Dunlop International AG v Pardoe (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 05 March 1998 |
| Date | 05 March 1998 |
| Court | Chancery Division |
Chancery Division.
Lightman J.
David Milne QC and Elizabeth Wilson (instructed by Eversheds) for the taxpayer.
Michael Furness (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
NAP Holdings UK Ltd v Whittles (HMIT) TAXTAX[1992] BTC 37; [1994] BTC 450 (HL)
Vestey v IR CommrsELR [1980] AC 1148
Wicks v Firth (HMIT) TAXELR[1982] BTC 402; [1983] 2 AC 214
Corporation tax - Chargeable gains - Company ceasing to be member of group - Whether principal company becoming non-resident a "chargeable company" - Whether relief available to company which acquired an asset from a company which was member of the group at the time of acquisition but ceased to be member of group on becoming non-resident -Taxation of Chargeable Gains Act 1992 section 178Income and Corporation Taxes Act 1970, s. 278(1)-(4) (Taxation of Chargeable Gains Act 1992 section 178 section 179Taxation of Chargeable Gains Act 1992, ss. 178, 179).
This was an appeal by the taxpayer ("DIAG") against a decision of the special commissioners that a charge to capital gains tax under theTaxation of Chargeable Gains Act 1992 section 178Income and Corporation Taxes Act 1970, s. 278(3) arose when the principal company of a group left the group on becoming resident outside the UK.
Before 31 May 1978 DIAG was a company resident in England carrying on business as an investment holding company with investments in UK and overseas companies. It was for the purposes of the Taxation of Chargeable Gains Act 1992 section 170Income and Corporation Taxes Act 1970, s. 272 the principal company of a group ("the International group") which included a subsidiary, "Plantations".
In 1973 Plantations transferred its 80 per cent holding in a Malaysian company to a UK company ("Moorgate") in consideration for the issue of 99.99 per cent of the shares in Moorgate to Plantations. Moorgate thereby became a member of the International group. Moorgate immediately sold 29 per cent of the shares in the Malaysian company, retaining 51 per cent, valued at nearly £11m.
By an agreement dated 16 March 1978, Moorgate sold the retained shares in the Malaysian company ("the shares") to DIAG for over £17m. As DIAG and Moorgate were members of the same group Taxation of Chargeable Gains Act 1992 section 171s. 273 of the 1970 Act applied so as to give rise to no gain and no loss.
On 31 May 1978, in accordance with Treasury consent underTaxation of Chargeable Gains Act 1992 section 765s. 482 of the 1970 Act and with Bank of England exchange control consent, DIAG ceased to be resident in the UK. As a result of DIAG's change of residence the International group ceased to exist, and Plantations and Moorgate constituted a new group with Plantations as the principal company.
The first question was whether the Taxation of Chargeable Gains Act 1992 section 178Income and Corporation Taxes Act 1970, s. 278 could apply to the principal company of a group. DIAG contended that s. 278 could not apply because, as principal company of the International group, DIAG would never cease to be a member of the International group: it remained the principal of the group, even though the group no longer had any other members.
If Taxation of Chargeable Gains Act 1992 section 178s. 278 did apply to a principal company, the second question was whether it applied where the shares left the group, not on a transfer outside the group but, by DIAG ceasing to be resident in the UK. DIAG contended that Taxation of Chargeable Gains Act 1992 section 178s. 278(1) was not intended to apply where a company ceased to resident in the UK for two reasons. First, in 1978 the consent of the Treasury and the Bank of England was required, which could be made obtainable on terms that appropriate provision was made to avoid any loss of tax to the Revenue. Secondly, Taxation of Chargeable Gains Act 1992 section 178s. 278 was enacted only for the specific purpose of suppressing an abuse known as the "envelope trick".
If Taxation of Chargeable Gains Act 1992 section 178s. 278 applied when DIAG left the group, the third question was whether DIAG was exempted from the charge by Taxation of Chargeable Gains Act 1992 section 178s. 278(2), which excepted the application of Taxation of Chargeable Gains Act 1992 section 178s. 278(1) where there had been an acquisition by one associated company from another and both companies ceased to be members of the group at the same time. DIAG contended that when the International group ceased to exist on DIAG's change of residence, both Moorgate, and DIAG, from which Moorgate acquired the shares, must be taken to have left the group. It was sufficient that the members of the group who were parties to the acquisition in question (DIAG and Moorgate) were "associated companies" until the moment they ceased to be members of the group. The Revenue contended that Taxation of Chargeable Gains Act 1992 section 178s. 278(2) looked at the situation arising on cesser of membership of the group.
Held, dismissing DIAG's appeal:
1. A "principal company" was defined by Taxation of Chargeable Gains Act 1992 section 170 subsec-or-para (2) section 170 subsec-or-para (2)ss. 272(1)(b) and (c) as a company of which another company was a 75 per cent subsidiary and required at least one subsidiary to form a group. Accordingly, on DIAG ceasing to be resident in the UK, and on its subsidiaries ceasing to be members of the International group, DIAG likewise ceased to be both the principal and a member of the group. Thus, unless exempted by Taxation of Chargeable Gains Act 1992 section 178s. 278(2), DIAG became a "chargeable company" subject to the charge under Taxation of Chargeable Gains Act 1992 section 178s. 278(3).
2. That any loss to the Revenue would have been avoided by the necessity for consents did not mean that Taxation of Chargeable Gains Act 1992 section 178s. 278 was not intended to prevent avoidance by change of residence as well as by the "envelope trick". Legislation as the means of countering tax avoidance had obvious advantages over recourse to the exercise of administrative discretion. Although the envelope trick might have been the primary mischief which prompted the enactment of Taxation of Chargeable Gains Act 1992 section 178s. 278, its language was apposite to a company ceasing to be a member of a group for any reason.
3. Reading the definition of "associated companies" inTaxation of Chargeable Gains Act 1992 section 178 subsec-or-para (8)s. 278(4) into Taxation of Chargeable Gains Act 1992 section 178 subsec-or-para (2)s. 278(2), the subsection would read: "where two or more companies [who by themselves would form a group of companies] cease to be members of the group at the same time". The language of Taxation of Chargeable Gains Act 1992 section 178 subsec-or-para (2)s. 278(2) focused on the moment when the companies ceased to be members. That was the moment when the relieving conditions inTaxation of Chargeable Gains Act 1992 section 178 subsec-or-para (2)s. 278(2) had to be satisfied. It was at that time that the companies leaving the group had to be "associated". The group that "would" be formed was a different group than that ceasing to exist. Therefore, the necessary relationship of "associated companies" did not subsist when DIAG and Moorgate ceased to be members of the International group. Moreover, the benefit of the relief underTaxation of Chargeable Gains Act 1992 section 178 subsec-or-para (2)s. 278(2) required one of the companies to be a subsidiary of the other and both to continue to be resident in the UK.
By originating motion pursuant to the Taxes Management Act 1970 section 56ATaxes Management Act 1970, s. 56A (as amended by SI 1994/1813) with effect from 1 September 1994), the taxpayer, Dunlop International AG, appealed to the High Court against the following decision of the special commissioners (Mr Malcolm JF Palmer and Dr JF Avery Jones (Lion v Inspector of Taxes Sp C 115)), sitting in private.
1. This is an appeal by Dunlop International AG (formerly Dunlop International Ltd) ("DIAG") against an estimated assessment made in 1979 on profits chargeable to corporation tax for the period ended 31 May 1978. The agreed issue for determination by us is whether a charge to corporation tax underTaxation of Chargeable Gains Act 1992 section 178 subsec-or-para (3)s. 278(3)Income and Corporation Taxes Act 1970 was triggered by the transfer of the residence of DIAG from the UK on 31 May 1978, so that DIAG is deemed to have sold and immediately re-acquired at market value shares in Dunlop Estates Berhad on 16 March 1978, or whether on the other hand Taxation of Chargeable Gains Act 1992 section 178s. 278 is prevented from applying by virtue of s. 278(2).
2. Mr David Milne QC appeared on behalf of DIAG and Mr Michael Furness appeared on behalf of the Crown. No oral evidence was given, but we were given an agreed statement of facts which we adopt to the extent not set out in this decision. We were also given on behalf of DIAG a file of 11 indexed documents, which mostly consisted of correspondence relating to the applications for consents from the Bank of England and from the Treasury under Taxation of Chargeable Gains Act 1992 section 765s. 482Income and Corporation Taxes Act 1970 for the transfer of residence of DIAG, and on behalf of the Crown a file of a further 11 indexed documents consisting of correspondence between DIAG's advisers and the Revenue, to which Mr Furness made no reference.
3. The following are the facts in so far as relevant to our decision.
4. At all relevant times prior to 31 May 1978 DIAG was a company incorporated with limited liability resident in the UK carrying on business as an investment holding company with investments in UK and overseas companies. During this time it was the principal company of a group of...
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