Furniss v Dawson; Murdoch v Dawson

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLORD JUSTICE OLIVER,LORD JUSTICE KERR,LORD JUSTICE SLADE
Judgment Date27 May 1983
Judgment citation (vLex)[1983] EWCA Civ J0527-3
Date27 May 1983
Docket Number83/0215

[1983] EWCA Civ J0527-3

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (Civil Division)

On appeal from Chancery Division (Revenue Paper) (Vinelott J.)

Royal Courts of Justice

Before:

Lord Justice Oliver,

Lord Justice Kerr

and

Lord Justice Slade

83/0215

1977 Nos. 3, 4 and 5

Between:
William Furniss (H.M. Inspector of Taxes)
Appellant
and
George Edward Dawson
Respondent
Between:
William Furniss (H.M. Inspector of Taxes)
Appellant
and
Douglas Edward Rexford Dawson
Respondent
And Between:
Ian Stuart Murdoch (H.M. Inspector of Taxes)
Appellant
and
Rexford Stuart Dawson
Respondent

Mr. P.J. MILLETT QC and Mr. R.J. CARNWATH (instructed by The Solicitor of Inland Revenue) appeared on behalf of the Appellants.

Mr. S.J.L. OLIVER QC and Mr. W.G.S. MASSEY (instructed by Messrs. Turner Peacock, Agents for Messrs. Browne, Jacobson & Roose, Nottingham) appeared on behalf of the Respondents.

LORD JUSTICE OLIVER
1

This is an appeal by the Crown from a judgment of Vinelott J. on the l8th December 1981 affirming a decision of the Special Commissioners who had discharged an assessment to capital gains tax made on three taxpayers, Mr. G.E. Dawson and his two sons Mr. D.E.R. Dawson and Mr. R.S. Dawson. Mr. G.E. Dawson died after the decision of the Special Commissioners and the appeals have been carried on against the personal representatives.

2

The facts are fully set out in the careful judgment of the learned judge, which is reported in [1982] STC at p. 267 and it is unnecessary for present purposes to do more than summarise the salient features of the transactions which gave rise to the claim for tax. The taxpayers and the wife of Mr. G.E. Dawson were, between them, the holders of all the ordinary shares in two family companies, Fordham and Burton Ltd. and Kirkby Garments Ltd. (conveniently referred to as "the operating companies"). They had, in September 1971, been in negotiation for the sale of the whole of the issued capital of both companies to an outside purchaser, Wood Bastow Holdings Ltd., and had agreed on the main details of a sale but without, at that stage, any binding commitment having been entered into on either side. The negotiations had been conducted by Mr. G.E. Dawson and at the point at which agreement in principle was reached he consulted solicitors with a view to carrying matters through in the most advantageous way. As a result of the advice received it was decided to reorganise the share capitals of the operating companies with a view to saving stamp duty on transfer and to incorporate a new investment company in the Isle of Man to acquire the reorganised share capital, which company, it was intended, would then sell the shares so acquired to Wood Bastow Holdings. On the l6th December 1971 Greenjacket Investments Ltd. ("Greenjacket") was incorporated in the Isle of Man with a share capital of £1,550 divided into 155,000 shares of lp each. Local directors were appointed by the subscribers and at the first directors' meeting, on the following day, two agreements were put before the board. The first was a share exchange agreement providing for the purchase of Dawson family shares in the capital of the operating companies in its reorganised state in exchange for the issue of 151,500 shares in Green jacket at a premium of 99p per share. That agreement was executed. It contained the usual vendors' warranties and indemnities customary in agreements for the sale of a majority interest in a company. At the same time a sale agreement providing for the sale of what would, on completion of the exchange agreement, be Greenjacket's shares in the operating companies to Wood Bastow for £151,500 was approved and it was resolved that Mr. Moroney, one of the directors, be authorised to execute it on behalf of Greenjacket if the negotiations for sale proved effective—as to which, of course, there was then no real doubt.

3

On the 20th December meetings of the operating companies were held at which their share capitals were reorganised by converting the ordinary shares into preference shares and creating new "A" ordinary shares which were then issued by way of bonus on renounceable letters of allotment. At that stage the exchange agreement was completed, transfers, letters of allotment and share certificates being handed over to Mr. Moroney who attended the meeting. Telephonic communication was maintained with the remaining directors in the Isle of Man and Greenjacket thereupon allotted shares to the taxpayers in accordance with the agreement, the appropriate share certificates then being sealed. Mr. Moroney then executed the sale agreement which was immediately thereafter exchanged. It provided for the sale of all the shares in the operatin companies to Wood Bastow at a total price of £155,000 of which £3,500 was payable to outside holders of preference shares who were also parties to the agreement. The sale agreement contained the same warranties and indemnities by the directors of the operating companies as had been given by the vendors to Greenjacket in the exchange agreement, the only difference being that Mr. R.S. Dawson, who was not a director, was not party to the sale agreement. That agreement was duly-completed by Greenjacket's transferring its preference shares and renouncing its allotments of "A" ordinary shares in favour of the purchaser and the purchase price of £151,500 was duly paid to Greenjacket. Accounts of Greenjacket for the year ended 30th November 1972 show that that money was dealt with as an investment by Greenjacket in accordance with its constitution.

4

This appeal therefore concerns the fiscal effect of what must, I think, be a series of transactions familiar to company lawyers and taxation advisers alike. It is, on the face of it, a perfectly straightforward and sensible series of transactions, the fiscal consequences of which are clearly laid out in the Finance Act 1965. The controlling shareholder of a family company wishes to retire from business and to dispose of his shares. He has an understandable desire that the fruits of his endeavours shall not be taxed more highly than the law compels and he accordingly consults professional advisers in order to ascertain from them the most advantageous way of effecting what he requires. He is advised that if he is content not to receive the proceeds of the shares himself but to have them represented by shares in another company in which he holds the shares, the payment of capital gains tax can be postponed until such time as he finds it necessary or convenient to dispose of those last-mentioned shares. He acts upon that advice. He causes to be formed an investment company—in the instant case it was an off-shore company, but that can be disregarded for present purposes as an irrelevant refinement—and he exchanges his shares in the family business for shares in that company, which now becomes the parent of the family company. The parent then sells the shares in what is now its subsidiary company to an outside purchaser, it matters not whether for cash or for other consideration—for instance, shares or debentures in the purchasing company.

5

Applying the statutory provisions to this series of transactions produces clearly defined and easily intelligible consequences. Section 19(1) of the Finance Act 1965 provides that "Tax shall be chargeable in accordance with this Act in respect of capital gains, that is to say, chargeable gains computed in accordance with this Act and accruing to a person on the disposal of assets". So the tax is chargeable only "in accordance with" the Act; the gains are to be computed "in accordance with" the Act; and, to be chargeable, those gains must be gains accruing "on the disposal of assets". Thus, when the shareholder exchanges his shares for shares in his newly formed investment company, on the face of it, he disposes of his shares and one looks to see whether, on that disposal, any gain accrues to him computed in accordance with the Act. Guidance as to that is found in section 22(9) which, for relevant purposes, provides that "the amount of the gains accruing on the disposal of assets shall be…. subject to the further provisions in Schedules 7 and 8 to this Act"; and reference to Schedule 7, paragraphs 4 and 6, shows that this particular type of transaction is the subject-matter of an exemption.

6

Paragraph 4 contains special provisions relating to reorganisations of share capital and sub-paragraph (2) provides that "a reorganisation or reduction of a company's share capital shall not be treated as involving any disposal of the original shares or any acquisition of the new holding or any part of it, but the original shares (taken as a single asset) and the new holding (taken as a single asset) shall be treated as the same asset acquired as the original shares were acquired". So if, on a reorganisation, you acquire new shares in place of your original shareholding and you subsequently dispose of those new shares, you have to go back to the acquisition of the original shareholding in order to ascertain the amount of any loss or gain on that disposal.

7

Paragraph 6(1)—subject to the qualification in sub-paragraph (2) that the issuing company has control of the company whose shares are acquired in exchange for the issue—provides that "where a company issues shares or debentures to a person in exchange for shares in or debentures of another company, paragraph 4 above shall apply with any necessary adaptations as if the two companies were the same company and the exchange were a reorganisation of its capital".

8

Thus in the transaction described above the shares in the investment company in the hands of the shareholder are statutorily to be treated as the same asset as his original shares in the family company acquired in the...

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