Ian Douglas Thomson (HM Inspector of Taxes) (Respondent) Gurneville Securities Ltd (Appellants)
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE RUSSELL,LORD JUSTICE CROSS |
| Judgment Date | 18 December 1969 |
| Judgment citation (vLex) | [1969] EWCA Civ J1218-1 |
| Court | Court of Appeal (Civil Division) |
| Date | 18 December 1969 |
[1969] EWCA Civ J1218-1
In The Supreme Court of Judicature
Court of Appeal
(Revenue Paper)
(On Appeal from the Chancery Division, Mr. Justice Goff).
Lord Diplock (not present)
Lord Justice Russell, and
Lord Justice Cross
Mr. R.H. WALTON, Q.C., Mr. M.J. FOX, Q.C. and Mr. A.E. PARK (instructed by Messrs. Beer, Timothy Jones & Webb) appeared on behalf of the Appellants.
Mr. W.A. BAGNALL, Q.C. Mr. P.W. MEDD, and Mr. J.P.F. WARNER (instructed by The Solicitor of Inland Revenue) appeared on behalf of the Respondent.
I will ask Lord Justice Cross to read the judgment of the Court.
The question at issue in this case is whether the purchase by Gurneville Securities Ltd. on the 23rd December, 1955, of 11,202 shares (the whole issued capital) of Bishopsgate Investments Ltd. was a transaction forming part of the trade of Gurneville Securities (which we will call G.S.) as a share-dealer or, to put the point in other words, whether the shares in Bishopsgate Investments (which we will call B.I.) bought by G.S. became part of its stock-in-trade. The facts are recited at length in the case stated by the Special Commissioners, which exhibits all the relevant documents. It is, therefore, only necessary for us to give such a summary of them as will make this judgment intelligible.
In 1954 the shares in B.I. were held by several members of the Colman family. B.I. was a holding company with 102 wholly owned subsidiary property companies owning together a large number of freehold and leasehold properties. The market value of these properties very much exceeded the cost of their acquisition and if they were sold the subsidiaries would receive very large profits. But these profits would be subject to income tax and if the balance of profit were distributed by way of dividends through B.I. to the Colmans, the latter would have to pay large sums by way of surtax before they could enjoy the ultimate balance. The Colmans looked about to find a way to avoid or reduce this unwelame tax liability and found in a Mr. Sandelson - who controlled the Stormgard group of companies - someone who was prepared to help them, if he could help himself at the same time.
His scheme was simple enough, though it could only have been evolved and carried through by someone who had an intimate knowledge of revenue law and was further prepared in the conduct of his affairs to adhere to its letter in defiance of its spirit. Whether he would think it proper for the revenue authorities to adopt the same attitude in the discharge of their duties one does not know.
The steps in the scheme were as follows; (1) the 102 property companies would transfer their properties at book values to a newly formed property dealing company; (2) that company would trade for four years only - which would mean (as the law then stood) that the profits which it made in the antepenultimate year of its trading would be taxed, regardless of what they really were, by reference to the profit of the previous year; (3) that so many as possible of the properties should be sold in that second year; (4) that one of Mr. Sandelson's share-dealing companies should purchase the shares in B.I. at an agreed percentage of the net assets value, so that the Colmans and Sandelson should share in agreed proportions in any reduction in the tax liability of the new property dealing company brought about by the four-year plan; (5) that the new company should after realising its profits declare as large dividends as it legally could declare; (6) that the company which had purchased the B.I. shares and so received the net dividend should in reliance on the principle of law which was affirmed in the F.S. Securities case, 41 Tax Cases, 666, (i.e., that dividends paid subject to deduction of tax to a share dealing company do not come into its trading account) write down the value of the shares purchased by reference to the dividend declared and reclaim the relevant tax; (7) that the shares - reduced in value by the payment of the dividend -should be sold in the course of the share dealing company's business.
The merit of the scheme from the point of view of the Colmans was that they would receive a large part of the reduction in the tax liability on the realisation of the profits of the property company in the shape of an increase in the purchase price for the B.I. shares and that that price would come to them in the shape of capital. The merits or, the scheme from the point of view of Mr. Sandelson were (a) that he would receive some benefit from the reduction in the tax liability, since he was to get a proportion of the net assets value without paying for it; (b) that he would or might be able to recover some part of the tax deducted or notionally deducted from the dividends paid to G.S. through B.I., and, (c) that he would inevitably make some commercial profit on the deal if none of the fiscal profit materialised since he was only to pay a proportion of the net value of the assets of the companies.
The implementation of the scheme proved to be more troublesome than was anticipated. The books of the 102 subsidiaries were in a state of some confusion so that it took a long time to find out exactly what the numerous properties were worth. On the other hand speed was of the essence because of the ever present risk that legislation would be passed which would deprive the scheme of some or all of its fiscal advantages.
For the purposes of this judgment it is not necessary to go into the many documents which were executed in detail. G.S. was incorporated on the 9th March, 1954, with a share capital of £100, all the shares being owned by Stormgard. Its first profit and loss account was for the period from 1st December, 1955, to 31st March, 1957. By far the largest transaction into which it entered was its purchase of the B.I. shares, but it engaged in a number of other share dealing transactions.
The new property company, Bishopsgate Properties, Ltd., (which we will call B.P.) was incorporated on the 20th April, 1554, with a share capital of £1,000, all shares being held by B.I., and the properties of the 102 other subsidiaries were duly transferred to it at book values. The first accounting year of B.P. was from the 8th May, 1954, to the 7th May, 1955, so it was desirable that so much as possible of its profit should be realised in the year 8th May, 1955, to 7th May, 1956.
The contract for the purchase of the B.I. shares by G.S, was made on the 23rd December, 1955, between the various members of the Colman family who owned the shares as vendors of the 1st part, a company called Willrose Financial Investments Ltd. (who were acting as agents of G.S.) as purchasers of the 2nd part and stormgard of the 3rd part. The purchase price was £16,803 i.e. 30/-d. Per share) plus a further sum equal to 95% of the amount by which the not assets of B.P. and its subsidiaries (defined as assets after providing for all liabilities inclUding taxation) as at 7th May, 1956, should exceed £16,803.
The £16,803 was paid on 30th December, 1955, and the shares were then put into the name of G.S. By a further agreement made on, the 4th May 1956,it was agreed that the further sum should be quantified at £1,769,000, but as the value of many of the Properties were still uncertain provision was made for that sum to be increased or reduced. In the ultimate result it proved to be too much by some £400,000. It was further agreed that the vendors should be entitled to only 94% instead of the net assets value. On this sameday, 4th May, 1956, B.P. sold the greater part of the properties to Carward Properties, Ltd., a company controlled by the Colmans, for £1,611,434. It does not appear whether or not it was always intended that the hulk of the properties should come back to the Colmans or whether that was something forced on the parties by the necessity of selling as many as possible before the 7th May, 1956. The sum of £1,769,000 payable by G.S. was borrowed from the bank and £1,611,434 of it was applied in paying for the properties bought by Carwards and found its way back to the bank at once.
A number of the remaining properties were sold by auction in the following two years and those that remained unsold were bought from B.P. by Efgan, Ltd. - another Sandelson company - at the beginning of April, 1958, so as to enable B.P. to cease trading on 3rd April, 1958, within the four year period. B.P's. total net profit during its trading life, i.e. from 8th May, 1954, to 3rd April, 1958, was £1,257,614, but as by far the greater part of it was earned in the year 1955/1956 only £194,160 tax was paid.
On 3rd April, 1957, B.P. paid to B.I. as holder of its 1,000 shares a dividend of £1,200 per share less tax on each share, making £690,000, and on 1st April, 1958, a further dividend of £520 per share less tax, making £299,000 net. B.I., in its turn, paid to G.S. a dividend of £106 less tax on each of its 11,202 shares on 3rd April, 1957, making £682,761.18.0., and on 1st April, 1958, a further dividend of £45 per share less tax, making £289,851.15.0. On 5th April, 1957, the directors of G.S. wrote down the value of its holding in B.I., by the amount of the net dividend of £682,751.18.0. and on 5th April, 1958, they further wrote down the value of their holding by £289,851.15.0.
In due course G.S. preferred repayment claims under Section 341 of the Income Tax Act, 1952, on the basis of trading losses sustained in the years 1956/57 and 1957/58 amounting to £683,095 and £290,333 respectively. The amounts of tax claimed to be repayable being £290,315.7.6. and £123,391.10.6. respectively.
The Special Commissioners held that B.P. was not entitled to deduct tax at the standard rate from the...
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