Kirby v Thorn E.M.I. Plc
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE NICHOLLS,LORD JUSTICE PURCHAS,LORD JUSTICE RUSSELL |
| Judgment Date | 24 July 1987 |
| Judgment citation (vLex) | [1987] EWCA Civ J0724-6 |
| Docket Number | 87/0788 |
| Court | Court of Appeal (Civil Division) |
| Date | 24 July 1987 |
[1987] EWCA Civ J0724-6
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(REVENUE LIST 33/85)
(MR. JUSTICE KNOX)
Royal Courts of Justice
Lord Justice Purchas
Lord Justice Nicholls
Lord Justice Russell
87/0788
MR. EDWARD NUGEE Q.C. and MR. CHRISTOPHER McCALL Q.C. (instructed by The Solicitor of Inland Revenue) appeared for the Appellant (Plaintiff).
MR. PETER WHITEMAN Q.C. and MR. B. GREEN (instructed by Messrs. Rowe & Maw) appeared for the Respondents (Defendants).
This appeal raises a question concerning capital gains tax. The question can be stated shortly, if somewhat loosely, as follows. As part of a transaction whereby three trading companies in a group were sold for a cash consideration, the ultimate holding company in the group, for a further cash consideration of U.S. $575,000, entered into a covenant with the purchaser that companies in the group would not, for a defined period, engage in the businesses carried on by the three trading companies being sold. Is capital gains tax payable in respect of that further cash consideration, paid in return for the covenant? Both the Special Commissioners and Knox J. have said no. The matter came before the Special Commissioners on an appeal by the taxpayer company, Thorn EMI plc, which I shall refer to as "Thorn", against an estimated assessment to corporation tax on profits for Thorn's accounting period ended 31st March 1978. On that appeal the only issue related to the sterling equivalent (£315,934) of the sum of £575,000 received by Thorn in that period. The Special Commissioners allowed the appeal, holding that this sum should not be included as a capital gain in the computation of Thorn's profits. They decided that, by entering into the covenant, Thorn did not dispose of any asset within the meaning of the capital gains tax legislation. On 27th February 1986 Knox J. dismissed the Crown's appeal against that decision. The Crown has now appealed to this court.
Strictly, the tax in issue in the present case is corporation tax, because on chargeable gains accruing to a company the tax charged is corporation tax and not capital gains tax. But in general, and it is not suggested that any exception is relevant in the present case, the amount of the chargeable gains of a company are to be computed in accordance with the principles applying for capital gains tax: see Income and Corporation Taxes Act 1970, sections 238 and 265. Accordingly, it will be convenient henceforth in this judgment for me to refer only to capital gains tax.
THE FACTS
The evidential material before the Special Commissioners consisted of an agreed statement of facts and a copy of the share sale agreement. No oral evidence was given. The essential facts are these. The three companies whose shares were sold were Dynamo and Motor Repairs Limited ("DMR"), Tyne and Wear Electrical Company Limited ("T & W") and Potters Electrical Repair Works Limited ("Potters"). I shall refer to these three companies as "the three companies being sold". Each of these companies carried on the trade of repairing and rewinding electrical motors and generators. Potters also carried on the trade of manufacturing and repairing heavy industrial lifting magnets, which were sold under the name of Thorn Electro Magnets. Thorn had never carried on these trades or any allied repairing or manufacturing trade. Thorn was primarily a holding company, but it also carried on the trade of providing management services to companies within its group.
The three companies being sold were members of the Thorn group but they were not direct subsidiaries of Thorn. In 1967 Thorn acquired the entire issued share capital of Metal Industries Limited ("MI"). One of Mi's wholly owned subsidiaries at that time was DMR. In 1968 and 1970 respectively Potters and T & W became part of the Thorn group, and in 1970 or 1971 these two companies became wholly-owned subsidiaries of MI.
By an elaborate agreement dated 9th December 1977 and made between Thorn, MI and a New York corporation called General Electric Company ("GE") Thorn agreed to procure the sale and MI agreed to sell, and GE agreed to buy, all the shares in the three companies being sold "together with the benefit of the covenant". The aggregate consideration of US, $1.73million was apportioned as follows:
| $ | |
| Covenant | 575,000 |
| DMR | 815,000 |
| Potters | 160,000 |
| T & W | 180,000 |
| 1,730,000 |
The consideration for the covenant was payable to Thorn, and the remainder of the consideration was payable to MI. The form of the covenant, to be executed by Thorn and handed over on completion, was set out in a schedule to the agreement.
Completion duly took place. The covenant was entered into by Thorn in favour of GE. This also was an elaborate document. In short, in consideration of the payment of $575,000, Thorn covenanted with GE that, until the end of the year 1982 (that is, for a period of just over five years), Thorn and its subsidiaries for the time being would not, within the United Kingdom, engage in the business of repairing and rewinding electric motors and generators of a type and range that the three companies being sold were engaged in repairing and rewinding at the date of the agreement, or engage in the business of manufacturing and repairing heavy industrial lifting magnets of a type and range manufactured and repaired by Potters at the date of the agreement. There was an exception regarding repair business necessary for servicing products manufactured by any company in the Thorn group. The Thorn group was to be deemed to be engaged in one of the prohibited businesses if a company in the group beneficially owned shares in and managed or controlled, or participated in the management or control of, a company carrying on one of those businesses. There was a corresponding provision in respect of the ownership, management or control of unincorporated businesses. There were some exceptions to these restrictions which I need not further mention. For its part, GE agreed to discontinue the use of the trade name Thorn Electro Magnets.
CREATION OF AN ASSET BY ACT OF DISPOSAL
The first argument advanced for the Crown was to the effect that, by the covenant, Thorn conferred rights on GE, and the asset thus created by Thorn must have been disposed of by Thorn to GE. There was a disposal of an asset by Thorn to GE even if that asset had had no existence prior to the execution of the covenant. In agreement with the Special Commissioners and the judge, I am unable to accept this submission.
Capital gains tax was introduced by Part III of the Finance Act 1965. With subsequent amendments the provisions then enacted were consolidated in the Capital Gains Tax Act 1979.However, the year of assessment with which this appeal is concerned preceded the Act of 1979. Accordingly, in this judgment I shall refer to the provisions of the Act of 1965, although I am not aware that they differ materially from the corresponding provisions in the consolidating Act now in force.
The tax is charged on capital gains, which are defined in the Act (section 19) as "chargeable gains computed in accordance with this Act and accruing to a person on the disposal of assets". The primary charging provision is section 20(1) under which, subject to exceptions, a person is chargeable to capital gains tax in respect of chargeable gains accruing to him in a year of assessment during which (stated broadly) he is a United Kingdom resident. Except as otherwise provided, every gain accruing after 6th April 1965 is a chargeable gain (section 22(10)). In general, the sums allowable as a deduction from the consideration in computing the amount of a gain accruing to a person on the disposal of an asset are restricted to the amount or value of the consideration given by that person for the acquisition of the asset or, if he did not acquire the asset, any expenditure incurred in providing the asset, the amount of any expenditure incurred by him for the purpose of enhancing the value of the asset or establishing or defending his title to the asset, and his incidental costs of making the disposal (para 4(1) of Schedule 6). All forms of property are assets for the purposes of the relevant part of the Act: this is provided by section 22, which loomed large in the arguments advanced on this appeal, so it will be convenient to set out the material parts of the first three sub-sections of section 22.
"(1) All forms of property shall be assets for the purposes of this Part of this Act, whether situated in the United Kingdom or not, including—
(a) options, debts and incorporeal property generally, and
(b)…and
(c) any form of property created by the person disposing of it, or otherwise coming to be owned without being acquired.
(2) For the purposes of this Part of this Act—
(a) references to a disposal of an asset include, except where the context otherwise requires, references to a part disposal of an asset, and
(b) there is a part disposal of an asset where an interest or right in or over the asset is created by the disposal, as well as where it subsists before the disposal, and generally, there is a part disposal of an asset where, on a person making a disposal, any description of property derived from the asset remains undisposed of.
(3)…there is for the purposes of this Part of this Act a disposal of assets by their owner where any capital sum is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum, and this sub-section applies in particular to—
(a)…
(b)…
(c)...
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