Finsbury Securities Ltd v Bishop (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 26 July 1966 |
| Date | 26 July 1966 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income tax, Schedule D - Loss in trade - Dealer in shares - Dividend-stripping - Forward-stripping - Whether shares acquired as stock-in-trade - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), s. 341.
The Appellant Company carried on the trade of dealing in shares and securities. During the years 1958, 1959 and 1960 it entered into a number of transactions in shares for the purpose of dividend-stripping. The transactions fell into two distinct categories. A typical transaction of the first category involved the acquisition by the Company of specially created preference shares in a manufacturing company. They carried, in addition to the normal right to a fixed dividend, a special right to dividends for five years which were to absorb the whole of the profits available for distribution after payment of the fixed dividend, provided that the total did not exceed a certain figure. The purchase price was to be determined by reference to the amount of the net dividends received and the amount of the income tax repayment obtained by the Appellant Company. A typical transaction of the second category involved the purchase by the Company of the whole of the share capital of an estate development company. The sale agreement provided that the development company would distribute the whole of its net profits for the following year and that if any of its assets then remained unsold the vendors of the shares would purchase those assets at cost or market value, whichever was the greater. The purchase price for the shares was to be determined by reference to the amounts of the development company's profits and of any income tax repayment.
The Appellant Company claimed adjustment of its tax liability for the year 1959-60 under s. 341, Income Tax Act 1952, on the basis that it had sustained losses in its trade in respect of the above transactions. On appeal, the Crown contended (1) that the shares in question were capital assets and not stock-in-trade, and (2) that, if they were stock-in-trade, the dividends received must be taken into account in determining whether there was a loss, and if this were done no loss was shown. The Special Commissioners rejected the Crown's first contention but accepted the second and disallowed the claim.
In view of the decision of the House of Lords in F.S. Securities Ltd. v. Commissioners of Inland Revenue 41 T.C. 666; [1964] 1 W.L.R. 742, the Crown did not pursue its second contention in the High Court.
Held, that the transactions were not "an adventure or concern in the nature of trade" within s. 526, Income Tax Act 1952, and the shares were not stock-in-trade. J.P. Harrison (Watford) Ltd. v. Griffiths 40 T.C. 281; [1963] A.C.1; distinguished.
Stated under the Finance Act 1953, s. 15(4) and the Income Tax Act 1952, s. 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At meetings of the Commissioners for the Special Purposes of the Income Tax Acts held on 26th, 27th and 28th March 1962, Finsbury Securities Ltd. (hereinafter called "the Company") claimed under s. 341 of the Income Tax Act 1952 an adjustment of its liability to tax for the year 1959-60 by reference to a loss alleged to have been incurred in that year, the Inspector of Taxes having objected to the claim.
2. The Company was incorporated in May 1956 to carry on the trade of dealing in shares and securities, and it has always carried on this trade, its profits therefrom being assessable under Case I of Schedule D.
3. The questions for our determination were: (1) whether certain "forward-stripping" transactions in shares were transactions in the course of the Company's trade (the nature of a forward-stripping transaction will appear later), and whether the shares in question were part of the Company's stock-in-trade; (2) whether taxed dividends received by the Company should be included in the computation to be made under s. 341(3) of the Income Tax Act 1952.
4. The Case I profits of a dealer in shares have for many years been computed on the basis of excluding the gross amount of dividends received from which tax has been deducted. Although this is to anticipate the remainder of this Case, we think it may be of assistance to show how the Company's loss claim is computed, on the basis that the shares referred to later were its stock-in-trade. There is annexed hereto, marked "A", and forming part of this Case(1) , a copy of the Company's accounts for the year ended 31st March 1960. There is annexed hereto, marked "B", and forming part of this Case(1), a copy of the Company's income tax computation for the year 1959-60. The gross dividends are brought into the trading and profit and loss account, but are deducted in the income tax computation, and this computation consequently shows a loss.
5. Mr. Leslie Lavy (hereinafter referred to as "Mr. Lavy") gave evidence before us on behalf of the Company. He was responsible for the formation of the Company, and was at all material times the director in control of its activities, carrying on during the same period practice as a chartered accountant. The only other director was a Mr. Lever, and the Company's shares were held by these two, either beneficially or as trustees of their respective family settlements.
6. During the year 1958-59 Mr. Lavy was approached by one or two persons who had interests in companies and were anxious to know whether there was some method of avoiding tax on the companies' profits. 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. The result was that during the years 1958, 1959 and 1960 the Company entered into 15 of these transactions. All of the transactions were designed to produce some profit for the Company apart from any tax repayment that might become due.
7. We were invited to consider the Company's transactions in the shares of a company called I. Warshaw & Sons Ltd. ("Warshaw"), as typical of a forward-stripping operation. This was the first of such operations entered into by the Company. The Warshaw shareholders approached Mr. Lavy; though not clients of his, they were well known to him socially and he had done a lot of business with them. Warshaw is a good example of one batch of transactions, except that it has certain features which do not occur in any other case: these are referred to in para. 9(5) below. There is another batch of transactions, of which an example will be given later; and there are, of course, minor variations throughout.
8. The companies of which Warshaw may be taken as an example are: L. Greenberg Ltd.; M.F. Lampert & Co. Ltd.; Superior Sewing Machines Ltd.; Alfred Kasmir Ltd.; J. Berry & Sons Ltd.; Bullroyd Properties Ltd.; Allenrim Developments Ltd.; M.A. Morris Ltd.; Reggie & Co. Ltd.; Smartwear Ltd.; Carol Freedman Ltd.
The Company received no dividends in the year to 31st March 1960 from Allenrim Developments Ltd., Reggie & Co. Ltd. or Carol Freedman Ltd., and only a half-year's fixed interest dividend from Superior Sewing Machines Ltd.; consequently there was no decrease in the value of the shares in these companies as at that date (see para. 9(4) below). The transactions in the shares of these four companies do not, therefore, affect the loss computation for that year, but they do form part of the general picture.
(2) Warshaw was incorporated on 1st April 1957 to acquire and take over as a going concern the business of brassfounders and ironmongers. Its original capital was £10,000 in £1 shares, of which 2004 were issued by 29th December 1958.
(3) On 29th December 1958 Warshaw passed two special resolutions and an ordinary resolution. Copies of these three resolutions are annexed hereto, marked "C", and form part of this Case(1). Put shortly, the special resolutions provide for the increase of Warshaw's capital to £10,100 by the creation of 100 6 per cent. preferred shares with the normal rights attached to fixed interest preference shares, but also with the special right to dividends, for the next five years, absorbing the whole of the profits available for distribution, after payment of the fixed preference dividend, provided that the total amount of these dividends did not exceed £60,000. The ordinary resolution provided for the capitalisation of £100, to be applied in paying up in full these new preferred shares.
(4) On the same day, 29th December 1958, the holders of these preferred shares agreed to sell them to the Company. A copy of the sale agreement is annexed hereto, marked "D", and forms part of this Case(1). The purchase price was £60,100, but clause 3 provides for adjustments of this price. If the total of the five years' dividends turned out to be less than £60,000 there was to be an adjustment in respect of the difference: but there was to be added to the purchase price 50 per cent. of the amount (if any) of the repayment obtained by the Company in respect of the tax deducted from the dividends received by it. Clause 2(a) provides for completion immediately, together with the payment of £20,100; under clause 2(b) the balance was to be paid not later than 31st December 1960.
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(5) £100 would be the residual value of the Warshaw preferred shares at the end of the five years, and year by year their value would be diminished
by reason of the distribution of all the available profits. On the assumption that the Warshaw preferred shares were stock-in-trade of the Company and that taxed dividends should be excluded from the s. 341 computation, the Company, having received dividends from which tax had been deducted but which had been excluded from the computation of its Case I profits, would receive repayment of the tax and retain half of this repayment. -
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