Lupton v F.A. & A.B. Ltd
| Jurisdiction | England & Wales |
| Judge | THE MASTER OF THE ROLLS,LORD JUSTICE PHILLIMORE |
| Judgment Date | 14 May 1969 |
| Judgment citation (vLex) | [1969] EWCA Civ J0514-1 |
| Date | 14 May 1969 |
| Court | Court of Appeal (Civil Division) |
Appeal of respondent from Order of Mr. Justice Megarry dated March 27, 1968.
[1969] EWCA Civ J0514-1
The Master of The Rolls (Lord Denning),
Lord Justice Sacks and
Lord Justice Phillimore.
In The Supreme Court of Judicature
The Court of Appeal
T. 284
Mr. S.W. TEMPLEMAN, Q.C., and Mr. MICHAEL NOLAN, Q.C. (instructed by Messrs. Herbert Smith & Co.) appeared on behalf of F.A. & A.B. Ltd., Appellant.
Mr. H.H. MONROE, Q.C., Mr. J. RAYMOND PHILLIPS, Q.C., and Mr. J.P. WARNER (instructed by the Solicitor of Inland Revenue) appeared on behalf of H.H. Inspector of Taxes, Respondent.
The Legislature has recently killed dividend stripping, but this is one of its death struggles. The strippers seek to make the Revenue pay them £400,000. So it is worth fighting about.
As usual, the financial transactions are very complicated, They have to be if they are to succeed. Simple traders cannot manage them. Nor can the general run of accountants or lawyers, it needs a specialist dividend stripper to do it. The company F.A. & A.B. Ltd. were experts. That is apparent from the five transactions described in the Case Stated. In all five of them, the Judge (Mr. Justice Megarry) found that they were not trading transactions but tax devices, and nothing else. So the company received nothing. The company accepted his decision in four of them. They appeal in the fifth. This depends so much on the facts that I must explain them as best I can.
In the years up till 1959 a group of private companies called the Spencer Wire group carried on business as copper processors and smelters. The shareholders were all members of a family named Gill. The group had prospered exceedingly. They had made large profits on which they had paid tax. But they had not paid those profits to the shareholders. (This was, no doubt, because the shareholders did not wish to be charged with sur-tax on them.) In round figures they had made profits of £1,360,000, on which they had paid tax of £560,000, leaving a sum of £800,000 available for distribution as dividend net of tax. This was a dividend ripe to be stripped. The Gill family early in 1960 went to a firm of dealers in stocks and shares, called F.A. & A.B. Ltd. They specialised in dividend stripping. They thought up a most ingenious scheme by which the dealers hoped to recover £400,000 of tax from the Revenue and to split it between the Gill family and themselves. That is, £200,000 apiece. It was not possible early in 1960 to recover tax by means of "backward stripping" such as was described in Griffiths v. Harrison (1963 A.C. 1): because that had been stopped by section 4 of the Finance (No. 2) Act, 1955. So the dealers thought of doing it by means of "forward stripping" such as was described in Finsbury Securities v. I.R.C. (1965 1 W.L.R. 1216). This was a loophole which was stillavailable to dralers early in 1960, "Forward stripping" was not banned until the 5th April, 1960, when it was caught by section 28 of the Finance Act, 1960. "Forward stripping" meant that a company had to be found which would in the future make profits on which it could declare a dividend net of tax. The dealers would then buy the shares pregnant with future dividend, then later oh the dealers would take the dividend, sell the shares, show a loss, and recover the tax.
The plan was carried out in this way: a parent company was found, called Oakroyd Investments Ltd. The Gill family held all the shares in Oakroyd. Then an intermediate company was found called Elm Tree Industrial Finance Co. Ltd. Oakroyd held all the shares in Elm Tree. So the Gill family were, through Oakroyd, in control of Elm Tree. Elm Tree, in turn, held nearly all the shares in the Spencer Wire Co. So the Gill family were still in control of the Spencer group. The Spencer Wire Co. declared a dividend of £800,000 net of tax. It was paid to Elm Tree. The result was that on the 20th March, 1960, Elm Tree had in hand a sum of £800,000 net of tax ("grossed" up it was £1,360,000, less tax paid of £560,000, making £300,000 net of tax). On that date - the 20th March, 1960 - Oakroyd had no profits in hand from this venture, but it could confidently expect that in the future Elm Tree would declare a dividend of £800,000 net of tax. This was the future dividend to be stripped. By stripping it, the dealers hoped to get £400,000 out of the Revenue and divide it between the Gill family and themselves. Then these elaborate transactions took place. Just before the Budget.
On the 30th March, 1960, the dealer's bought from the Gill family all their shares in Oakroyd. The price was nearly £1,700,000. This price was arranged on the basis that Oakroyd would soon receive from Elm Tree a dividend of £800,000 net of tax. In addition Oakroyd had other investments worth nearly £700,000. Moreover the dealers were in due course to pay the Gill family a sum of £200,000, being their share of the expected tax recovery. Thus these figures £300,000, £700,000 and £200,000 made up the £1,700,000. The dealers paid the Gill family £1,500,000 in cash, or its equivalent, and paid the £200,000 to stakeholders to await the tax recovery.
A year later, on the 30th March, 1961, Elm Tree declared a dividend of £800,000 net of tax and paid it to Oakroyd; and Oakroyd in turn declared a dividend of £800,000 net of tax and paid it to the dealers (who were, of course, the owners of all the shares in Oakroyd). The dealers did not sell the shares in Oakroyd. They were advised not to do so, lest they fell foul of section 28 of the Finance Act, 1960.
Afterwards the dealers made out their accounts for the year 1960-61. They, of course, omitted the dividend they had received because share dealers are allowed by law to omit it. The upshot was:
£
Cost of Oakroyd shares (March 1960) 1,700,000
Value of Oakroyd shares (March 1961) 700,000
Less: 1,000,000
Seeing that the accounts showed a loss of £1,000,000, the dealers prayed in aid section 341 of the Income Tax Act 1952. They claimed to recover the tax which had been paid on that sum, namely £.400,000. If they were to succeed in getting £400,000 from the Revenue, the dealers were to ask the stakeholders to release the £200,000 to the Gill family. If they did not succeed in getting the £400,000 from the Revenue, the stakeholder was to return the £200,000 to the dealers. In short, if no part of the £400,000 was recovered, the dealers paid out £1,500,000 to the Gill family for the shares. If all the £400,000 was recovered, they would pay an extra £200,000 to the Gill family and keep £200,000 for themselves.
Such being the transaction, the question for us is whether it was an adventure "in the nature of trade" or merely a tax recovery device? The dealers say it is an adventure "in the nature of trade", because it is indistinguishable in essence from Griffiths v. Harrison (1963 A.C. 1): whereas the Revenue say it is a tax-recovery device because it was on a par with the Mantern case in Finsbury Securities v. I.R. C. (1966 1 W.L.R. 1402). The dealers point to various distinctions in their favour, such as that there was not here (as there was in the Finsbury case) any creation of special shares which carried special rights to dividends. The Revenue point to other distinctions in their favour, such as that there was here an agreement to split the tax recovered between the dealers and the shareholders (as there was in the Finsbury case, but not in Griffiths v. Harrison).
I do not propose to go into any such distinctions. We should seek for the principle to be derived from the two cases in the House of Lords and not be led away into by-paths. And we should not place too much emphasis on a word here or there in the speeches. I agree with the way Mr. Justice Megarry put it in 1963 1 W.L.R. at page 1423. Put shortly, it conies to this; if the transaction is, in truth, a transaction in the nature of trade, it does not cease to be so simply because the trader had in mind a tax advantage. But if it is, in truth, a tax-recovery device and nothing else, then it remains a tax-recovery device, notwithstanding that it is clothed in the trappings of a trade. Applying this principle here, and looking at all the five transactions (as we are entitled to do), I am quite satisfied that these dealers - F.A. & A.B. Ltd. - were not, in any of these cases, carrying on a trade, or doing anything in the nature of a trade. Neither in the other four, nor in this one, were they carrying on a trade. They were engaged, as the Commissioners found, in dividend stripping transactions. I decline to elevate dividend stripping into a trade. It is dividend stripping and nothing else.
I find myself in agreement with the judgment of Mr. Justice Megarry and I would dismiss this appeal.
LORD JUSTICE SACHS: The appellants, who at all material times were genuinely trading as dealers in shares, on the 30th March 1960 purchased all the 353,957 issued £1 shares (Ordinary, Deferred and Preferred) - of which 99,702 had been issued and allotted that day - in Oakroyd Investments Ltd. The nature of the business of that company is indicated by its name. The contract under which the purchase was made involved payments to the extent of £1,678,932 including expenses. It was a dividend stripping transaction in that the price for the shares was largely dependent on the degree of ability to strip the dividends with which the shares were pregnant. After a dividend of £800,000 had been stripped on the 31st March 1961, Oakroyd Investments Ltd. was still a going concern and its relevant shares remained in the hands of the appellants backed by very substantial assets to the value of almost £700,000 - quite a formidable figure.
The appellants had by then incurred a loss on the value of the shares of which £300,000 was attributable...
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