Finsbury Securities Ltd v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | THE MASTER OF THE ROLLS,LORD JUSTICE DAVIES,LORD JUSTICE RUSSELL |
| Judgment Date | 07 July 1965 |
| Judgment citation (vLex) | [1965] EWCA Civ J0707-1 |
| Court | Court of Appeal |
| Date | 07 July 1965 |
[1965] EWCA Civ J0707-1
In The Supreme Court of Judicature
Court of Appeal
T.89
The Master of the Rolls (Lord Denning)
Lord Justice Davies and
Lord Justice Russell
THE SOLICITOR-GENERAL (Sir Dingle Foot, Q. C.), Mr ROY BORNEMAN, Q. C., Mr J. R, PHILLIPS and Mr J. P. WARNER (instructed by Solicitor of Inland Revenue) appeared on behalf of the Appellant.
Mr. HEYWORTH TALBOT, Q. C., Mr H. MAJOR ALLEN, Q. C. and Mr PETER REES (instructed by Messrs Slaughter & May) appeared on behalf of the Respondents.
This is yet another case about dividend stripping) but of a new kind. It is forward-stripping as distinct from backward-stripping. We had to consider backward-stripping in Griffiths v. Harrison, 1963 Appeal Cases at pages 17-19, and in Argosam Finance v. Oxby, 1964 3 Weekly Law Reports at pages 778-9. The essence of backward-stripping is that a dealer in shares buys shares in a company which has accumulated large profits and has paid tax on those profits. It is in a position to declare a dividend, after deduction of tax. The price is high because of the dividend soon to be distributed. The dealer pays the price and receives the dividend. In consequence the value of the shares falls at once by a large amount. He re-sells (or holds till the end of the year). The dealer then makes out his accounts for income tax purposes. These accounts omit all reference to the dividend received. (This practice is sanctioned by law: see F. S. Securities, Ltd. -v- Inland Revenue Commissioners, 1964 1 Weekly Law Reports, 742). The accounts show simply the shares bought at a high price, and re-sold (or re-valued) at a low price. So they show a large loss on the purchase and sale of the shares. The dealer claims tax-repayment on this loss: and succeeds. He gets back into his own hands all the tax which the company paid. It is all sheer gain to him. No tax on it. No sur-tax. The only loser is the Revenue, or rather the other taxpayers.
Now in forward-stripping the dealer buys shares in a company which hopes to make in the future large profits out of which it will be asked to declare a dividend, after deduction of tax. The dealer agrees to pay a lump sum price to cover the anticipated amount of dividends in the next few years. It may be 5 years, 3 years, or only 1 year. He keeps the shares and receives the dividends each year as they are declared. The value of the shares drops each year as and when the dividends are received. Then each year he makes out his accounts for income tax purposes. These omit all reference to the dividends received. So the accounts show a loss each year as the shares are re-valued. The dealer claims tax-repayment on this loss. Can he succeed? I should add that if the dividends should not reach the anticipated figure, the original price is reduced to meet the deficiency. So the dealer in the long run only pays the amount of the dividends. The price equals the amount of the dividends received. But he gets the whole of the tax-repayment (if permitted) free of any tax at all.
It is plain that in all these dividend-stripping cases the so-called "loss" sustained by the dealer is an artificial loss. He sustains no loss in fact on his outlay because he gets it all back in dividends. But there is a strange rule of income tax law which enables him in his accounts to ignore the dividends he receives. He takes advantage of this rule so as to show a fictitious loss. All he does is to make artificial book entries: and this enables him to claim hard cash from the Revenue. Thousands and thousands of pounds of it. He says it is all part of his trade. If so, it is a most discreditable part. I feel, for my part, that the Courts should do nothing to encourage it. Encourage it they do if they allow this palpable device to succeed. Repayment should only be permitted if there is genuine loss in a genuine trading transaction. It should not be permitted when it is a device to outwit the Revenue.
In the present case the dealer carried out 15 forward-Strippinng transactions. They are described in the report in the court below, 1965 1 Weekly Law Reports, 358: and I need not repeat them again. The whole question in point of law is whether the loss sustained on these transactions by the dealeris a "loss in any trade" within Section 341 of the Income Tax Act, 1952. If these transactions were trading transactions in the way of his trade, he is entitled to recover the tax. Otherwise not. The Commissioners have found that the shares were part of the dealer's stock-in-trade. In other words, that these transactions were trading transactions; with the result that the dealer is entitled to recover the tax. So has Mr Justice Buckley. The Crown appeals to this Court.
The first question is whether we can go behind the finding of the Commissioners. I think we can for the reason that they have misdirected themselves. They gave their reasons.
They said in their written decision on 12th July, 1962: "We find that the shares were acquired with the object of making a profit out of them, a profit by the recovery of income tax. On this finding, the question is", they say, whether the case can be distinguished from Griffiths v. Harrison: and they held it was not distinguishable.
It is plain from that reasoning that the Commissioners had regard to the profit motive. They thought that these transactions by the dealer had, as their object, the making of profit and were therefore transactions in the way of the dealer's trade. And the profit they had in mind was a profit by the recovery of income tax. They say so. They adopted the words of Lord Justice Upjohn in the Court of Appeal in Griffiths v. Harrison and treated them as applicable to the present case. Now the House of Lords, as I understand them, rejected that element. They held it was immaterial. It was not permissible to have regard to the profit made by the recovery of income tax. Such a profit is not a profit by way of trade. It is only the fiscal result of the transaction and that must be ignored. "It appears to me wholly immaterial", said Viscount Simonds, "what may be the fiscal result or the ulterior fiscal object of the transaction". And Lord Guest said that "one has to look at the transaction by itself irrespective of the object, irrespective of the fiscal consequence". In looking to the fiscal object, therefore, the Commissioners misdirected themselves. This misdirection is such that the Court can review that determination, see Edwards v. Bairstow, 1956 Appeal Cases at pages 29, 36: and determine the matter itself, see British Insulated Company v. Atherton, 1926 Appeal Cases at page 212.
Mr Justice Buckley rightly rejected the fiscal object but he found another profit-motive. He seems to have found that the objective was a trading profit. He relied particularly on the statement in the Case that "all of the transactions were designed to produce some profit for the company, apart from any tax repayment that might become due", and a table exhibited to the Case. I am afraid I cannot go with Mr Justice Buckley on this point. The statement in the Case was, I think, a mere recital of what Mr Lavy (one of the dividend-strippers) had said, and not an acceptance of it by the Commissioners. It is only necessary to look at the figures in the table. In one case a gross profit of 15s. 2d., in another £4. 5s. Od., and so forth. Those trifling sums were not the object of the exercise. The object was obviously to get tax repayments. Indeed the Commissioners, in their written decision, so said: "a profit by the recovery of income tax".
It appears to me, therefore, that both the Commissioners and Mr Justice Buckley proceeded on the wrong lines. All that Griffiths v. Harrison decided was that, if a transaction was truly an adventure in the way of trade, it did not cease to be so simply because the ulterior object was a fiscal benefit.But the question remains in every case, Was the transaction truly a transaction in the way of trade? In Griffiths v. Harrison the House held that the transaction there (of backward-stripping) was an adventure in the nature of trade because it had all the characteristics of a trade. As Lord Guest put it: "The company had power to deal in shares, they bought shares, they received a dividend on these shares, they sold the shares. This was just the ordinary commercial transaction of a dealer in shares".
Here we have a transaction of a different kind. These transactions of forward-stripping do not wear the ordinary characteristics of a trade. The dealers here on the forward-stripping did not buy the shares in order to re-sell them. They bought them to keep. They did not buy at any fixed price. They bought at a price dependent on future dividends. They bought the shares rather as a man buys a coal mine or a gravel pit. They bought the shares as an income-producing asset at a price dependent on the income produced by that asset. They acquired the shares as fixed capital, not circulating capital. Lord Haldane described the difference in John Smith & Son v. Moore, 1921- 2 Appeal Cases at page 19: "Adam Smith described fixed capital as what an owner turns to profit by keeping it in his possession, circulating capital as what he makes profit of by parting with it and letting it change masters". In Griffiths v. Harrison the shares in Claiborne were circulating capital. Here the shares are fixed capital.
In Griffiths v. Harrison the majority of the House felt it useful to ask the test question, "If it is not a trade, what is it?" I still have misgivings about the utility of that question. But, accepting it as relevant, there was no answer to it in Griffiths v. Harrison except the one I there gave: It is dividend stripping and nothing else. That was held to...
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