Irving v Tesco Stores (Holdings) Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 29 July 1982 |
| Date | 29 July 1982 |
| Court | Chancery Division |
Chancery Division.
Mr. A. Heyman Q.C. and Mr. C.H. McCall (instructed by the Solicitor of Inland Revenue) for the Crown.
Mr. C.N. Beattie Q.C., Mr. G.R. Bretten Q.C. and Miss M.H. Arden (instructed by Messrs. Norton, Rose Botterell & Roche) for the taxpayer.
Before: Walton J.
Corporation tax - Group relief - Whether loss-making company and acquiring company should be treated as members of same group - Whether company making acquisition controls company making loss -Income and Corporation Taxes Act 1970 section 258 section 534Income and Corporation Taxes Act 1970, sec. 258, 534 -Finance Act 1973 section 29Finance Act 1973, sec. 29.
The taxpayer company (Holdings) was a member of a successful group of companies. In 1974, Holdings entered into a tax-saving scheme. The scheme involved a subsidiary of Holdings (Stores) acquiring 75% of the ordinary share capital of "Rebron", a member of the Shell group of companies, for a sum of £75. Rebron was to enter into a novation of a shipbuilding contract with a Japanese company for a vessel ordered by another company in the Shell group. The object of the scheme was for Rebron to surrender it's losses (which would largely be capital allowances equal to the sterling cost of the vessel) to Holdings.
By Income and Corporation Taxes Act 1970 section 258sec. 258 of the Taxes Act 1970, one group member could surrender trading losses incurred by it to another member of the group. ByIncome and Corporation Taxes Act 1970 section 258 subsec-or-para (5)sec. 258(5)(a) two companies were deemed to be members of the same group if one was the 75% subsidiary of the other or both were 75% subsidiaries of a third company. By Finance Act 1973,Finance Act 1973 section 29 subsec-or-para (1)sec. 29(1)(b)(ii), two companies were not to be treated as members of the same group where arrangements were in existence so that any person had control of one company but not of the other. "Control" was defined byIncome and Corporation Taxes Act 1970 section 534sec. 534 of the 1970 Act as the power to secure the imposition of one's wishes by means of voting power or of any powers conferred by the articles of association.
Under Rebron's articles, its share capital of £102 was divided into 50 "A" ordinary shares, 50 "B" ordinary shares and 2 "C" deferred shares. The "C" shares, which were not ordinary share capital, were held by a Shell group member. What was envisaged was that Shell should be able to appoint a majority of the board of Rebron by means of its "C" shares. The arrangement involved the appointment of 9 directors: 2 by "A" shareholders, 2 by "B" shareholders and 5 by resolution passed by a majority of "A" and "B" shareholders subject to the approval of "C" shareholders. No "C" directors were ever appointed. In a general meeting, "A" and "B" shareholders each had one vote. The chairman of the meeting had a casting vote on a resolution to remove a "C" director. Article 11(e) of Rebron's articles of association stated that where two "A" directors supported a resolution which was opposed by a "C" director, the resolution would be carried.
Stores owned beneficially 49 "A" shares and (through an interest in another company) 25 "B" shares. Thus, Stores beneficially owned 74% of Rebron's ordinary share capital. One "A" share had been transferred by W, an employee of the solicitors to Stores, to P (Holdings' chairman) expressed to be for a consideration of £1. No evidence was adduced as to how or by whom the £1 was paid. P considered he was holding the share on behalf of Stores. If this share was regarded as being beneficially owned by Stores, Stores would own the requisite 75% of Rebron's ordinary share capital for the purpose of group relief.
The Inspector refused Holdings' claim for group relief underIncome and Corporation Taxes Act 1970 section 258sec. 258 for accounting periods between 1973 and 1977. Holdings successfully appealed to the Special Commissioners against that decision. The Crown appealed against the findings of the Special Commissioners contending that Stores did not quality for group relief because the "A" share had not been transferred effectively to P. It also submitted that Rebron was not a member of the same group as Stores under the Finance Act 1973, Finance Act 1973 section 29sec. 29 because "C" shareholders could bar the appointment of "C" directors. At general meetings "A" shareholders would have no more votes than "B" shareholders and thus could not dictate policy. Therefore, whilst Holdings had control of Stores it could not be said to have control of Rebron. Holdings contended that control involved the management of a company's affairs by its Board of Directors and that "A" directors had control of Rebron, especially since there was no appointment of any "C" directors.
Held, appeal allowed.
1. The one "A" share was held beneficially by P on behalf of Stores. A contract existed whereby W agreed to sell and P to buy the share for a consideration of £1. If there was a failure to pay that consideration, W would be entitled to set aside the contract but he had not done so. Therefore, 75% of Rebron's shares was held by Stores.
2. Rebron and Stores should not be treated as members of the same group for group relief purposes. Under the Finance Act 1973,Finance Act 1973 section 29sec. 29, one was bidden to have regard to the arrangements in existence, not the extent to which such arrangements were, in fact, duly implemented. There was an arrangement whereby "A" directors were to be in a minority, subject to the power given to them by Article 11(e). There was no control at company meeting level because "A" shareholders could not dictate company policy against "B" shareholders and this produced a deadlock.
Walton J.: The background to the present case emerges with great clarity from a letter of 5th October 1973, written by a Mr. Stanley Berwin, who was then a director of N.M. Rothschild & Sons Ltd. ("Rothschilds"). Rothschilds were then acting on behalf of the Royal Dutch Shell Group of Companies, and were also merchant bankers to the Tesco Group of Companies. It was doubtless this combination of roles which caused Mr. Berwin to write his letter to Mr. Ralph Temple, who was the financial director of the Respondent Company ("Holdings") and of Tesco Stores Ltd., the wholly-owned subsidiary of Holdings.
That letter reads as follows:
Dear Ralph, You will recall that I informed you recently of an investment opportunity whereby for an investment of £75 you would receive an after tax remuneration of approximately £1.4 million. The proposal entails the purchase by a trading subsidiary of the Tesco Group ("Tescosub") of 75 per cent of the ordinary share capital of a wholly owned subsidiary ("Shellsub") of the Royal Dutch Shell Group of Companies for the nominal consideration of £75. The remaining 25 per cent of the ordinary share capital would be purchased by N.M. Rothschild & Sons (Leasing) Limited and an associated overseas leasing company, jointly referred to as "the Managers".
Shellsub will enter into a novation of a shipbuilding contract with Mitsui Shipbuilding Company of Japan for the construction of a 300,000 deadweight ton oil tanker ("the VLCC" or "the vessel") which has been ordered and partially paid for by Shell International Marine ("SIM"). Shellsub will pay Mitsui approximately £11.25 million as refinance for the payment already made and, on delivery of the VLCC in February 1975, the sterling equivalent of Yen 7.2 billion (approximately £11.25 million on current exchange rates).
Finance for these payments has been arranged by the Managers and will, during the construction of the VLCC, be secured by the guarantee of Shell International Petroleum Ltd. After delivery the vessel will be chartered on a bareboat basis for 15 years to SIM; the charter payments over this period will be calculated so as to cover all interest charges and capital repayment of Shellsub's debt as well as its corporation tax liabilities. The assignment of these charter payments together with a mortgage on the vessel will secure Shellsub's borrowing after delivery. It will be the responsibility of the Managers to ensure that the cash flow of Shellsub is properly managed and that the revisions of charter payments which are to be contractually provided for will meet any additional requirements that may arise due to changes in interest rates, currency parities, or tax rates prior to or during the 15-year lease period.
The commitment sought from the Tesco Group will be to claim against normal trading taxable income the loss surrendered by Shellsub arising on expenditure incurred during the period of construction of the VLCC. Having claimed this loss the Tesco Group will be asked to make payments for group relief back to Shellsub at the time when the corporation tax, which would otherwise be due on the taxable income which has been sheltered by claiming Shellsub's loss, would normally be payable. In broad terms this loss amounts to capital allowances equal to the sterling cost of the VLCC plus interest paid by Shellsub on loans required for the construction finance. Since Tescosub would be the trading subsidiary that purchases the shares it is expected that the losses will be offset against the proportion of taxable profits of the Tesco Group measured from the date Tescosub purchases the shares to the financial year end of the Tesco Group. 121/2 per cent of the corporation tax saved as a result of claiming Shellsub's loss would form the principal remuneration of the Tesco Group. The remaining 871/2 per cent of the corporation tax saved would be used by the Managers towards defraying the cost of the VLCC. A summary of the sums of money involved is set out in the Appendix.
In addition Tescosub would retain throughout the life of the vessel a 75 per cent interest in the company, qualifying for an agreed share in the profits (which...
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