Land Securities Plc v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 September 2011 |
| Neutral Citation | [2011] UKFTT 599 (TC) |
| Date | 14 September 2011 |
| Court | First Tier Tribunal (Tax Chamber) |
[2011] UKFTT 599 (TC)
Howard M Nowlan (Tribunal Judge) (Chairman), Sonia Gable
John Gardiner QC and Philip Walford, counsel, on behalf of the Appellant
Julian Ghosh QC and Elizabeth Wilson, counsel, on behalf of the Respondents
Corporation tax - scheme to generate an allowable capital loss of 200 million in reliance on the identification rule of Taxation of Chargeable Gains Act 1992 section 106s. 106 TCGAct 1992 for matching a disposal with a later acquisition - whether Ramsay principle undermined the disposal - whether Taxation of Chargeable Gains Act 1992 section 30s. 30 TCGAct 1992 diminished the loss on a contention that, even disregarding the identification rule, the disposal was nevertheless a disposal of shares acquired after the disposal, rather than a disposal of the shares in fact owned at the time of the disposal, in order to bring s. 30 into operation by virtue of s. 30(9) - whether in the alternative s. 30(9) was brought into operation in reliance on the identification rule, or whether this analysis was precluded by the decision of the Special Commissioners and Park J in Davies v Hicks - whether, if s. 30 applied, the allowable loss should be diminished or diminished to nil, notwithstanding that the result of disallowing the loss in full would be to leave the appellant with a latent chargeable gain of 200 million - appeal dismissed
1.This was an ingenious scheme designed to create an allowable capital loss of 200,415,181 for the Appellant's accounting period ended 31 March 2003. The Appeals were against the decision of HMRC to deny the entire loss. The transactions required to effect the scheme all occurred between 27 March 2003 and 25 September 2003, though since the loss could not be entirely utilised in the relevant period, this case involved formal appeals, all governed by the same points, for various later periods as well.
2.In late 2002, the Land Securities group was conscious that its recent repayment of capital had left the group both short of finance to fund various planned property acquisitions, and also at risk of having its credit rating with the various rating agencies downgraded. It therefore entered into discussions with several banks with a view to trying to address these two concerns.
3.One of the banks approached was Morgan Stanley. Morgan Stanley suggested a scheme to Land Securities that claimed to provide finance (albeit only very short-term finance) for Land Securities' proposed property acquisitions, in the form of a joint venture company between the two groups, into which Morgan Stanley would inject the vast proportion of the required finance in the form of a capital contribution. The other, and in reality the far more material and realistic benefit of this scheme, was that it was claimed that it would generate a capital loss for Corporation Tax purposes for the Appellant in an amount geared to the capital provided, namely 200 million.
4.Very briefly the proposal was as follows. The Appellant would first re-name a company that had been some form of group "name protection" company, the only 9 shares of which the Appellant had owned for years, and would call that company LM Property Investments Limited ("LMPI"). The rights attaching to 41 of the then authorised but unissued 91 shares were then changed. The 41 shares were re-classified as B Ordinary Shares ("the 41 B shares"), and they were given rights to dividends and distributions in relation to, their capital, any premium at which they were issued, and also to any capital contribution specifically made in respect of them. The 9 shares remained unclassified, and their rights were not changed, but it was suggested and expected that the effect of the change to the rights of the 41 B shares would be that capital contributions made in respect of the 9 shares would likewise confer value only on the 9 shares, and not on the 41 B shares. Another Land Securities subsidiary, Ravenseft Properties Limited ("RPL") then subscribed the 41 B shares at a premium of 3.75 million; the Appellant made a capital contribution of 1.25 million in respect of the 9 shares, and the Appellant then sold the 9 shares to a Morgan Stanley Cayman Isles company, Morgan Stanley Canmore Limited ("Canmore") on 31 March 2003, simultaneously granting Canmore a put option for 1 to put the shares back on to the Appellant at any time within the next 12 months at market value. The expectation was that Canmore, having acquired the 9 shares, would make a capital contribution of 200 million to LMPI. LMPI would then ostensibly rank as a joint venture property investment company between RPL and Canmore, with each shareholder having rights to appoint equal numbers of directors.
5.Whilst the Appellant claimed that this method of funding the joint venture vehicle was attractive to the Land Securities group from a rating agencies standpoint, since it did not technically rank as debt, the Appellant conceded that the principal objective of the transactions was to create a capital loss. This was to be achieved by the re-acquisition of the 9 shares within a six-month period of their disposal, pursuant either to the exercise of Canmore's put option, or the exercise of a call option that was granted to the Appellant after the initial steps. The re-acquisition price was to be market value, obviously reflecting the 200 million capital contribution that it was assumed Canmore would have made to LMPI prior to the re-acquisition of the 9 shares.
6.The scheme was designed, from a tax point of view, to exploit the point, under Taxation of Chargeable Gains Act 1992 section 106section 106 TCGAct 1992, that if (as in fact occurred) the Appellant re-acquired the 9 shares within the six-month period after their disposal to Canmore, the Appellant would be required to match its 31 March disposal of the 9 shares for just 1.25 million, not with its historic acquisition cost of 9, but with the price paid on the re-acquisition. Since by that time the value of the 9 shares had been enhanced by the capital contribution made by Canmore, such that the re-purchase price was 202,265,179.50 the Appellant claimed a capital loss of the excess of that amount over the figure of 1.25 million.
7.Not surprisingly, HMRC challenged the transaction. The ways in which the challenges were mounted are too complex to explain in this Introduction, but very shortly the first argument was that the disposal of the 9 shares should simply be ignored on Ramsay principles. The second argument, which became rather more involved during the course of the hearing, was that the value shifting section, namely Taxation of Chargeable Gains Act 1992 section 30section 30 TCGAct, operated to deny the loss. The possible application of section 30 revolved around the provision in subsection 30(9). This subsection modified the usual feature that section 30 applied in relation to the receipt of tax-free benefits, coupled with reductions in the value of assets, to apply as well to "increases in the value of assets" where disposals preceded acquisitions. The Appellant contended that the disposal of the 9 shares on 31 March was a disposal of the shares that it had owned for years, and not a disposal of shares that it would later acquire, so that subsection 30(9) was not in point. In due course we considered two different contrary arguments, pursuant to which the value shifting section might be engaged. We concluded that the section was in point. That led to the final issue of what reduction, if any, would be "just and reasonable". In this context the Appellant contended that if its loss was reduced to nil, this would not be reasonable, since on any view it would have a latent gain on the re-acquired shares in LMPI since shares then worth approximately the price paid on their re-acquisition would be left with the hitherto unallocated base cost of 9. Our conclusion was that the whole loss should be disallowed.
8.In summarising the transactions, it will make it easier for a reader to understand the steps if we add some comments as to why particular features of the transactions doubtless existed. We are adding these comments not because they are of much relevance to the decisions that we have reached, but simply because they will facilitate an immediate understanding of the scheme.
9.The Appellant had owned the 9 issued shares (the only issued shares) out of the 100 authorised shares of LMPI for many years. The company appeared initially to have been used simply for "name protection" purposes, which resulted in the fact that it had had no apparent activity. The rights attaching to the 9 shares were not technically altered, and they were periodically referred to as "the unclassified shares".
10.The rights attached to 41 of the unissued shares were changed in the manner that we have described shortly in the Introduction, and that we will have to revert to below. The 41 B shares were then subscribed by RPL on 27 March 2003 as we have described. The Appellant also made the modest capital contribution on the same date in respect of the 9 shares. One of the obvious objectives of RPL in subscribing the 41 B shares, was that this subscription would explain how it was that the company remained theoretically a "joint venture" company, once the 9 shares had been sold by the Appellant to Canmore, and it would also explain why it was that both the Land Securities group and the Morgan Stanley group would have the right to appoint equal numbers of directors to the Board of LMPI.
11.In passing, we comment that the reason why:
the Appellant chose to use its original 9 shares in LMPI for the purposes of the following steps;
the Appellant endeavoured to change only the rights attaching to the 41, rather than the 9, shares when changing the share rights to ensure that capital contributions made by the holder of either the 9 or the 41 shares would enhance the value of only the shares in respect of...
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