Finsbury Securities Ltd v Commissioners of Inland Revenue
Jurisdiction | England & Wales |
Judge | Lord Reid,Lord Morris of Borth-y-Gest,Lord Pearce,Lord Upjohn,Lord Pearson |
Judgment Date | 26 July 1966 |
Judgment citation (vLex) | [1966] UKHL J0726-2 |
Date | 26 July 1966 |
Court | House of Lords |
[1966] UKHL J0726-2
Lord Reid
Lord Morris of Borth-y-Gest
Lord Pearce
Lord Upjohn
Lord Pearson
House of Lords
Upon Report from the Appellate Committee, to whom was referred the Cause Bishop (Inspector of Taxes) against Finsbury Securities Limited, that the Committee had heard Counsel, as well on Tuesday the 28th, Wednesday the 29th and Thursday the 30th, days of June last as on Monday the 4th day of this instant July, upon the Petition and Appeal of Paul Bishop, of Finsbury 1st District, City Gate House, Finsbury Square, London, E.C.2 (one of Her Majesty's Inspectors of Taxes), praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 7th of July 1965, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioner might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the Case of Finsbury Securities Limited, lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal of the 7th day of July 1965, complained of in the said Appeal, be, and the same is hereby, Reversed, and that the Fourth Question of Law in the Case Stated be answered by Declaring, That the Commissioners for the Special Purposes of the Income Tax Acts were wrong in law in holding that the shares referred to in paragraphs 7, 8 and 10 of the Case Stated were part of the Company's stock-in-trade: And it is further Ordered, That the Respondents do pay, or cause to be paid, to the said Appellant the Costs incurred by him in the Courts below, and also the Costs incurred by him in respect of the said Appeal to this House, the amount of such last-mentioned Costs to be certified by the Clerk of the Parliaments: And it is also further Ordered, That the Cause be, and the same is hereby, remitted back to the Commissioners for the Special Purposes of the Income Tax Acts, to do therein as shall be just and consistent with this Judgment.
My Lords,
For the reasons given by my noble and learned friend, Lord Morris of Borth-y-Gest, I would allow this appeal.
My Lords,
The question which arises in this case concerns the nature of a number of transactions entered into by the Respondent Company, Finsbury Securities Limited, whom I will refer to as the Company. The Company claimed an adjustment of its liability to tax for the year 1959-60. The claim was made under section 341 of the Income Tax Act, 1952. The Company asserted that it had sustained a loss in its "trade" and was entitled to have an adjustment of its tax liability by reference to such loss. In the Act (see section 526) the word "trade" is interpreted to include "every trade, manufacture, adventure or concern in the nature of trade". The claim was considered by the Commissioners for the Special Purposes of the Income Tax Acts who Stated a Case for the opinion of the High Court.
The Company was incorporated in May, 1956, to carry on the trade of dealing in shares and securities. After its incorporation it carried on that trade. Its profits from that trade have been assessable under Case I of Schedule D. The director in control of its activities was a Mr. Lavy. He had been responsible for the formation of the Company. There was only one other director, a Mr. Lever. The Company's shares were held by these two either beneficially or as trustees of their respective family settlements.
The Case Stated records with stark clarity the events which led to the transactions whose nature is under consideration. Mr. Lavy had some acquaintances who were well-known to him socially. They were shareholders in certain companies. They were anxious to avoid tax on the company's profits. So they approached Mr. Lavy. They wanted to know whether there was some method whereby they could achieve their aim. Mr. Lavy was at first lukewarm to these approaches, but he came to the conclusion that forward-stripping transactions might achieve this object and provide a profit for the Company.
So it came about that during the years 1958, 1959 and 1960 the Company entered into fifteen sets of transactions. In the Case Stated one set or batch of transactions (relating to a company called I. Warshaw & Sons, Ltd.) was said to be an example of eleven other similar sets of transactions: copies of the relevant documents forming the set of transactions were annexed to the Case. All further relevant facts are fully stated in the Case. The transactions relating to twelve different companies were, therefore, in all important respects, similar. One other set of transactions (which related to a company called Mantern Properties, Limited) was said to be an example of two other similar sets of transactions: copies of the relevant documents forming this set of transactions are annexed to the Case and the facts are set out. Such differences as there are between the arrangements in the one group of transactions and the arrangements in the other group do not denote any difference between the essential nature of the transactions in the one group as compared to the other.
The question to be decided is whether the transactions should be regarded as trading transactions of a kind undertaken by a dealer in shares and securities. This, in my view, is a question of law. The facts are found. Indeed, they were not at any time in dispute. The documents and agreements which are annexed to the Case Stated are typical of those not actually annexed. On the Case Stated it is for the Court to consider the documents and the agreements and the established facts and then to decide as to their legal nature and effect.
I do not propose to repeat or to refer fully to the contents of the Case Stated but, in order to express my view, it is necessary to describe briefly the tax avoiding scheme which was evolved in response to the request of those who sought such avoidance. The arrangements concerning the Company I. Warshaw & Sons, Ltd. may be taken as illustrative. That Company (Warshaw) was incorporated on the 1st April, 1957, to acquire and take over as a going concern the business of brass founders and ironmongers. It had a capital of £10,000 in £1 ordinary shares of which 5,000 were issued by the 29th December, 1958. These shares were owned as to one half by Mr. Gerald Warshaw and as to the other half by Mr. Edward Simon Warshaw. On the 29th December, 1958, Warshaw passed two special resolutions and an ordinary resolution. The effect of these may be summarised as follows. The capital of the Company was increased to £10,100 by the creation of 100 6 per cent. Preferred shares. A sum of £100 standing to the credit of Warshaw's profit and loss account was capitalised and was set free for distribution among the holders of the 5,000 issued and fully paid Ordinary Shares and was to be applied in paying up in full the 100 unissued 6 per cent. Preferred Shares. The result was that each Mr. Warshaw became the owner of 50 Preferred Shares of £1 each. The Preferred Shares had the normal rights attached to fixed interest Preference Shares but in addition they had certain special rights to dividends. Shortly stated these special rights entitled holders of the shares to have dividends paid to them for the next five years which absorbed the whole of the profits available for distribution (after payment of the fixed preference dividend). There was a proviso, however, that the total amount of the dividends in respect of the five years should not exceed £60,000 after deduction of income tax. In each of the five years, therefore, the Preferred Shares had a special right to be paid a dividend (net after deduction of income tax) equal to the amount of the profits (as defined) of Warshaw for the year (less the Preference dividend). No dividend was to be paid which would interfere with this special right.
On the same date as the resolutions to which I have referred the two Mr. Warshaws agreed to sell the newly created shares which they had newly acquired. They agreed to sell the shares to the Company. The price was to be £60,100. That sum was to be paid as to £20,100 at once (i.e., on the 29th December, 1958), and as to the balance of £40,000 not later than the 31st December, 1960. There was, however, a provision that the purchase price could be adjusted. It might become more or it might become less. If the total of the five years net dividends did not amount to £60,000 then the purchase price of the shares was to be reduced to the figure of that total. The price was, however, in certain circumstances to be increased. If the Company made a loss and if it was able, as a result, to claim a repayment in respect of the tax deducted from the Dividend on the Preferred Shares (other than the cumulative dividends) then...
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