Lupton (HM Inspector of Taxes) v F.A. & A.B. Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 21 October 1971 |
| Date | 21 October 1971 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income tax, Schedule D - Loss in trade - Dealer in securities - Dividend-stripping - Whether shares bought for dividend-stripping held as stock-in-trade.
In the years 1959-60 to 1961-62 the Respondent Company traded as a dealer in stocks and shares. In addition to numerous other transactions in stocks and shares it carried out five dividend-stripping transactions, partly forwards and partly backwards, all with the object of making money bearing in mind the fiscal advantages which were expected to follow.
Four of these transactions involved the creation for purchase by the Company of shares with special rights. In one typical transaction, entered into in December 1959, such shares were bought for £625,000 down with a warranty that a dividend of £125,000 net would be paid immediately and further dividends amounting to £500,000 net by December 1964, and a stakeholder was appointed to hold £500,000 deposited by the Company and release it to the vendors as and when the dividends were paid. The legal costs and stamp duty borne by the Company amounted to £3,572, and it sold the shares for £455,000 after dividends of £170,000 net had been received.
In the remaining case the Company on 30th March 1960 bought for some £1,700,000 the issued share capital of an investment company with a trading sub-subsidiary. The vendor undertook that the revenue profits of the investment company's immediate subsidiary were then sufficient to declare a dividend of £800,000 net and that the Respondent Company would be entitled to recover from the Inland Revenue the tax deducted from any dividends paid to it by the investment company out of that dividend; they further undertook if the Company failed to recover any such tax to pay the difference between half the tax recovered and £200,000, and the Company undertook to proceed with a repayment claim with due diligence. The vendors deposited £200,000 with a stakeholder as security for their undertakings, to hold for three years on trust to release to the vendors that sum or half the tax recovered by the Company. The Company did not sell the shares after payment of the relevant dividend, but on a revaluation of the investment company's assets the transaction showed a loss of £182,980 after taking account of the net dividends received but not of the claim to repayment of tax or compensation in lieu.
On appeal against the refusal of claims to relief under s. 341, Income Tax Act 1952, for the years 1959-60 to 1961-62 in respect of trading losses resulting from falls in the value of the shares purchased in the five transactions, whether attributable to the payment of dividends or otherwise, it was contended for the Crown that the transactions were not entered into by the Company in the course of trade and the shares were never part of its stock-in-trade. In a decision given shortly after the decision of the Court of Appeal in Finsbury Securities Ltd. v. Bishop43 T.C. 491
the Special Commissioners held, following that decision and J.P. Harrison (Watford) Ltd. v. Griffiths 40 T.C. 281, that the transactions formed part of the Company's tradeHeld, that all the transactions were tax devices and not trading transactions.
Stated under the Income Tax Management Act 1964, s. 12(5) and the Income Tax Act 1952, s. 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 15th, 16th and 19th July 1965, F.A. & A.B. Ltd. appealed against an assessment to income tax in the sum of £1,000 made upon the Company for the year 1960-61 and claimed relief from tax under s. 341 of the Income Tax Act 1952 for the years 1959-60, 1960-61, and 1961-62 in respect of losses claimed by the Company to have been sustained by it in those years in its trade as a dealer in stocks and shares.
2. Shortly stated, the questions for our decision which are still in issue between the parties were:
(2) whether or not shares which F.A. & A.B. Ltd. acquired in five other companies were acquired by F.A. & A.B. Ltd. in the course of its trade as a dealer in stocks and shares and accordingly formed part of its stock-in-trade; and
(3) whether or not a sum of £13,325 formed part of the cost to F.A. & A.B. Ltd. of shares which it acquired in one of the said five companies.
3. The following witnesses gave evidence before us:
(2) Mr. Clifford Henry Barclay F.C.A. (hereinafter referred to as "Mr. Barclay"), a director of Barro Equities Ltd., the parent company of a group of companies of which F.A. & A.B. Ltd. is a member (hereinafter referred to as the "Barro Equities group"). Mr. Barclay recently became a director of F.A. & A.B. Ltd. and is also a director of certain other companies in the Barro Equities group.
(3) Mr. Anthony Holloway F.C.I.S., A.C.C.A., who in December 1959 joined F.A. & A.B. Ltd. as its accountant and assistant secretary and became a director of that Company from October 1960 to September 1961.
(4) Mr. Edward Lawson F.C.A., a principal accountant employed in the Secretaries' Office of the Board of Inland Revenue.
4. The following documents were proved or admitted before us:
(2) Memorandum and articles of association of F.A. & A.B. Ltd.
(3) Balance sheets and profit and loss accounts of F.A. & A.B. Ltd. for the four years ended 31st March 1959 to 31st March 1962 inclusive, together with directors' reports relating to the Company's accounts for the last three of those years.
(4) Particulars of dividends received by F.A. & A.B. Ltd. for the years ended 31st March 1960 and 31st March 1961.
(5) Abstract of accounts of F.A. & A.B. Ltd. for the years ended 31st March 1960, 31st March 1961 and 31st March 1962.
(6) Investment schedules of F.A. & A.B. Ltd. and summaries of the Company's profit and loss accounts for the years ended 31st March 1955 to 31st March 1959 inclusive, together with copies of (a)entries in the Company's investment control account from 1st April 1959 to 29th March 1962, and (b) entries in the Company's profits or loss on sale of shares account from 14th August 1959 to 31st March 1962.
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(7) Documents relating to the acquisition by F.A. & A.B. Ltd. of shares in the following five companies, namely Sotheby & Co. (an unlimited company), Leggett Nicholson & Partners Ltd., Western Productions Ltd., Oakroyd Investments Ltd. and Balcombe Productions Ltd. (hereinafter referred to as "S. & Co.", "L.N.P. Ltd.", "W.P. Ltd.", "O.I. Ltd." and "B.P. Ltd." respectively) as follows:
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(a) Documents relating to the acquisition of S. & Co. shares:
(i) Resolutions passed on 21st December 1959.
(ii) Letter from Hambros Bank Ltd. to F.A. & A.B. Ltd. dated 22nd December 1959.
(iii) Sale agreement dated 22nd December 1959.
(iv) Stakeholder agreement dated 22nd December 1959.
(v) Bundle containing copies of minutes commencing with extract from minutes of board meeting of Adjant Ltd. held on 21st December 1959, together with certain correspondence.
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(b) Documents relating to the acquisition of L.N.P. Ltd. shares:
(i) Sale agreement dated 23rd March 1959, together with copy of resolution passed on 23rd March 1959.
(ii) Agreement dated 31st March 1959.
(iii) Deed dated 31st March 1959.
(iv) Deed dated 18th August 1961.
(v) Copy of minutes of meeting of directors of F.A. & A.B. Ltd. held on 31st March 1959.
(c) Documents relating to the acquisition of W.P. Ltd. shares:
(i) Sale agreement dated 18th September 1959.
(ii) Stakeholder agreement dated 18th September 1959.
(iii) Bundle containing copy of minutes of meeting of directors of F.A. & A.B. Ltd. held on 18th September 1959, together with certain correspondence.
(d) Documents relating to the acquisition of O.I. Ltd. shares:
(i) Sale agreement dated 30th March 1960.
(ii) Stakeholder agreement dated 30th March 1960.
(iii) Bundle containing copies of minutes commencing with minutes of a meeting of directors of F.A. & A.B. Ltd. held on 29th March 1960.
(iv) Letter from Messrs. Cooper Bros. & Co., chartered accountants, to Barro Equities Ltd. dated 14th July 1961.
(e) Documents relating to the acquisition of B.P. Ltd. shares:
(i) Sale agreement dated 1st April 1960.
(ii) Stakeholder agreement dated 1st April 1960.
(iii) Copy of minutes of meeting of directors of F.A. & A.B. Ltd. held on 31st March 1960.
(8)
(9) Statements summarising transactions by F.A. & A.B. Ltd. in shares in S. & Co., L.N.P. Ltd., W.P. Ltd., O.I. Ltd. and B.P. Ltd.
(10) Copy of letter from Messrs. Chipchase, Wood & Jacobs, chartered accountants, to H.M. Inspector of Taxes, Brook District, dated 27th January 1961, and of certain enclosures thereto.
Copies of the documents referred to in subheads (4), (6) and (7) above are attached hereto as exhibits (marked "A" "B(a)(i)" to "B(e)(iii)" and "C" respectively) and form part of this Case(1). The other above-mentioned documents are not attached to, and do not form part of, this Case, but copies are available for inspection by the Court if required.
5. As a result of the evidence, both documentary and oral, adduced before us we find the following facts proved or admitted:
(2) The Respondent Company, F.A. & A.B. Ltd., was incorporated on 10th May 1952, and had at all material times an issued share capital of £1,000 consisting of 1000 ordinary shares of £1 each.
(3) During the years which were the subject of the appeal and claim before us, namely the years 1959-60, 1960-61 and 1961-62, the Company had entered into numerous transactions in stocks and shares other than the five transactions hereinafter referred to, and it was during those years admittedly trading as a dealer in stocks and shares.
(4) During the years 1959 and 1960 the Company acquired certain holdings of shares in S. & Co., L.N.P. Ltd., W.P. Ltd., O.I. Ltd. and B.P. Ltd. The...
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