Fielder (Inspector of Taxes) v Vedlynn Ltd

JurisdictionEngland & Wales
Judgment Date06 March 1992
Date06 March 1992
CourtChancery Division

Chancery Division.

Harman J.

Fielder (HMIT)
and
Vedlynn Ltd

Robert Carnwath QC and Timothy Brennan (instructed by the Solicitor of Inland Revenue) for the Crown.

David Milne QC and Jeremy Woolf (instructed by Rabin Leacock Lipman) for the taxpayer.

The following cases were referred to in the judgment:

Blakemore, Ex parte ELR(1877) 5 ChD 372

Currie v Misa ELR(1875) LR 10 Ex 153

Fleming v Bank of New Zealand ELR[1900] AC 577

O'Brien (HMIT) v Benson's Hosiery (Holdings) Ltd ELR[1980] AC 562

Ramsay (WT) Ltd v IR Commrs ELR[1982] AC 300

Shepherd (HMIT) v Lyntress Ltd TAX[1989] BTC 346

Corporation tax - Chargeable gains - Sale of losses - Loss shares sold to subsidiaries - Subsidiaries sold to another group for market value in cash and supplemental payment of 7.5 per cent of losses to be paid if and when accepted by Revenue - Guarantees given by purchasing group that loss-owning companies would fulfil obligations - Whether value of consideration for shares in subsidiaries was market value only or market value plus value (if any) of guarantees - Finance Act 1965 section 22 subsec-or-para (4)Finance Act 1965, sec. 22(4)(b)(replaced by the Capital Gains Tax Act 1979 section 29A subsec-or-para (1)Capital Gains Tax Act 1979, sec. 29A(1)(b),replaced by the Taxation of Chargeable Gains Act 1992 section 17 subsec-or-para (1)Taxation of Chargeable Gains Act 1992, sec. 17(1)(b)).

This was an appeal by the Revenue against the decision of a special commissioner that guarantees given to the taxpayer by the purchaser of shares in subsidiaries to ensure that the subsidiaries would meet their obligations to repay a percentage of losses allowed by the Revenue could not be valued and were not to be regarded as adding value to the consideration received for the shares.

The taxpayer held shares in Grendon Trust which had been acquired by the group at high cost but which had become of very little value after the collapse of the property market in the early 1970s.

On 20 December 1977 eight subsidiaries of the taxpayer purchased blocks of Grendon shares from the taxpayer for market value and deferred payment of 7.5 per cent of any losses if and when they were allowed by the Revenue. On 22 December the taxpayer sold the shares in the subsidiaries to M Ltd, a purchaser outside the group, in two stages and ensured that each subsidiary disposed of the loss-making shares.

M Ltd paid market value for the shares in the subsidiaries and gave guarantees that each of them would comply with the deferred payment obligations. The guarantees were in turn backed up by another company in M Ltd's group.

The Revenue contended that the guarantees represented consideration received by the taxpayer when the shares in the subsidiaries left the group.

A special commissioner held that the guarantees were part of the consideration given by M Ltd for the shares but did not add monetary value to it. The cash price, agreed to be the market value of the shares, was the consideration received by the taxpayer.

Held, dismissing the Revenue's appeal:

The special commissioner was entitled to conclude that there was no basis on which a separate and additional money value could be placed on the guarantees to be added to the cash paid which was the true open market value of the shares. There was no way of valuing the guarantees and no comparables which could be referred to in ascertaining something so nebulous as the cash value of a guarantee. Since consideration which could not be valued was taken to be market value by virtue of theFinance Act 1965 section 22 subsec-or-para (4)Finance Act 1965, sec. 22(4)(b) the cash paid for the shares was the whole consideration.

CASE STATED

1. At a hearing before [Mr D A Shirley] sitting as a single commissioner for the special purposes of the Income Tax Acts on 31 July 1990 Vedlynn Ltd appealed against an assessment to corporation tax on profits estimated at £1.5m for an accounting period from 15 March 1977 to 31 December 1977.

2. The question in issue was whether on the sale by Vedlynn Ltd of the issued capital of eight wholly owned subsidiary companies to a subsidiary company of Lazard Brothers and Co Ltd named Minden Securities Ltd ("Minden") by eight agreements made on 22 December 1977 for the aggregate price of £19,529, in computing the chargeable gains of Vedlynn Ltd the consideration for the disposals is that price alone.

3. Mr D C Milne QC and Mr Jeremy Woolf represented Vedlynn Ltd. Mr A Mundy of the Solicitor's Office of Inland Revenue represented the inspector of taxes.

4. No witnesses were called to give oral evidence.

5. [Paragraph 5 listed the documents put in evidence.]

6. At the conclusion of the hearing I reserved my decision which I gave in principle on 15 August 1990.

7. The facts and contentions of the parties are set out in my decision. It will be seen therefrom that I decided the question in issue affirmatively.

8. The parties subsequently agreed that in the light of my decision the assessment should be reduced to £919 and I determined the appeal accordingly on 14 November 1990.

9. In addition to the cases referred to in my decision, there were also cited in argument:

Aveling Barford Ltd v Perion Ltd UNK(1989) 5 BCC 677

Rolled Steel Products (Holdings) Ltd v British Steel Corporation & Ors ELRUNK[1986] Ch 246; (1984) 1 BCC 99,158

West Mercia Safetywear Ltd (Liquidator of) v Dodd & AnorUNK(1988) 4 BCC 30

Kinsela & Anor v Russell Kinsela Pty Ltd (in liquidiation)[1986] 4 NSWLR 722; (1986) 4 ACLC 215

Rowlatt on the law of Principal and Surety (4th ed., 1982).

10. Immediately after the determination of the appeal, on 14 November 1990 the inspector of taxes declared to us his dissatisfaction therewith as being erroneous in point of law and on 28 November 1990 required us to state a case for the opinion of the High Court pursuant to theTaxes Management Act 1970 section 56Taxes Management Act 1970, sec. 56.

11. The question of law for the opinion of the court is whether I erred in my decision that in computing the chargeable gains of Vedlynn Ltd arising from the sale of the issued capital of its eight subsidiary companies to Minden on 22 December 1977 the consideration for those disposals is the aggregate cash price of £19,529 alone.

DECISION

This is an appeal by Vedlynn Ltd ("the taxpayer") against an assessment to corporation tax on profits estimated at £1.5m for an accounting period from 15 March 1977 to 31 December 1977 made on 15 February 1982. The delay in hearing the appeal is occasioned by the parties' desire to await the outcome of Shepherd (HMIT) v Lyntress Ltd and News International plc v Shepherd (HMIT)TAX[1989] BTC 346.

The issue is whether, in computing the chargeable gains of the taxpayer on the sale by it to a subsidiary company of Lazard Brothers and Co Ltd named Minden Securities Ltd ("Minden") of the issued capital of eight wholly owned subsidiary companies for the aggregate price of £19,529 by eight agreements made on 22 December 1977, any and if so what account should be taken of a guarantee given by Minden in each case in respect of obligations owed to the taxpayer by the subsidiary companies to pay deferred consideration, measured by reference to allowable capital losses, for the acquisition by the subsidiary companies two days earlier of shares in Grendon Trust Ltd and a contemporaneous guarantee given by Lazard Brothers in respect of the obligations of Minden under those eight agreements.

No witnesses were called to give oral evidence. A statement of agreed facts was produced and a bundle of agreed documents was put in.

In 1973 CST Investments Ltd ("CST") acquired 6721,499 issued ordinary shares of Grendon Trust Ltd by means of a public offer at a total cost of £21.6m. Owing to a crashing fall in the property market later in 1973 and in 1974 the value of the shares in Grendon Trust Ltd fell. On 23 June 1977 the taxpayer acquired 6051,499 shares in Grendon Trust Ltd for £15,129. These shares came directly or indirectly from CST to the taxpayer by means of transfers within a single group of companies. For the purposes of corporation tax on chargeable gains the taxpayer was entitled to be treated as acquiring the shares "for a consideration of such an amount as would secure that on the [disponor's] disposal neither a gain nor a loss would accrue to" the disponor: Income and Corporation Taxes Act 1970 section 273 subsec-or-para (1)sec. 273(1) of the Income and Corporation Taxes Act 1970. In other words the taxpayer would have been treated for tax purposes as acquiring the shares for a consideration equal to the cost of the shares to CST.

On 20 December 1977 the taxpayer beneficially owned the whole of the issued share capital of each of its eight subsidiary companies, namely Atindale Ltd, Gabonstar Ltd, Hardash Estates Ltd, Hardthorpe Ltd, Orlinpoint Ltd, Polescene Ltd, Retoria Ltd and Risville Ltd. These companies are referred to collectively as the "owning companies" or singly as an "owning company". The share capital consisted solely of ordinary shares. The aggregate capital subscribed amounted to £16,550. The proceeds were maintained in separate bank deposit accounts. Apart from these deposits and interest accruing thereon none of the owning companies had, before the transactions next mentioned took place, any other assets or liabilities and apart from such transactions that remained the case until after 29 December 1977.

On 20 December 1977 the taxpayer entered into an agreement with each of the owning companies whereby it sold to the owning companies all its shares in Grendon Trust Ltd. Save for the number of shares in Grendon Trust Ltd and the amount of the consideration all these eight agreements were identical. For tax purposes the owning companies acquired the shares for the same consideration as the taxpayer (and CST) had acquired them. Correspondingly the taxpayer disposed of the shares for that consideration (Income and Corporation Taxes Act 1970 section 273sec. 273). It is...

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