Johnston Publishing (North) Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Sir John Chadwick,Lord Justice Toulson,Lord Justice Tuckey |
| Judgment Date | 23 July 2008 |
| Neutral Citation | [2008] EWCA Civ 858 |
| Docket Number | Case No: A3/2007/0759 |
| Court | Court of Appeal (Civil Division) |
| Date | 23 July 2008 |
[2008] EWCA Civ 858
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE LINDSAY)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Tuckey
Lord Justice Toulson and
Sir John Chadwick
Case No: A3/2007/0759
CH/2006/APP/0838
Mr John Gardiner QC and Mr Philip Walford (instructed by Nabarro, Lacon House, Theobald's Road, London WC1X 8RW) for the Appellant
Mr Christopher Tidmarsh QC (instructed by Solicitor to HMRC, East Wing, Somerset House, Strand, London WC2R 1LB) for the Respondents
Hearing date: 26 February 2008
This is an appeal from an order made on 15 March 2007 by Mr Justice Lindsay on an appeal from the decision of the Special Commissioners (Mr John Clark, sitting alone) released on 9 October 2006. The issue between the parties turns on the true construction of section 179(2) of the Taxation of Chargeable Gains Act 1992 (“ TCGA 1992”).
The statutory framework
In order to set the issue in context it is necessary to describe the statutory provisions which determine the charge to corporation tax on gains accruing on transfers between associated companies. Those provisions are contained within Chapter I (“Companies”) of Part VI (“Companies, Oil, Insurance Etc”) of TCGA 199The underlying principle is set out in section 171(1) of the Act:
“171(1) Notwithstanding any provision in this Act fixing the amount of the consideration deemed to be received on a disposal or given on an acquisition, where a member of a group of companies disposes of an asset to another member of the group, both members shall, except as provided by subsections (2) and (3) below, be treated, so far as relates to corporation tax on chargeable gains, as if the asset acquired by the member to whom the disposal is made were acquired for a consideration of such amount as would secure that on the other's disposal neither a gain nor a loss would accrue to that other; …”
The policy upon which that principle (commonly known as the “in-group rule”) is based was explained by Mr Justice Hoffmann in Westcott (Inspector of Taxes) v Woolcombers Ltd [1986] STC 182, 190:
“The policy of para 2(1) of Schedule 13 [of the Finance Act 1965]”—the precursor of section 171 TCGA 1992 –“is to recognise that in the case of transactions between members of a group of companies, the legal theory that each company is a separate entity does not accord with economic reality. It gives effect to that policy by, broadly speaking, ignoring transactions within the group, computing the gain as the difference between the consideration given when an asset was acquired by the group and the consideration received when it left the group, and charging the tax on whichever company made the outward disposal… . Thus all the provisions with which we have been concerned are directed to neutralising the tax effects of transactions which are disposals in legal theory but not in real life”.
As Mr Justice Millett pointed out, in NAP Holdings UK Ltd v Whittles (Inspector of Taxes) [1992] STC 59, 64c-d, it became apparent to the Revenue that, following the enactment of the Finance Act 1965, the in-group rule provided an opportunity to postpone liability for tax on gains by what became known as the “envelope” scheme:
“… A company, owning an asset (other than shares) which has appreciated in value, wishes to sell it. The company incorporates a subsidiary and transfers the asset to it (no chargeable gain) in return for an issue of the subsidiary's shares (not a disposal: those shares have an acquisition cost reflecting the current value of the asset). The company then sells the shares in the subsidiary for their current market value (no chargeable gain). Thus, the company which has actually realised the gain is not charged at all; and the taxability of the gain is postponed until the purchaser of the subsidiary's shares sells the asset (to which the original low base cost still attaches). That may never happen.”
He explained (ibid, 64g) that the provisions enacted as section 278 of the Income and Corporation Taxes Act 1970 (introduced by section 34 of, and paragraph 18 of schedule 12 to, the Finance Act 1968: and now re-enacted in section 179 TCGA 1992) were a response to schemes of that nature.
Section 179 TCGA 1992 (at the date relevant to these proceedings) was in these terms, so far as material:
“179(1) If a company ('the chargeable company') ceases to be a member of a group of companies, this section shall have effect as respects any asset which the chargeable company acquired from another company which was at the time of acquisition a member of that group of companies, but only if the time of acquisition fell within the period of 6 years ending with the time when the company ceases to be a member of the group; …
(2) Where 2 or more associated companies cease to be members of the group at the same time, subsection (1) above shall not have effect as respects an acquisition by one from another of those associated companies.
(3) If, when the chargeable company ceases to be a member of the group, the chargeable company, or an associated company also leaving the group, owns, otherwise than as trading stock—
(a) the asset, …
then, subject to subsection (4) below, the chargeable company shall be treated for all the purposes of this Act as if immediately after its acquisition of the asset it had sold, and immediately reacquired, the asset at market value at that time.
For the purposes of section 179 TCGA 1992 two or more companies are “associated companies” if, by themselves, they would form a group of companies: section 179(10). Section 170(3) – read with sections 170(4) to (6) – applies for the purpose of determining when two or more companies would form a group of companies.
As I have said, the provisions of section 179 TCGA 1992 were introduced in 1968 as a response to envelope schemes of the nature described by Mr Justice Millett in the NAP Holdings case. The effect of those provisions (ignoring, for the moment, section 179(2)) is to impose an “exit charge” when the group company which has acquired the asset leaves the group. So, in the envelope scheme described by Mr Justice Millett, when the subsidiary to which the asset has been transferred by a fellow group company leaves the group on the sale of its shares to a third party purchaser, it will be treated as having realised a gain (representing the difference between the deemed acquisition cost under section 171(1) and the market value at the time of acquisition) which will (prima facie) give rise to an immediate tax liability. The third party purchaser of the subsidiary's shares will not be able to postpone that liability until it sells the asset.
When introduced as paragraph 18(1), schedule 12, Finance Act 1968, the provisions now enacted as section 179(1) TCGA 1992 were subject to the proviso now enacted as section 179(2) TCGA 1992. In a case where two or more associated companies cease to be members of the group at the same time there is no exit charge “as respects an acquisition by one from another of those associated companies”. The issue between the parties is whether – in the case where, following the acquisition of an asset by one group company (say, company A) from another group company (company B), both company A and company B leave the group at the same time —it is enough, for the purposes of section 179(2) TCGA 1992 and its predecessors, that company A and company B are associated companies at the time when they leave the group (as the appellants contend) or whether it is necessary, also, that company A and company B were associated companies at the time of the acquisition (as the Revenue contends).
The issue arises because companies which are members of the same group are not, necessarily, “associated companies” within the meaning given to that expression by section 179(10) TCGA 1992. Companies will be associated companies for the purposes of section 179 if, but only if, by themselves, they would form a group of companies. That condition will not be met in a case where (for example) company A and company B are each 75 per cent subsidiaries of a third company (company C), but neither company A nor company B is a subsidiary of the other: section 170(3) TCGA 1992. By contrast, the condition would be met in a case where (for example) company A was a 75 per cent subsidiary of company B, notwithstanding that company B was a 75 per cent subsidiary of company C.
The underlying facts
The facts which have given rise to the issue in these proceedings are set out fully at paragraphs 4 to 14 of the special commissioner's decision, [2006] UKSPC 00564. Those facts are not in dispute. It is sufficient, for the purposes of this judgment, to adopt (as I do, with gratitude) the summary at paragraphs [4] and [5] of the judgment of Mr Justice Lindsay, [2007] EWHC 512 (Ch):
“[4] … on 7 th July 1997 UPNH [the appellant, Johnson Publishing (North) Limited, then known as UPNH Limited] became a member of the UNM Group by way of being a wholly owned subsidiary of UNMG [United News & Media Group Limited], a member of that Group. On the same day, but after UNMG had been registered as the shareholder of UPNH, UPNH made a rights issue to UNMG in return for £314,700,000. Then another member of the UNM Group, UPN [United Provincial Newspapers Limited], which owned a number of operating subsidiaries, offered to sell the share capital in those subsidiaries to UPNH. That was stage 1. Then,...
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