Magnavox Electronics Company Ltd v Hall
| Jurisdiction | England & Wales |
| Judgment Date | 28 February 1985 |
| Date | 28 February 1985 |
| Court | Chancery Division |
Chancery Division.
Mr. R. Venables (instructed by Messrs. McKenna & Co.) for the taxpayer.
Mr. P. Goldsmith (instructed by Solicitor of Inland Revenue) for the Crown.
Before: Nicholls J.
Corporation tax - Trade - Trading losses - Loss relief - Taxpayer company entering into contract for sale of factory - Liquidation of company before completion - Inability of purchaser to complete - Scheme devised whereby purchaser assigned contract rights to off-the-shelf company acquired by taxpayer company which sold to new purchaser - Whether sale of factory under original contract - Whether taxpayer entered into preordained series of transactions to avoid tax -Finance Act 1971 schedule 10 subsec-or-para 10Finance Act 1971, Sch. 10, para. 10(1).
This was an appeal by the taxpayer company from a decision of the Special Commissioners upholding an assessment to corporation tax for the period to 28 December 1979 in respect of a chargeable gain made by the company on the sale of a factory.
The taxpayer company was the UK subsidiary of a company incorporated and resident in the US. On 1 September 1978 the company negotiated the sale of a factory to J Ltd. and exchanged contracts. On 29 December 1978 the taxpayer company went into liquidation. By March 1979, it became clear that J Ltd. was not in a position to complete and when it failed to do so in accordance with a notice issued by the liquidator, the liquidator became entitled to rescind the contract. He was unwilling to do so since the company would then lose the benefit of its entitlement to set off any capital gain arising on the sale of the factory against trading losses incurred in the accounting period to 28 December 1978 which ended when the taxpayer went into liquidation.
Therefore, a scheme was devised to sell the factory to a new purchaser without losing the tax advantage. On 29 June 1979, the taxpayer acquired S Ltd., an off-the-shelf company. On 6 July 1979, J Ltd. assigned to S Ltd. its rights under the contract of sale, including its right to a £70,000 deposit already paid, for a consideration of £32,559.99. This amount was provided by the taxpayer company which then agreed with S Ltd. that the £70,000 deposit should be reduced by £32,559.99 to £37,440.01. On 9 July 1979 the taxpayer company and S Ltd. agreed under seal to make further substantial variations to the original contract and, on the terms as varied, S Ltd. and the new purchaser (BIP) exchanged contracts for the lease of the factory. That sale was completed on 30 October 1979 when S Ltd. directed the taxpayer company to transfer the factory to BIP.
On 14 March 1980, the liquidator submitted to the Revenue a computation of the corporation tax payable by the taxpayer company in respect of the accounting period 1 January 1978 to 29 December 1978. He claimed that the company was able to set off the chargeable gain arising on the sale of the factory against trading losses which had accrued during that accounting period, on the ground that the date of disposal was 1 September 1978 when the original contract was made. The Revenue refused the relief and assessed the company to corporation tax of £400,000 which included the chargeable gain and any other income.
The liquidator appealed to the Special Commissioners against the assessment. The question arose as to the date on which the factory was disposed of by the company for tax purposes. The Commissioners found that, on the facts, the agreements entered into on 9 July 1979 between the taxpayer company and S Ltd. and S Ltd. and BIP were to be regarded as new contracts entered into on that day and the original contract rescinded. For tax purposes, that was the date of the disposal by the taxpayer which gave rise to a chargeable gain.
The taxpayer further appealed to the High Court, contending that the factory was disposed of under the 1978 contract and that neither the assignment nor the deeds of variation nor a combination of those documents destroyed the contract since a mere variation was insufficient to destroy it. The assignment of the contract rights to S Ltd. was commercially the most effective course to take once it was clear that J Ltd. was unable to complete. The steps involved were not inserted solely to avoid tax but to preserve the taxpayer's tax position. To apply the Ramsay principle would be to extend its scope since it involved treating the taxpayer company as having done something which it did not do, i.e. getting back the factory wholly under its own control by a different route from that actually followed.
The Crown contended that but for the tax consequences there would not have been an assignment to S Ltd. The taxpayer would have terminated any rights which J Ltd. still had under the 1978 contract and sold direct to BIP under a new post liquidation contract. Therefore, the assignment to S Ltd., the variations and the sale between S Ltd. and BIP were all steps which had no business purpose apart from tax avoidance and were a preordained series of transactions to be disregarded for fiscal purposes under the principle laid down in Furniss v. Dawson TAX[1984] BTC 71
Held, dismissing the appeal:
1. The second variation of the contract for sale of the factory on 9 July 1979 did not operate to vary the terms of the 1978 contract. In fact, completion took place not on the terms of the original contract nor on the terms of that contract as varied, but on the terms of the second variation. Those terms did not constitute a variation in any normal sense of the 1978 contract but stood apart from it. The completion by the taxpayer company could not be said to have been under the 1978 contract.
2. The Crown's alternative argument based on the Ramsay principle and Furniss v. Dawson was well-founded. The highly artificial steps taken to endow the sale of the factory to BIP in 1979 with the tax advantage of the original contract with J Ltd. in 1978 had no commercial purpose other than the avoidance of a tax liability.
3. The principle enunciated in Edwards v. Bairstow ELR[1956] A.C. 14 was that an appellate court could not interfere with the Commissioners' findings of fact unless the true and only reasonable conclusion from the evidence contradicted those findings. Applying that principle, the court was entitled to reach the conclusions it had even though the Commissioners did not make the necessary findings of fact.
Per Curiam: Where a claim was made under the rule in Furniss v. Dawson and pursued before the Commissioners who then decided the appeal on another ground, it was nonetheless desirable that the Commissioners should find the facts material to that claim wherever possible. That was because on appeal the court might take a different view of the ground on which the Commissioners reached their decision in which case the Furniss v. Dawson rule would be material.
1. At a meeting of the Commissioners for the special purposes of the Income Tax Acts held on 20 and 21 February 1984 The Magnavox Electronics Company Limited (in Members' voluntary liquidation) (hereinafter called "Magnavox") appealed against an assessment to corporation tax for the accounting period to 28 December 1979 in the sum of £400,000.
2. Shortly stated the question for our decision was the date at which, for the purposes of liability to corporation tax on chargeable gains, the factory and land at Alfred's Way, By-Pass Road, Barking, Essex ("the Barking Factory") was disposed of by Magnavox.
3. Paragraph 3 listed the documents proved or admitted before the Commissioners.
4.1 The facts agreed between the parties, the additional facts found by us as a result of the documentary evidence adduced before us, the submissions of the parties, and our conclusions together with the reasons therefor are set out in our written decision a copy of which is annexed hereto and forms part of this case.
4.2 In the course of preparing this case it has become apparent to us that we were wrong in suggesting, as we did at the end of para. 7.2 of our decision, that there may have been a typing error in the revised amount for the deposit. It has been pointed out to us that the aggregate of the figure of £37,440.01 and the amount by which the deposit was reduced (£32,559.99) is £70,000, i.e. the amount of the original deposit. Our error arose from having translated, earlier in that paragraph, the figure of £32,559.99 into the round figure of £32,600.
5. We the Commissioners who heard the appeal took time to consider our decision and gave it in writing on 22 March 1984.
6. Figures were agreed between the parties on 27 April 1984 and on 10 May 1984 we adjusted the assessment accordingly.
7. The Appellant immediately after the determination of the appeal declared to us its dissatisfaction therewith as being erroneous in point of law and on 10 May 1984 required us to state a case for the opinion of the High Court pursuant to the Taxes Management Act 1970 section 56Taxes Management Act 1970 sec. 56 which case we have stated and do sign accordingly.
8. The questions of law for the opinion of the court are:
(2) Whether we were correct in holding that the contract was abandoned by the liquidator of Magnavox when on 6 July 1979 he caused Safemark to enter into a deed of assignment whereby Safemark acquired the beneficial interest of Jomac in the contract.
(3) If not, whether we were correct in holding that the terms of the second variation were such as to constitute a rescission of the contract.
(4) Whether we were correct in holding that the second variation and an agreement made on 9 July 1979 between Safemark and BIP are to be regarded as new contracts for the sale of the Barking Factory entered into upon that date.
1. The Magnavox Electronics Company Limited ("Magnavox") appeals through its liquidator, Edward Charles Layton, FCA, FCCA ("the liquidator"), of Layton Train, Chartered Accountants, against...
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