DMWSHNZ Ltd (in members' voluntary liquidation) v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judge | Lord Justice Moore-Bick,Sir Timothy Lloyd |
| Judgment Date | 20 October 2015 |
| Neutral Citation | [2015] EWCA Civ 1036 |
| Date | 20 October 2015 |
| Docket Number | Case No: A3/2014/1405 |
| Court | Court of Appeal (Civil Division) |
[2015] EWCA Civ 1036
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND TRIBUNAL CHAMBER)
Mr Justice Rose
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Moore-Bick
Lord Justice Lewison
and
Sir Timothy Lloyd
Case No: A3/2014/1405
Graham Aaronson QC and MS ZIZHEN YANG (instructed by Ernst & Young LLP) for the Appellant
Michael Gibbon QC (instructed by General Counsel and Solicitor to HM Revenue & Customs) for the Respondents
Hearing date: 7 October 2015
The issue on this appeal is whether a gain accruing to one company in a group of companies can be set off against a loss accruing to another company in the same group for the purposes of corporation tax on capital gains. This turns on whether the taxpayer and its sister company made a valid election under section 171A of the Taxation of Chargeable Gains Act 1992 (" TCGA"). Both the First Tier Tribunal (Judge Jonathan Cannan and Mrs Caroline de Albuquerque) and the Upper Tribunal (Rose J) held that they did not. The decision of the FTT is at [2013] UKFTT 37 (TC), [2013] SFTD 648; and that of the UT is at [2014] UKUT 98 (TCC), [2014] STC 1440. The taxpayer appeals with the permission of the UT. For the reasons that follow, I would dismiss the appeal.
I can take the facts verbatim from the decision of the FTT. Unless otherwise stated all references to legislation are references to the TCGA as it stood at the time of the relevant events.
Until 22 October 2003 DMWSHNZ Ltd ("the appellant") was a member of the Bank of Scotland Group. Until that time its name was BOS Holdings (New Zealand) Ltd.
On 9 September 1998 the appellant sold its shares in Countrywide Banking Corp Ltd, its wholly-owned New Zealand subsidiary. The consideration was NZ$ 850,000,000 and was satisfied by ten-year unsecured floating rate notes 2008 ("the Loan Notes"). The Loan Notes were qualifying corporate bonds for the purposes of capital gains tax ("CGT"). As such, a gain crystallised on the disposal of the shares but that gain would only be charged to tax on a future triggering disposal. In 2002 the held-over gain was £203,753,103.
In 2003 Bank of Scotland was owed £42,150,000 by an investment trust called Geared Income Investment Trust plc ("Geared Income"). Lloyds TSB Bank plc was owed a similar amount. Together the two banks appointed joint administrative receivers. The effect of this was that capital losses realised by Geared Income would be allowable for CGT. Geared Income thereby realised capital losses on its investments of approximately £180m.
A planned re-structuring was then put in place with a view to effectively setting off Bank of Scotland's share of the losses in Geared Income against some of the held-over gains.
Pursuant to the re-structuring certain transactions took place. The following steps are relevant for present purposes and are described with some simplification:
i) Geared Income's investments were divided equally and transferred to two newly created subsidiaries. One of these subsidiaries was called GIIT Realisations 1 Ltd ("GR1") and was for the benefit of Bank of Scotland. At the same time a further subsidiary of Geared Income was set up called GIIT Realisations 3 Ltd ("GR3") also for the benefit of Bank of Scotland.
ii) Geared Income then transferred 26% of its shares in GR1 outside the Geared Income capital gains group. The effect of this was to crystallise capital losses in GR1 of approximately £92m.
iii) The shares in the appellant were re-structured and on 22 October 2003 the resulting 'A' shares were purchased by GR3. At that time therefore the appellant and GR3 formed part of the same capital gains group.
iv) On 28 October 2003 the appellant served notice on NBNZ requiring repayment of NZ$370m Loan Notes.
v) On 28 November 2003 NZ$370m was repaid by NBNZ to the appellant bringing into charge to tax a held-over gain of £88,692,527.
vi) On 1 December 2003 GR1 and GR3 made a joint election pursuant to section 179A to treat the £92m losses at step (ii) as accruing to GR3 rather than GR1. Both parties agreed that this election was effective.
vii) Also on 1 December 2003 the appellant and GR3 made a joint election pursuant to s 171A to deem the disposal on repayment of the Loan Notes at step (v) to have been made by GR3 rather than the appellant.
It is the effectiveness of step (vii) which is the subject of this appeal. If it was effective then the chargeable gain at step (v) would accrue to GR3 and it could offset the losses accruing to it at step (vi).
It was not suggested by HMRC that if the re-structuring achieved the intended objective, it was anything other than legitimate tax planning on the part of the appellant and Bank of Scotland. Indeed HMRC accepted that a variation of the structure involving a disposal of the NZ$370m Loan Notes to a third party at a time when the debt remained outstanding, rather than repayment to the appellant, could have been effective. The appellant did make attempts to sell the Loan Notes to a number of third-party financial institutions but was unable to find a buyer at an acceptable price.
A company is chargeable to corporation tax on chargeable gains computed in accordance with the TCGA and accruing to a person "on the disposal of assets": s. 1. All "forms of property" are assets for the purposes of the Act; and debts are specifically included: s. 21 (1) (a). The word "disposal" is not comprehensively defined by the TCGA but there are a number of provisions which elucidate its meaning. Many of them are in Chapter II of the Act. Thus section 22 (1) provides that there is a disposal of assets by their owner where any capital sum is derived from an asset "notwithstanding that no asset is acquired by the person paying the capital sum"; and it goes on to give examples such as sums received as compensation or damages, and sums received under a policy of insurance. Section 24 (1) provides that there is a disposal of an asset where it is lost, destroyed, dissipated or extinguished. Under section 161 where an asset acquired otherwise than as trading stock is appropriated to trading stock it is treated as having been sold at market value.
Section 25 creates a deemed disposal where an asset ceases to be a chargeable asset because it ceases to be situated in the United Kingdom. In such a case the asset is deemed to have been sold and reacquired at market value. The FTT referred to other situations where the TCGA creates deemed disposals; for example:
i) Where a company acquired an asset from a group company and then ceases to be a member of the group. In such a case the company is treated as having sold the asset at market value and to have immediately reacquired it: section 179.
ii) Where an asset ceases to be chargeable by virtue of ceasing to be dedicated to an oil field. In such a case it is deemed to have been disposed of at market value and immediately reacquired: section 199.
It is clear, then, that there are situations in which a disposal takes place without any corresponding acquisition of the asset which is the subject of the disposal. It is also clear that in some cases the Act specifies not only a deemed disposal but also a deemed acquisition (or reacquisition).
So far as debts are concerned, section 251 (2) provides that the satisfaction of a debt or part of it (including a debt on a security) is treated as a disposal of the debt or of that part by the creditor made at the time when the debt or that part is satisfied. I shall return to section 251 in due course.
Section 171 provided for the effect of transfers between members of groups of companies. At the time of the events with which we are concerned it provided so far as relevant as follows:
"'171 Transfers within a group: general provisions
(1) Where—
(a) a company ("company A") disposes of an asset to another company ("company B") at a time when both companies are members of the same group, and
(b) the conditions in subsection (1A) below are met,
company A and company B are treated for the purposes of corporation tax on chargeable gains as if the asset were acquired by company B for a consideration of such amount as would secure that neither a gain nor a loss would accrue to company A on the disposal …
(2) Subsection (1) above shall not apply where the disposal is—
(a) a disposal of a debt due from Company B effected by satisfying the debt or part of it; or
(b) a disposal of redeemable shares in a company on the occasion of their redemption; or
(c) a disposal by or to an investment trust; or
(cc) a disposal by or to a venture capital trust; or
(cd) a disposal by or to a qualifying friendly society; or
(d) a disposal to a dual resident investing company; …
(4) For the purposes of subsection (1) above, so far as the consideration for the disposal consists of money or money's worth by way of compensation for any kind of damage or injury to assets, or for the destruction or dissipation of assets or for anything which depreciates or might depreciate an asset, the disposal shall be treated as being to the person who, whether as an insurer or otherwise, ultimately bears the burden of furnishing that consideration."
As Rose J explained in the UT at [9]:
"This meant that if Company A had an asset that it wanted to sell which would generate a capital gain and Company B in the same group had an asset that it wanted to sell which would generate a capital loss, Company A could transfer its asset to Company B without thereby generating a gain, Company B could then sell both assets and set the loss on one off against the gain on the other. … The First-tier Tribunal described s 171 as...
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