009] UKFTT 137 (TC). The question before him was whether or not certain expenditure incurred by the Appellant (“Dawsongroup”) was deductible in computing its profits for the purposes of corporation tax in relation to the accounting year to 31 st December 2000. The amount in question was just over £433,000.00. Dawsongroup claimed that that sum was deductible because it was an “investment company” for the purposes of section 30 of the Income and Corporation Taxes Act 1988, and that the sums in question were “disbursed as expenses of management” for the purposes of section 75(1) of the same Act. In order to succeed, Dawsongroup had to succeed on both those issues. The judge held that on the facts Dawsongroup was not an investment company, and also held that even if he had determined otherwise on the first issue, the expenses in question were not expenses of management within section 75. There had been other issues in the hearing below, but they had fallen away by the time of the decision. Dawsongroup appeals on the footing that the judge below was wrong on both counts. The representation before me was the same as it had been below – Mrs Felicity Cullen QC appeared for the taxpayer, and Mr Daniel Margolin appeared for HMRC.
Background
Dawsongroup is the holding company of a group of companies which carries on the business of renting trucks, trailers, buses, coaches and some specialist equipment. It has its origins in a haulage business which had begun in 1935. By 1988 it had adopted a group structure and in that year it became a public company and roughly 25% of its shares were floated on the London Stock Exchange. The remaining shares were held by Mr Peter Dawson, his family and trustees for his family.
In paragraph 2 of the decision the judge dealt with the background to a decision to take the company private again, reached in 2000. While the share price had originally risen after the flotation, it then declined and fluctuated around the flotation price. The directors thought that poor share performance was attributable to illiquidity because Mr Peter Dawson and his family owned 75% of the issued shares and that outside shareholders were interested in short term profits rather than allowing money to stay in the group for long term gain. A low share price impacted adversely on the reputation and standing of the company in the eyes of outsiders such as bankers and customers. There was an additional financial burden imposed as a result of Dawsongroup being listed, arising out of more stringent compliance requirements including the need for one, and later two, independent directors.
By 2000, those controlling and running Dawsongroup had come to the conclusion that it would be better if the company were no longer a listed company, and it was decided that Mr Peter Dawson and his family should make an offer to buy out the external shareholders. The offer was made, the shares were bought and the company became a private one once more. The idea of removing the company's public status was investigated and ultimately supported by the board of Dawsongroup, and money was spent in considering and implementing the offer. The £433,000.00 deduction, which is the subject of these proceedings, is the cost to the company of that exercise. That sum is a proper deduction if Dawsongroup is an investment company and if that money ranks as an expense of management. Hence the issues arising below and on this appeal.
I shall have to consider the activities of Dawsongroup and its subsidiaries in more detail below, but in order to understand the narrative and criticism of the decision it is necessary to have an outline understanding at this stage. Dawsongroup was a holding company in the sense that it owned the shares of the other companies in the group. Some of the shareholdings were indirect – that is to say, Dawsongroup's directly owned subsidiaries themselves owned the shareholding in other companies. The group's trading activities were carried out by various of those subsidiaries. From time to time the board of Dawsongroup considered the acquisition of other companies to add to the group. Usually these ideas were rejected, but on occasions companies were purchased. Ultimately the activities of the trading subsidiaries were controlled by Dawsongroup's board, but day to day trading decisions were taken by the subsidiaries in question. Dividends were paid up into Dawsongroup, and Dawsongroup itself distributed its own profits. To that extent the structure was a typical group structure.
However, there was one additional feature of its activities. As well as conducting those activities Dawsongroup itself conducted trading activities. Those activities were the provision of services to the rest of the companies in the group. These included centralised treasury functions (Dawsongroup did the borrowing required by the group, and on-lent to the subsidiaries), company secretarial services, IT services, some legal services and other services which were more conveniently and economically acquired centrally and distributed into the group. These services were significant and an arm's length charge was made to the subsidiaries for them. It was common ground that this amounted to a trading activity, and did not amount to “making investments” for the purposes of section 130.
Legislative Provisions
Section 130 of the 1988 Act defines “investment company”:
“In this Part of this Act 'investment company' means any company whose business consists wholly or mainly in the making of investments and the principal part of whose income is derived therefrom…”
As the judge accepted, and as the parties agreed, there are two distinct parts of the definition. The first relates to the nature of the business (“whose business consists wholly or mainly in the making of investments”), and the second relates to the proportion of the income of the company which comes from that business. It is common ground on the facts of this case that the second part of this test is fulfilled. The dispute turns on the first part.
Section 75(1) of the 1988 Act deals with the nature of the expenses which are at issue in this case:
“In computing for the purposes of corporation tax the total profits for any accounting period of an investment company resident in the United Kingdom there shall be deducted any sums disbursed as expenses of management (including commissions) for that period, except any such expenses as are deductible in computing profits apart from this Section.”
The decision appealed from
The judge below started his decision by setting out some background. In paragraph 2 he set out the background to the decision to take the company private. He said:
“Unfortunately, the flotation was not a success. Although the price of the shares increased significantly for a time, it later subsided and remained at or about the flotation price. The Directors' belief was that the poor share value performance was a consequence of two principal clauses: the fact that the majority shareholder, Peter Dawson, and his family owned almost three-quarters of the shares, making the market in them illiquid; and the fact that outside investors were more concerned about short-term profits than long-term growth which was the goal of the 'family' shareholders, a factor which made the strategic management of the Group difficult. Another material consideration was the additional financial burden imposed on the company by reason of its being listed, including the cost of more stringent compliance requirements, one of which was the obligation that its Board should include initially one and later two independent Directors.”
He then goes on to place the disputed expenditure in the context of the implementation of that decision.
From paragraph 6, he goes on to consider the first question, namely the “investment company” question. He correctly identifies the fact that the question is one of fact. At paragraph 9 he referred to a statement of agreed facts (which has been before me as well), supplemented by the oral evidence of the then Finance Director, Mr Clive Gear. In paragraph 10 he sets out the structure of the group and Dawsongroup's position in that structure and describes some of the activities. He then moves on to consider some of the authorities to which he was referred. In the course of this discussion he is said by Mrs Cullen to have committed various errors of exposition which she says demonstrate his misperception of the proper test to be applied.
The meat of his decision came in paragraph 25:
“25.I agree with Mr Margolin that the critical tests are those adumbrated by Lightman J in the final sentence of the extract from his judgment in Cook v Medway Housing Society, which I have set out above, and by Teevan J in Monteagle Estate. Though I accept that it is possible to be simultaneously a trading company and an investment company, I have reached the clear conclusion that Dawsongroup is a trading company which carries out its business by means of subsidiaries which it controls, that it holds the shares in its...
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