Grays Timber Products Limited V. The Commissioners For Hm Revenue And Customs Against A Decision Of The Special Commissioners Dated 21st March 2007
| Jurisdiction | Scotland |
| Judge | Lord Osborne,Lord Kingarth,Lord Mackay of Drumadoon |
| Neutral Citation | [2009] CSIH 11 |
| Court | Court of Session |
| Published date | 17 February 2009 |
| Date | 13 February 2009 |
| Year | 2009 |
| EXTRA DIVISION, INNER HOUSE, COURT OF SESSION | |
| Lord Osborne Lord Kingarth Lord Mackay Of Drumadoon | [2009] CSIH 11 OPINION OF LORD OSBORNE in Appeal under the Taxes Management Act 1970, Section 56A by GRAY'S TIMBER PRODUCTS LIMITED Appellants against THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS Respondents against A Decision of the Special Commissioners dated 21 March 2007 _______ |
Act: Ghosh, Biggart Baillie
Alt: D E L Johnston, Q.C.; Acting Solicitor (Scotland) HM Revenue & Customs
13 February 2009
The Background Circumstances
[1] On 9 December 1999, a Mr G was allotted 14,465 ordinary £1.00 shares in Gray's Group Limited, for a consideration of £50,000. After that share issue, Mr G's holding represented 5% of the issued ordinary share capital of Gray's Group Limited. Mr G acquired a further 258 shares in Gray's Group Limited on 16 May 2000 at a cost of £864. These shares were acquired from another shareholder who had offered his shares for sale, pursuant to the Articles of Association of Gray's Group Limited. On 8 November 1999, Mr G had taken up employment with Gray's Timber Products Limited, the appellants, a wholly owned subsidiary of Gray's Group Limited. Mr G had also entered into a Subscription and Shareholders' Agreement, "the Subscription Agreement", with certain other shareholders, who, including Mr G, held 84.6% of the issued ordinary shares in Gray's Group Limited. Clause 4 of the Subscription Agreement provided, amongst other things, that, in the event of a change in control of 50% or more or the issued ordinary shares of Gray's Group Limited, the other parties to the Subscription Agreement were to procure that Mr G's original shareholding be purchased, either by Gray's Group Limited, or by the purchaser of that portion of the issued ordinary shares of Gray's Group Limited. The terms upon which Mr G's shares were to be so purchased were to depend upon the timing of the change of control. Clause 4.2.1 was to apply in respect of such a disposal of shares taking place on or after the second anniversary of "the Completion Date", as defined in the Subscription Agreement.
[2] In order to deal with the allotment of shares in Gray's Group Limited to Mr G and certain other matters, on 9 December 1999, Gray's Group Limited held an extraordinary general meeting at which two special resolutions and two ordinary resolutions were passed. The two special resolutions were in the following terms:
"1. That the entering into by the company of the Subscription and Shareholders' Agreement among the company, Mr G and certain shareholders of the company in the form annexed hereto for identification purposes be and is hereby approved.
2. That the regulations contained in the document headed 'new Articles of Association' annexed hereto be and they are hereby adopted as the Articles of Association of the Company to the exclusion of all existing Articles thereof."
The Subscription Agreement itself was undated, but the last shareholder to execute it did so on 18 December 1999.
[3] By Clause 2.3 of the Subscription Agreement, Mr G was to enter into, and Gray's Group Limited was to procure that their subsidiary, the appellants, entered into a service agreement with Mr G and that Mr G should be appointed a director of Gray's Group Limited and the appellants.
[4] In terms of Clause 4.2.1 of the Subscription Agreement, in the event of a disposal of shares in Gray's Group Limited of the kind previously referred to taking place after the second anniversary of the completion date, Mr G was entitled to receive payment for the shares allotted to him in accordance with the formula set forth in that Clause. The broad effect of that arrangement was that, in that event, Mr G would become entitled to an agreed enhanced payment, in addition to the return of his original investment, disproportionately greater than the amounts received by other shareholders or his percentage of the equity shares of Gray's Group Limited.
[5] On 29 November 2003, the entire share capital of Gray's Group Limited was sold to an unconnected third party, Jewson Limited. The total consideration paid was £5,903,219, of which a total of £1,451,172 was paid to Mr G, pursuant to a contract between all shareholders in Gray's Group Limited and Jewson Limited, the Agreement for the sale and purchase of the entire issued share capital of Gray's Group Limited, "the Sale Agreement". Prior to this sale of Gray's Group Limited, the existence and content of the Subscription Agreement had been disclosed to Jewson Limited.
[6] Against the foregoing background of fact, an issue has arisen between the appellants and the respondents concerning the taxation consequences of the disposal by Mr G of his shares in Gray's Group Limited. The respondents have contended that those shares, as employment- related securities, and sold as part of the sale of the whole share capital of Gray's Group Limited, were sold for more that their market value. Consequently, they have contended that the sale occasioned a charge to income tax, determined under Part 2 of the Income Tax (Employment & Pensions) Act 2003, by virtue of Chapter 3D of Part 7 of that Act. If the disposal in question did occasion a charge under the Income Tax (Employment & Pensions) Act 2003, the amount of the income charged by virtue of Section 446Y of that Act was to be treated as though it had been a payment of income to Mr G by the appellants. They would then be required to account for tax in respect of that notional payment under the PAYE provisions, as though it had been an actual payment. By contrast, the appellants maintained that the shares in question were sold for their market value, so that the whole of the consideration received by Mr G fell to be brought into computation of his capital gain on the disposal under the Taxation of Chargeable Gains Act 1992. Thus the fundamental dispute between the parties is as to the market value of the shares concerned in Gray's Group Limited and how that value is to be determined.
[7] The issue between the parties was the subject of a determination by the respondents issued on 3 March 2004. By letter dated 30 March 2004, the appellants appealed against that determination. The appeal was heard on 29 November 2006 by a Special Commissioner. In a Decision released on 21 March 2007, the Special Commissioner dismissed the appeal, making certain directions in relation to the determination under appeal, as appears from paragraphs 49 and 50 of his Decision. The appellants, being dissatisfied in point of law with the decision of the Special Commissioner, have now appealed to this Court under Section 56A of the Taxes Management Act 1970.
The Legislative Framework
[8] The legislation relevant to the circumstances of this case is to be found in Part 7 of the Income Tax (Earnings & Pensions) Act 2003 and in Part VIII of the Taxation of Chargeable Gains Act 1992. The relevant parts of Chapters 1 and 3D of Part 7 of the 2003 Act provide as follows:-
"Chapter 1 Section 417 Scope of Part 7
(1) This Part contains special rules about cases where securities...are acquired in connection with an employment.
(2) The rules are contained in-...
Chapter 3D (securities disposed of for more than market value),
Chapter 4 (post-acquisition benefits from securities),
(3) The following make provision for amounts to count as employment income-
Chapters 2 to 6..."
Section 420
"Meaning of 'securities' etc
(1) Subject to subsections (5) and (6), for the purposes of this Chapter and Chapters 2 to 5 the following are "securities"-
(a) shares in any body corporate (wherever incorporated)..."
Section 421
"Meaning of 'market value' etc
(1) In this Chapter and Chapters 2 to 5 "market value" has the same meaning as it has for the purposes of the Taxation of Chargeable Gains Act 1992 by virtue of Part 8 of that Act."
Section 421A
"Meaning of 'consideration'
(1) This section applies for determining for the purposes of Chapters 2 to 5 the amount of the consideration given for anything.
(2) If any consideration is given partly in respect of one thing and partly in respect of another, the amount given in respect of the different things is to determined on a just and reasonable apportionment..."
Section 421B
"Application of Chapters 2 to 4A
(1) Subject as follows (and to any provision contained in Chapters 2 to 4A) those Chapters apply to securities...acquired by a person where the right or opportunity to acquire the securities...is available by reason of an employment of that person or any other person.
(2) For the purposes of subsection (1)-
(a) securities are...acquired at the time when the person acquiring the securities...becomes beneficially entitled to those securities...(and not, if different, the time when the securities are....conveyed or transferred), and
(b) 'employment' includes a former or prospective employment.
(3) A right or opportunity to acquire securities...made available by a person's employer or by a person connected with a person's employer, is to be regarded for the purposes of subsection (1) as available by reason of an employment of that person unless-
(a) the person by whom the right or opportunity is made available is an individual, and
(b) the right or opportunity is made available in the normal course of the domestic, family or personal relationships of that person...
(8) In this Chapter and Chapters 2 to 4A-
"the acquisition", in relation to employment-related securities, means the acquisition of the employment-related securities pursuant to the right or opportunity available by reason of the employment,
'the employment', in relation to employment-related securities, means the employment by reason of which the right or opportunity to acquire the employment-related securities is available ("the employee" and "the employer" being construed accordingly unless otherwise indicated), and
"employment-related securities" means...
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