Dunstan v Young, Austen & Young Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 20 October 1987 |
| Date | 20 October 1987 |
| Court | Chancery Division |
Chancery Division.
Mr. C.H. McCall Q.C. (instructed by the Solicitor of Inland Revenue) for the Crown.
Mr. Andrew Thornhill Q.C. (instructed by Messrs. Ashurst, Morris & Crisp) for Young, Austen & Young Ltd.
Before: Warner J.
The following cases were referred to in the judgment:
C. & E. Commrs. v. Savoy Hotel Ltd. WLR[1966] 1 W.L.R. 948
Dilworth & Ors. v. Commr. of Stamps ELR[1899] A.C. 99
R. v. Income Tax Special Commrs., ex parte National Union of Railwaymen WLR[1967] 1 W.L.R. 263
Weir's Settlement Trusts, Re ELR[1971] Ch. 145
Corporation tax - Capital gains - Losses - Reorganisation of share capital - Parent company wished to eliminate subsidiary's debts before selling it - Subsidiary issued new shares - New shares allotted to parent for cash at par - Price of new shares repaid to parent in satisfaction of subsidiary's debts - Subsidiary sold to outside purchaser - Whether issue of new shares was a reorganisation of subsidiary's share capital for capital gains tax purposes -Finance Act 1965 schedule 7 subsec-or-para 4Finance Act 1965, Sch. 7, para. 4(1)(a)(i) (see now the Capital Gains Tax Act 1979 section 77 subsec-or-para (1) section 77 subsec-or-para (2)Capital Gains Tax Act 1979, sec. 77(1), (2)).
This was an appeal by the Crown against the decision of a Special Commissioner that an increase in the capital of a company by the issue of shares to be allotted to the holder of all but one of the company's existing shares was not a "reorganisation of a company's share capital" within the meaning of the Finance Act 1965 schedule 7 subsec-or-para 4Finance Act 1965, Sch. 7, para. 4.
The taxpayer company ("YAY") was a member of the Trafalgar House group. In 1977 shortly before becoming a member of the group, YAY had acquired all the 1000 issued £1 shares in a company ("Jones") for £16,000. When YAY became a member of the group, one share in Jones was registered in the name of another company in the group (THIGS) as nominee for YAY.
By 1979 Jones, which had never traded profitably since its acquisition by YAY, had incurred debts to YAY amounting to £200,911. It was decided that Jones must be sold, but before that was possible, the debts had to be eliminated from its balance sheet. The method adopted for that purpose was as follows: on 12 June 1979 Jones increased its share capital by the creation of 200,000 new ordinary shares of £1 each ranking pari passu with the existing shares; YAY offered to take up the new shares for cash at par; that offer was accepted and all the new shares were allotted to YAY, none being allotted to THIGS; YAY paid £200,000 for them and received £200,000 back from Jones in satisfaction of its debts. All the shares in Jones were then sold to a purchaser for £38,000.
YAY claimed a loss amounting to £178,100 on the footing that the cost to YAY of the shares in Jones was £16,000 plus £200,000. When that claim was rejected YAY appealed to a Special Commissioner. It was common ground that the 200,000 new shares in Jones were acquired by YAY "otherwise than by way of a bargain made at arm's length" so that, prima facie, they were to be deemed, by virtue of the Finance Act 1965 section 22 subsec-or-para (4)Finance Act 1965, sec. 22(4),to have been acquired for a consideration equal to their market value, which the Commissioner found to be nil, or nearly nil.
YAY, however, contended that the issue of the new shares and their allotment to YAY constituted a reorganisation of Jones's share capital within Finance Act 1965 schedule 7 subsec-or-para 4Sch. 7, para. 4 of the 1965 Act. If Finance Act 1965 schedule 7 subsec-or-para 4Sch. 7, para. 4 applied instead ofFinance Act 1965 section 22 subsec-or-para (4)sec. 22(4) the £200,000 given for the new shares would be treated as having been given by YAY for the original shares. The Commissioner allowed the appeal. The Crown appealed to the High Court.
The question for decision was whether the issue of the new shares in Jones, and their allotment to YAY, was a "reorganisation of a company's share capital" within the meaning of the Finance Act 1965 schedule 7 subsec-or-para 4Finance Act 1965, Sch. 7, para. 4.
YAY contended that the allotment of the new shares in Jones was covered by the specific provisions of Finance Act 1965 schedule 7 subsec-or-para 4Sch. 7, para. 4(1)(a)(i), or by the natural or general meaning of the phrase "a reorganisation of a company's share capital" at the beginning of para. 4.
Held, allowing the Crown's appeal:
1. Construed as a whole, Finance Act 1965 schedule 7 subsec-or-para 4para. 4(1)(a)(i) required the number of new shares allotted to each shareholder to be dependent on the number of existing shares. It must be possible to say that if the number of shares held by an allottee before the allotment had been different, the number of new shares allotted to him would have been correspondingly different. The issue of 200,000 shares to YAY was not related to the 999 existing shares previously held. Accordingly the transaction was not withinFinance Act 1965 schedule 7 subsec-or-para 4para. 4(1)(a)(i).
2. Although Finance Act 1965 schedule 7 subsec-or-para 4para. 4(1)(a)(i), introduced by the word "include", did not provide an exhaustive definition of a "reorganisation of a company's share capital" for the purposes of para. 4 as a whole, it did so where the alleged reorganisation took the form of an allotment of new shares. It followed that, since the transaction in question was not withinFinance Act 1965 schedule 7 subsec-or-para 4subpara. (1)(a)(i), the transaction was not a reorganisation of Jones's share capital within Finance Act 1965 schedule 7 subsec-or-para 4para. 4.
1. On 21 and 22 May 1985 one of the Special Commissioners, heard the appeal of Young, Austen & Young Ltd. ("YAY") against an assessment to corporation tax for YAY's accounting period ending 30 September 1979 in the figure of £7,000.
2. The questions for determination related not to the amount of YAY's profits for the period (which were agreed to be nil) but to the amount of the capital loss realised during the period on the sale of all the shares in a wholly-owned subsidiary company hereinafter referred to as "Jones". YAY claimed that that loss amounted to £178,100. The question turned on the view to be taken of a subscription by YAY for new shares in Jones shortly before the sale. In particular, the questions were:
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(a) whether, having regard to the form which the allotment of the new shares in Jones actually took, the said allotment was a "reorganisation of a company's share capital" within the meaning of the Finance Act 1965 schedule 7 subsec-or-para 4Finance Act 1965, Sch. 7, para. 4; and
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(b) whether, on the facts, the cost to YAY of the allotted new shares should be excluded from the computation of its loss upon the principles explained in W.T. Ramsay Ltd. v. I.R. Commrs. TAX(1981) 54 T.C. 101 and later authorities.
3. [Paragraph 3 listed the witnesses who gave evidence before the Commissioners.]
4. [Paragraph 4 listed the documents put in evidence before the Commissioners.]
5. The facts and the contentions of the parties were set out in the Commissioner's decision.
6. The following authorities were referred to in addition to those mentioned in the decision:
Young v. Phillips (H.M.I.T.) TAX[1984] BTC 311
Magnavox Electronics Co. Ltd. v. Hall (H.M.I.T.) TAX[1985] BTC 188
7. The Commissioner took time to consider his decision and gave it in writing on 25 June 1985. For the reasons set out therein he answered the first of the particular questions set out in para. 2 hereof in the affirmative and the second in the negative. The Commissioner accordingly allowed the company's appeal and formally reduced the assessment to nil. The figures being agreed, the Commissioner also declared that in accordance with his decision YAY had a capital loss of £147,345 to carry forward and other losses of £2,110,115 available for surrender within the group.
8. The inspector immediately after the determination of the appeal declared her dissatisfaction therewith as being erroneous in point of law and on 12 July 1985 required the Commissioner to state a case for the opinion of the High Court pursuant to the Taxes Management Act 1970 section 56Taxes Management Act 1970, sec. 56.
9. The questions of law for the opinion of the court were (a) whether the Commissioner erred in answering the first of the particular questions set out in para. 2 hereof in the affirmative; and (b) where the Commissioner erred in answering the second of the questions in the negative.
This appeal by Young, Austen & Young Ltd. ("YAY") is against an assessment to corporation tax in the figure of £7,000 made in respect of profits for the company's accounting period, the year to 30 September 1979. It is, however, agreed between the parties that the profits for the period were nil: what is in dispute is whether there was a capital loss to carry forward, and the extent of the losses for the period capable of being surrendered to another company in the group of which YAY is a member.
Put shortly, the question for my determination is whether, on the sale of all the shares in a wholly-owned subsidiary, Jones Refrigeration Ltd. ("Jones"), the loss realised by YAY amounted to £178,100 (as YAY claims) or to £16,100 only. The question turns on the view to be taken of a subscription by YAY for new shares in Jones, shortly before the sale.
YAY's business is that of a mechanical engineering contractor within the building industry, specialising in heating, ventilating and air-conditioning systems. It is based in Leicester. From early in 1978 it has been a wholly-owned subsidiary of Trafalgar House Ltd. and accordingly a member of the large Trafalgar House group.
Within that group there is another company, T.H.I. Group Services Ltd. ("THIGS") which, as its name suggests, provides...
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