NAP Holdings UK Ltd v Whittles (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | Lord Keith of Kinkel,Lord Jauncey of Tullichettle,Lord Browne-Wilkinson,Lord Mustill,Lord Lloyd of Berwick |
| Judgment Date | 17 November 1994 |
| Judgment citation (vLex) | [1994] UKHL J1117-1 |
| Date | 17 November 1994 |
| Court | House of Lords |
[1994] UKHL J1117-1
House of Lords
Lord Keith of Kinkel
Lord Jauncey of Tullichettle
Lord Browne-Wilkinson
Lord Mustill
Lord Lloyd of Berwick
My Lords,
This appeal is concerned with the interaction between certain provisions of the Capital Gains Tax legislation in force at the time of the transactions in issue. These provisions have since been superseded by later statutes, but for convenience I shall refer to them in the present tense. The first and perhaps the most important of the provisions in question is section 273 of the Income and Corporation Taxes Act 1970, subsection (1) of which, as amended by the Capital Gains Tax Act 1979, provides:
"Notwithstanding any provision in the Capital Gains Tax Act 1979 fixing the amount of the consideration deemed to be received on a disposal or given on an acquisition, where a member of a group of companies disposes of an asset to another member of the group, both members shall, except as provided by subsections ( 2) and (3) below, be treated, so far as relates to corporation tax on chargeable gains, as if the asset acquired by the member to whom the disposal is made were acquired for a consideration of such amount as would secure that on the other's disposal neither a gain nor a loss would accrue to that other; but where it is assumed for any purpose that a member of a group of companies has sold or acquired an asset, it shall be assumed also that it was not a sale to or acquisition from another member of the group."
The transactions in issue are these: (1) in 1981 and 1982 Exco Overseas Ltd. ("Overseas") acquired 100 shares in a company called Astbro Inc. ("Astbro") for a consideration amounting to about $7.5 million; (2) in 1983 Overseas transferred these 100 shares to the respondents NAP Holdings U.K. Ltd. ("Napuk") in exchange for the issue to it of 20 million shares in Napuk, both Overseas and Napuk then being companies in the Exco International Group and the market value of the 100 shares being at the time about $400 million: (3) in 1985 Napuk sold the 100 Astbro shares outside the group for a price of about $344 million.
The dispute between the parties relates to the acquisition cost of the 100 Astbro shares which falls to be attributed to Napuk for the purpose of ascertaining its liability, if any, to Corporation Tax on Capital Gains Tax principles. The appellant inspector of taxes maintains that by virtue of section 243(1) of the ICTA 1970 that acquisition cost is $7.5 million, being the amount of the consideration for which Overseas originally acquired the shares. That is the amount of consideration which would secure that on the disposal by Overseas to Napuk neither a gain nor a loss would accrue to Overseas. In the result, it is maintained that Napuk made a capital gain of about $336.5 million and is liable to corporation tax accordingly.
Napuk, on the other hand, contends that the acquisition cost to it of the 100 Astbro shares is $400 million, being the market value of the shares at the time of acquisition, by virtue of sections 29A and 62 of the CGTA 1979, dealing with transactions between connected persons, which Overseas and Napuk were as being members of the same group of companies. That would result in Napuk sustaining a loss on the disposal, rather than realising a gain. It is argued for Napuk that section 273(1) of the ICTA 1970 has no application, because the effect of sections 78 and 85 of the CGTA 1979 is to exclude it.
Section 78 provides:
"Subject to sections 79 to 81 below, a reorganisation shall not be treated as involving any disposal of the original shares or any acquisition of the new holding or any part of it, but the original shares (taken as a single asset) and the new holding (taken as a single asset) shall be treated as the same asset acquired as the original shares were acquired."
Certain terms in this section are defined by section 77(1), providing:
"For the purposes of this section and sections 78 to 81 below 'reorganisation' means a reorganisation or reduction of a company's share capital, and in relation to the reorganisation -
( a) 'original shares' means shares held before and concerned in the reorganisation,
( b) 'new holding' means, in relation to any original shares, the shares in and debentures of the company which as a result of the reorganisation represent the original shares (including such, if any, of the original shares as remain)."
Section 85 provides:
"(1) Subsection (3) below has effect where a company (company A) issues shares or debentures to a person in exchange for shares in or debentures of another company (company B) and
( a) company A holds, or in consequence of the exchange will hold, more than one quarter of the ordinary share capital (as defined in section 526(5) of the Taxes Act) of company B, or
( b) company A issues the shares or debentures in exchange for shares as the result of a general offer-
(i) which is made to members of company B or any class of them (with or without exceptions for persons connected with company A), and
(ii) which is made in the first instance on a condition such that if it were satisfied company A would have control of company B.
(2) Subsection (3) below also has effect where under section 86 below persons are to be treated as exchanging shares or debentures for shares or debentures held by them in consequence of the arrangement there mentioned.
(3) Subject to the provisions of sections 87 and 88 below, sections 78 to 81 above shall apply with any necessary adaptations as if the two companies mentioned in subsection (1) above, or as the case may be in section 86 below, were the same company and the exchange were a reorganisation of its share capital."
Condition ( a) in subsection (1) was satisfied in relation to the share exchange between Napuk and Overseas.
The argument for Napuk is that the effect of section 78, as applied by section 85(3) to the case where a person acquires shares in company A in exchange for shares in company B, is that for all capital gains tax purposes that person is to be treated as not having disposed of the shares in company B, and as not having acquired the shares in company A. On the contrary, the shares in company A are to be treated as being the same asset as the shares in company B and as having been acquired for the cost at which the shares in company B were acquired. The result in the present case, so it is claimed, is that so far as section 273 of ICTA 1970 is concerned, there never was any disposal by Overseas of the Astbro shares and therefore the section does not apply.
In Westcott v. Woolcombers Ltd. [1986] S.T.C. 182 and [1987] S.T.C. 600 Hoffman J. and the Court of Appeal had occasion to deal with the statutory predecessors of the enactments referred to above, which were for all practical purposes in the same terms. Section 273 of the ICTA 1970 was at the material time represented by paragraph 2(1) of Schedule 13 to the Finance Act 1965 and sections 78 and 85 of the CGTA 1979 by paragraphs 4( 2) and 6(1) of Schedule 7 to that Act. The position was that the taxpaying company, to which its holding company ("Holdings") had via a share exchange transaction with another subsidiary ("Topmakers") transferred shares in three companies which were later liquidated, had made a allowable loss if Topmakers acquisition cost of the shares fell to be treated as being that for which Holdings had originally acquired the shares, by virtue of paragraph 2 (1) of Schedule 13, but not if paragraphs 4( 2) and 6(1) of Schedule 7 had the effect that there had been no disposal by Holdings to Topmakers within paragraph 2(1). The Revenue's argument was the opposite of that presented in the present case. It maintained that paragraph 2(1) was excluded, so that there had been no allowable loss. That argument was rejected both by Hoffman J. and by the Court of Appeal (Fox and Nourse L.JJ. Sir Denys Buckley), and it was held that an allowable loss had indeed been incurred.
Hoffman J. [1986] 182, 188, said:
"Paragraph 6 of Sch 7 applies the rules for a single-company share exchange contained in para 4(2) to a two-company share exchange 'with any necessary adaptations'. What adaptations are necessary? There are two limbs to para 4(2). The first says that the reorganisation shall not be treated as involving any disposal of the original shares or acquisition of the new holding. The second says that the original shares and the new holding shall be treated as the same asset, acquired as the original shares were acquired. It is easy to see how, in a single-company share exchange, the original shares and new holding can be 'treated as the same asset' so that the shareholder is deemed not to have disposed of the one or acquired the other. The statute identifies an asset held at one time with another asset held at a later time. Similarly, in a two-company share exchange the original shares and the new holding can be treated as the same asset in the hands of the person who has parted with the one and acquired the other. But once the original shares are in the hands of the transferee company they cannot be treated as the same asset as the new holding which has been acquired by the transferor company. The purpose of the paragraph is to assimilate successive ownerships of different assets by the same person but not simultaneous ownerships of different assets by different persons."
After alluding to an argument for the Revenue that, while the second limb of paragraph 4(2) could not apply to the shares in the hands of the transferee, there was no absurdity in applying the first limb, so that the transferee company was deemed to have acquired the shares without there having been any disposal, he continued:
"I have...
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