Kellogg Brown and Root Holdings Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | THE CHANCELLOR OF THE HIGH COURT,The Chancellor |
| Judgment Date | 24 March 2009 |
| Neutral Citation | [2009] EWHC 584 (Ch) |
| Docket Number | Case No: CH/2008/APP/0536/0582 |
| Court | Chancery Division |
| Date | 24 March 2009 |
[2009] EWHC 584 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Chancellor of the High Court
Case No: CH/2008/APP/0536/0582
MR JOHN GARDINER QC & MR PHILIP WALFORD (instructed by Norton Rose) for the Appellant
MR RUPERT BALDRY (instructed by the Solicitors for HM Revenue and Customs) for the Respondents
Hearing date: 11 March 2009
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
By an Agreement dated 18th January 1996 ("the Sale Agreement") the appellant, then called Halliburton Holdings Ltd, agreed to sell to Highlands Holdings (UK) Ltd ("HHUKL") for $7.5m the issued share capital in Highlands Insurance Company (UK) Ltd ("HICUK") and Highlands Underwriting Agents Ltd ("HUAL") conditionally on "the Distribution [as defined] being effected" pursuant to a Distribution Agreement dated 10th October 1995 and made between Halliburton Company (1) and Highlands Insurance Group, Inc.("HIG") (2). The distribution referred to was effected at or before 0830 on 23rd January 1996 and the sale of the shares was duly completed later on the same day.
In its corporation tax return for the accounting period ended 31st January 2000 the appellant ("HHL") sought to set against its profits a loss of £14,867,445 it claimed to have sustained in consequence of the sale of the shares in HICUK and HUAL. This claim was rejected by HMRC by means of a notice of amendment issued on 14th August 2007 on the ground that HHL and HHUKL were, at the relevant time, connected persons for the purposes of s.18 Taxation of Chargeable Gains Act 1992 (" TCGA") with the consequence, pursuant to s.18(3) TCGA, that the loss was not available to be set against the chargeable gains of HHL arising from transactions with persons other than HHUKL.
HHL's appeal against that notice was dismissed by the Special Commissioner (Dr Avery Jones CBE) on 18th June 2008. For the reasons explained in his decision, which I shall consider in detail later, he found that HHL and HHUKL were connected persons at the relevant time as defined by s.286(5)(b) TCGA. HHL now appeals to the High Court. As is well known such an appeal lies under s.56A Taxes Management Act 1970 on a point of law only. Before describing the points of law relied on it is necessary to refer in more detail to the facts, the relevant legislation and the reasoning and conclusions of the Special Commissioner.
The Facts
Halliburton Company is a company incorporated under the laws of the State of Delaware. Its shares were and are quoted on the New York Stock Exchange. It was the ultimate holding company of a group comprising subsidiaries incorporated in Delaware and England and engaged in energy or insurance businesses. It wished to regroup its insurance industries under HIG and spin that group off to the shareholders in Halliburton Company. The machinery for achieving that result was set out at length in a Distribution Agreement dated 10th October 1995 and made between Halliburton Company (1) and HIG (2) ("the Distribution Agreement"). The distribution for which it provided was the distribution amongst the members of Halliburton Company on the Distribution Record Date the proportionately equivalent number of shares in HIG which were also to be quoted on the New York Stock Exchange. The distribution was conditional on the matters set out in clause 4.01, but even if they were fulfilled Halliburton Company remained free to abandon the project at any time before the Distribution Date (see clauses 4.02 and 9.01). The Distribution Agreement also provided in clause 3.07 (in both its original and amended form) that "immediately following the Distribution Date" HHUKL, newly incorporated as a wholly owned subsidiary of HIG, should buy the issued share capital of HICUK and HUAL.
On 26th December 1995 the directors of Halliburton Company determined, as provided in the Distribution Agreement, that the Distribution Record Date and the Distribution Date should be 4th and 23rd January 1996 respectively. As I have indicated in paragraph 1 above, the agreement for the sale of the shares in HICUK and HUAL by HHL to HHUKL was made on 18th January 1996. The sale was conditional on
"the Distribution (as such term is defined in the Distribution Agreement) being effected pursuant to the Distribution Agreement"
That condition matched the provision in clause 3.07 of the Distribution Agreement that the sale should be "immediately following" the Distribution Date.
The conditions precedent to the Distribution were satisfied by close of business on 22nd January 1996 and the Distribution itself was effected by 0830 on 23rd January 1996. The Closing Memorandum records that the shares in HIG were duly issued to the members of Halliburton Company on its register of members on 4th January 1996 and immediately thereafter the sale of the shares in HICUK and HUAL by HHL to HHUKL for $7.5m was duly completed.
The Agreed Statement of Facts put before the Special Commissioner included details as to the shareholdings in Halliburton Company as at the Distribution Record Date and in Halliburton and HIG at the Distribution Date. The Special Commissioner concluded in paragraph 18 of his decision:
"On 23 January 1996 the shareholders of Halliburton Company and of HIG (who are the shareholders of Halliburton Company as at 4 January 1996) are not identical since there have been changes of 16% in between the two dates and may be other dealings outside the stock exchange. But I infer, and find as a fact, that one could identify a collection of shareholders who owned the greater part of the share capital of both companies on 23 January 1996."
There is no challenge to that conclusion.
As I have indicated HHL claimed that the sale of the shares in HICUK and HUAL gave rise to a capital loss of some £14m and sought to set it off against chargeable gains arising on transactions with parties other than HHUKL. HMRC contended that as HHL and HHUKL were connected persons such set off was not permissible. That contention was upheld by the Special Commissioner.
The relevant legislation
Before I set out the conclusions of the Special Commissioner I should refer to the relevant legislation. I have set it out in its context in the appendix to this judgment. For present purposes it is sufficient to indicate its relevance in broad terms. S.18(3) precludes the set off HHL seeks to make if the sale of the shares in HICUK and HUAL by HHL to HHUKL comes within the section. The section applies
"…where a person acquires an asset and the person making the disposal is connected with him."
Who are connected persons is to be determined in accordance with the provisions of s.286. The material provision is subsection (5)(b). This provides that:
"(5) A company is connected with another company-
(a)…
(b) if a group of 2 or more persons has control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person with whom he is connected."
By s.288 "control" is to be construed in accordance with section 416 of the Taxes Act 1988. S.416 contains elaborate provisions for determining whether a person has control of a company. HMRC rely on subsections (2), (3) and (6). So far as material they provide:
"(2) For the purposes of this Part, a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, direct or indirect control over the company's affairs,…
(3) Where two or more persons together satisfy any of the conditions of subsection (2) above, they shall be taken to have control of the company.
[(4)…
(5)…]
(6) For the purposes of subsections (2) and (3) above, there may also be attributed to any person all the rights and powers of any company of which he has, or he and associates of his have, control or any two or more such companies, or of any associate of his or of any two or more associates of his, including those attributed to a company or associate under subsection (5) above, but not those attributed to an associate under this subsection;"
HHL contends that on the facts of this case those provisions do not apply.
Given the facts to which I have referred the time at which the question of connection is to be answered is obviously important. In that context it is necessary to have regard to s. 28 TCGA. That section provides:
"28 Time of disposal and acquisition where asset disposed of under contract
(1) Subject to section 22(2), and subsection (2) below, where an asset is disposed of and acquired under a contract the time at which the disposal and acquisition is made is the time the contract is made (and not, if different, the time at which the asset is conveyed or transferred).
(2) If the contract is conditional (and in particular if it is conditional on the exercise of an option) the time at which the disposal and acquisition is made is the time when the condition is satisfied."
The decision of the Special Commissioner
After setting out the agreed statement of facts, the terms of the relevant legislation and a summary of the submissions made to him by counsel for the parties the Special Commissioner explained the reasons for his decision. He started by considering three submissions made by counsel for HMRC as to the timing of the sale of the shares by HHL to HHUKL. In each case he rejected them but as they have been raised again before me and...
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Kellogg Brown and Root Holdings Ltd v HM Revenue and Customs
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