Dunlop International AG v Pardoe (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 30 July 1999 |
| Date | 30 July 1999 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Peter Gibson, Pill and Chadwick LJJ.
David Milne QC and Elizabeth Wilson (instructed by Eversheds) for DIAG.
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; 67 TC 166
Wicks v Firth (HMIT) TAXTAX[1982] BTC 402; 56 TC 318
Corporation tax - Chargeable gains - Principal company ceased to be member of group on becoming non-resident in the UK - Company leaving the group had acquired shares from another group member - Whether chargeable gain arose when the company became non-resident - Income 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 against a decision of Lightman J ([1998] BTC 117), upholding the decision of the special commissioners that a chargeable gain arose when Dunlop International AG ("DIAG") left the Dunlop International Group ("the International Group") on becoming resident in Switzerland.
Before May 1978 DIAG was a company resident in England carrying on business as a holding company with investments in UK and overseas companies. It was for tax purposes the principal company of a group which included a subsidiary, Dunlop Plantations Ltd ("Plantations").
In 1973 Plantations transferred its 80 per cent holding in a Malaysian company ("Berhad") to a UK company ("Moorgate") in consideration for the issue of 99.9 per cent of the shares in Moorgate to Plantations. Moorgate thereby became a member of the International Group. Moorgate immediately sold 49 per cent of the shares in Berhad, retaining 51 per cent valued at nearly £11m. By an agreement dated 16 March 1978, Moorgate sold the retained shares in Berhad to DIAG for over £17m.
On 31 May 1978, in accordance with Treasury consent 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 effect of the Taxation of Chargeable Gains Act 1992 section 171 subsec-or-para (1)Income and Corporation Taxes Act 1970, s. 273(1) was that on the sale on 16 March 1978 of the Berhad shares by Moorgate, DIAG was treated as if it had acquired that asset for a consideration of such amount as would secure that neither a gain nor a loss would accrue to Moorgate on Moorgate's disposal. But ifTaxation of Chargeable Gains Act 1992 section 178 subsec-or-para (3)s. 278(3) of the 1970 Act was applicable, DIAG would also be treated as if, immediately after its acquisition of the Berhad shares on 16 March 1978, it had sold and immediately re-acquired the Berhad shares at market value at that time.
For Taxation of Chargeable Gains Act 1992 section 178 subsec-or-para (3)s. 278(3) to be applicable, three conditions had to be satisfied:
(2) DIAG must have ceased to be a member of the International Group within the meaning of Taxation of Chargeable Gains Act 1992 section 170 subsec-or-para (2) section 170 subsec-or-para (10)ss. 272(1) and (3) on ceasing to be resident in the UK on 31 May 1978;
(3) DIAG must, at the time when it ceased to be a member of the International Group, have been a "chargeable company" for the purposes of Taxation of Chargeable Gains Act 1992 section 178 subsec-or-para (3)s. 278(3); and
(4) both Moorgate and DIAG must have ceased to be associated companies within Taxation of Chargeable Gains Act 1992 section 178 subsec-or-para (8)s. 278(4) i.e. companies which, by themselves, would form a group.
A case was removed from Taxation of Chargeable Gains Act 1992 section 178 subsec-or-para (1) section 178 subsec-or-para (3)ss. 278(1) and (3) by Taxation of Chargeable Gains Act 1992 section 178 subsec-or-para (2)s. 278(2) in respect of an acquisition by one associated company from another, where those companies ceased to be members of the group at the same time. The question was whether it was enough that the companies were "associated companies" within Taxation of Chargeable Gains Act 1992 section 178 subsec-or-para (8)s. 278(4)(a) immediately before they each ceased to be members of the old group; or whether they had to be associated companies (in a new group) immediately after they had each ceased to be members of the old group.
DIAG contended that none of the three conditions were satisfied. The main argument relied on the third condition, whether Taxation of Chargeable Gains Act 1992 section 178 subsec-or-para (2)s. 278(2) removed this case from Taxation of Chargeable Gains Act 1992 section 178 subsec-or-para (1) section 178 subsec-or-para (3)s. 278(1) and (3). If for the purposes of Taxation of Chargeable Gains Act 1992 section 171 subsec-or-para (4)s. 273(3) it was necessary to look at the position immediately before a company ceased to be a member of a group, a different test, looking at the position immediately after the company ceasing to be a member of the group, could not be applied in applying Taxation of Chargeable Gains Act 1992 section 170 subsec-or-para (9)s. 272(2).
Held, dismissing DIAG's appeal:
1. DIAG could not remain a member of the group of which it was formerly the principal company within the meaning of Taxation of Chargeable Gains Act 1992 section 170 subsec-or-para (2) section 170 subsec-or-para (10)ss. 272(1) and (3) once the group had ceased to exist, so the first condition was satisfied.
2. The second condition was also satisfied. DIAG and Moorgate were not "associated companies" when DIAG ceased to be a member of the group. The relevant time was immediately after, not immediately before DIAG left the group.
3. DIAG and Moorgate were associated companies until each ceased to be a member of the International Group on 31 May 1978. Thereafter, DIAG and Moorgate were not associated companies. If Taxation of Chargeable Gains Act 1992 section 178 subsec-or-para (2)s. 278(2) required that DIAG and Moorgate remained associated companies after each ceased to be a member of the International Group on 31 May 1978, then it did not remove the present case from Taxation of Chargeable Gains Act 1992 section 178 subsec-or-para (1) section 178 subsec-or-para (3)ss. 278(1) and (3).
4. The section was intended to counter tax avoidance schemes whereby the transferee company could take an asset out of the group while preventing any gain crystallising on a subsequent disposal. That purpose would be defeated if DIAG's argument were accepted. It was possible to read Taxation of Chargeable Gains Act 1992 section 178s. 278 either way, but since there was an equally tenable construction of Taxation of Chargeable Gains Act 1992 section 171 subsec-or-para (2)s. 273(2) which did not defeat that purpose, that construction should be adopted. It followed that Taxation of Chargeable Gains Act 1992 section 178 subsec-or-para (2)s. 278(2) of the 1970 Act did not take DIAG out of Taxation of Chargeable Gains Act 1992 section 178 subsec-or-para (1) section 278 subsec-or-para (3)ss. 278(1) and (3).
Chadwick LJ: This is an appeal against the order made on 5 March 1998 by Lightman J ([1998] BTC 117) dismissing an appeal under Taxes Management Act 1970 section 56A subsec-or-para (1)s. 56A(1) of the Taxes Management Act 1970 by Dunlop International AG ("DIAG") from the decision of the commissioners for the special purposes of the Income Tax Acts dated 7 January 1997. The issue on this appeal, as it was both before the special commissioners and the judge, is whether a charge to corporation tax arose, by virtue of the provisions in Taxation of Chargeable Gains Act 1992 section 178 subsec-or-para (3)s. 278(3) of the Income and Corporation Taxes Act 1970 on the transfer of residence of DIAG from the UK to Switzerland on 31 May 1978, in respect of a disposal of an asset to DIAG by a subsidiary pursuant to an agreement made on 16 March 1978. The fact that this dispute has taken so extraordinarily long to be litigated has not been explained and is not a matter for which either side reproaches the other.
The facts, which have not been in dispute, are set out at para. 4-8 in the decision of the special commissioners:
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 companies (the "International Group") for the purposes ofTaxation of Chargeable Gains Act 1992 section 170s. 272 of the Income and Corporation Taxes Act 1970 that included Dunlop Plantations Limited ("Plantations"). Until some time between 22 December 1977 and 4 April 1978 the International Group also included four other resident group companies.
5. Prior to 19 October 1973 Plantations owned 80 per cent of the issued shared capital in Dunlop Estates Berhad ("Berhad"), a Malaysian company. On 19 October 1973 Moorgate Industrials Limited ("Moorgate"), a company resident in the UK, acquired from Plantations the shares in Berhad owned by Plantations in consideration for an issue of shares in Moorgate to Plantations. As a result Moorgate became from 19 October 1973 a member of the International Group as a 99.99 per cent subsidiary of Plantations. Moorgate immediately sold part of its newly acquired shareholding in Berhad. The market value of its remaining 51 per cent shareholding in Berhad (the "Berhad shares") as at 19 October 1973 has been agreed with the shares Valuation Division of the Revenue as £10,981,307.
6. As a result of the transfer of the Berhad shares and the issue of shares in Moorgate to Plantations the International group included in a vertical chain...
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