NAP Holdings UK Ltd v Whittles (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 09 July 1993 |
| Date | 09 July 1993 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Nolan, Hirst and Ralph Gibson LJJ.
Andrew Thornhill QC and Kevin Prosser (instructed by Ashurst Morris & Crisp) for Napuk.
Nicholas Warren QC (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment of Nolan LJ:
Farrell & Anor v Alexander ELR[1977] AC 59
IR Commrs v Joiner WLR[1975] 1 WLR 1701
Pepper (HMIT) v Hart and related appeals TAX[1992] BTC 591
Ramsay (W T) Ltd v IR Commrs ELR[1982] AC 300
Stanton (HMIT) v Drayton Commercial Investment Co Ltd ELRTAX[1983] 1 AC 501; [1982] BTC 269
Westcott (HMIT) v Woolcombers Ltd TAXTAXTAX(1987) 60 TC 575; [1986] BTC 130 (ChD), [1987] BTC 493 (CA)
Corporation tax - Chargeable gain - Group of companies - Transfer of shares in subsidiary within the group in exchange for issue of shares in transferee - Sale of shares outside the group - Whether base value of shares in computing chargeable gain to be their value when acquired by the group or their value when transferred from one group member to another - Whether share exchange a "disposal" - Income and Corporation Taxes Act 1970 section 273 subsec-or-para (1)Income and Corporation Taxes Act 1970, sec. 273(1); Capital Gains Tax Act 1979 section 78 section 85Capital Gains Tax Act 1979, sec. 78, 85 (replaced by Taxation of Chargeable Gains Act 1992 section 171 subsec-or-para (1) section 127 section 135Taxation of Chargeable Gains Act 1992, sec. 171(1), 127, 135 respectively).
This was an appeal by the taxpayer ("Napuk") from a decision of Millett J ([1992] BTC 37) dismissing Napuk's appeal from the decision of a special commissioner that if a member of a group of companies disposed of the shares in a subsidiary to another member of the group in exchange for an issue of its own shares, theIncome and Corporation Taxes Act 1970 section 273Income and Corporation Taxes Act 1970, sec. 273 applied so that the base cost in computing a capital gain when the shares were sold outside the group (before as well as after 15 March 1988 when the legislation was amended by the introduction of Income and Corporation Taxes Act 1970 section 273 subsec-or-para (2A)sec. 273(2A) by theFinance Act 1988 section 115Finance Act 1988, sec. 115) was the consideration given when the shares were first acquired by the group.
Immediately before 23 April 1983 a company ("Exco") owned all the shares in Napuk and another company ("Astbro"). On that date Exco transferred the shares in Astbro to Napuk in exchange for an issue of its own shares. In 1985 Napuk sold the shares in Astbro to a purchaser outside the group resulting in a substantial profit for the group.
The question was whether Income and Corporation Taxes Act 1970 section 273 subsec-or-para (1)sec. 273(1) applied, as the judge had held, or whether the provisions of the Capital Gains Tax Act 1979 section 78 section 85Capital Gains Tax Act 1979, sec. 78 and 85, dealing with transfers within a group of companies, applied so that the base value of the shares on disposal was their market value on their transfer to Napuk.
Napuk maintained that Income and Corporation Taxes Act 1970 section 273sec. 273 did not apply to the present transaction because it applied expressly only where there had been a disposal, and, by virtue of Capital Gains Tax Act 1979 section 78sec. 78 of the 1979 Act the transfer of the Astbro shares "shall not be treated as involving any disposal". The Revenue contended that that view had been rejected by the Court of Appeal in 1987 in a case decided on the statutory provisions prevailing before the consolidation of the legislation in 1970 and 1979. However, the Revenue said that the consolidating provisions did not alter their meaning and the court was bound by the 1987 decision. Napuk contended that the court was not obliged to follow a case decided on the previous provisions.
Held, allowing Napuk's appeal:
The court's task was to have regard to the intention of the legislation as expressed in the language which Parliament had enacted. For that purpose it was not necessary to look further than the two consolidating Acts in which the relevant law was set out at the material time.
The court could not, therefore, regard the question as concluded by a case decided before the consolidation but had to take a fresh look atIncome and Corporation Taxes Act 1970 section 273sec. 273 in the context in which it appeared at the relevant time. Applying the language of the 1970 and the 1979 Acts, Income and Corporation Taxes Act 1970 section 273sec. 273 did not apply to the intra-group share exchanges and the cost of the Astbro shares for the purpose of computing the gain on their disposal was their value at the time of the share exchange. (Farrell v Alexander ELR[1977] AC 59, per Lord Wilberforce at p. 73 applied. Westcott (HMIT) v Woolcombers Ltd TAX[1987] BTC 493 not followed.)
By a notice of appeal dated 1 January 1992 NAP Holdings UK Ltd appealed against the decision of Millett J given on 5 December 1992. The grounds of the appeal were that the judge had erred in law in construing the Income and Corporation Taxes Act 1970 section 273Income and Corporation Taxes Act 1970, sec. 273 as applying to intra-group transfers of shares as part of an exchange of shares between members of the same group.
Nolan LJ: This is an appeal by the taxpayer NAP Holdings UK Ltd ("Napuk") against a decision of Millett J given on 6 December 1991. By that decision Millett J dismissed Napuk's appeal from a decision of a special commissioner, who had in turn dismissed Napuk's appeal against an assessment to corporation tax for its chargeable accounting period to 30 December 1985 in the sum of £230m. The sole question at issue between the parties is the amount of the taxable gain realised by Napuk during that period on its sale of the shares in a company called Astbro Inc ("Astbro"). The question turns upon the amount of the consideration for which Napuk must be taken, under the relevant legislation, to have acquired the Astbro shares. The facts are these.
Prior to 23 April 1983 both Napuk and Astbro were wholly owned subsidiaries of Exco Overseas Ltd ("Exco"). All three companies were resident in the UK. They were therefore members of the same group of companies for the purposes of corporation tax on chargeable gains: seeIncome and Corporation Taxes Act 1970 section 272sec. 272 of the Income and Corporation Taxes Act 1970. On 23 April 1983 Napuk acquired the Astbro shares from Exco in consideration for the issue to Exco of a further 20m ordinary shares in Napuk of one US dollar each. The value of the Astbro shares at the time was some $400m (the precise figures have yet to be agreed) but its original cost to Exco was only some $7.5m. On 8 August 1985 Napuk sold the Astbro shares outside the group for $431m. It is common ground that apart from the statutory provisions dealing with certain share exchanges and with transfers of assets between members of the same group of companies the tax consequences of these transactions would have reflected the value of the consideration for which they were carried out. The transfer of the Astbro shares by Exco to Napuk would have been treated as a sale by Exco and a purchase by Napuk for a price of some $400m, the market value of the Astbro shares (and also, it may be assumed, of the Napuk shares issued in exchange), either under the general law as stated inStanton (HMIT) v Drayton Commercial Investment Co Ltd ELRTAX[1983] 1 AC 501; [1982] BTC 269 or under the capital gains tax rules laid down byCapital Gains Tax Act 1979 section 62sec. 62 of the Capital Gains Tax Act 1979 for transactions between connected persons. Other things being equal, that would leave Exco liable to tax on its gain of some $392.5m, and Napuk liable to tax on its gain of some $31m. But by virtue of the share exchange provisions Exco incurred no liability on the transfer of the Astbro shares to Napuk: the gain of $392.5m was, as it is said, "rolled over" into the new shares in Napuk which were acquired in exchange. The critical question is whether, as the Revenue contend, the transaction also fell within the scope of the provisions dealing with the transfer of assets between members of the same group of companies. If it did, then the consideration treated as having been given by Napuk for the Astbro shares would be, not $400m, but $7.5m, the price for which they were acquired by Exco.
At the time of the crucial transaction the main relevant provisions dealing with share exchanges and with the transfer of assets between members of the same group of companies were contained, respectively, inCapital Gains Tax Act 1979 section 78 section 85sec. 78 and 85 of the Capital Gains Tax Act 1979 and Income and Corporation Taxes Act 1970 section 273sec. 273 of theIncome and Corporation Taxes Act 1970. Both of these Acts have been replaced by later measures, but in the interests of simplicity I shall refer to their provisions in the present tense. Capital Gains Tax Act 1979 section 85Section 85 is part of a group of sections (Capital Gains Tax Act 1979 part IVCh. II of Pt. IV of the Act) concerned primarily with the internal reorganisation of the share capital of a company by means of, for example, a bonus issue, or reduction of capital. Capital Gains Tax Act 1979 section 78Section 78 provides that a reorganisation "shall not be treated as involving any disposal" of the original shares (that is, shares held before the reorganisation) or any acquisition of the new holding (that is, the shares which as a result of the reorganisation represent the original set shares), but the original shares and the new holding "shall be treated as the same asset acquired as the original shares were acquired". Capital Gains Tax Act 1979 section 85Section 85 extends the "reorganisation" concept to certain share exchanges. Capital Gains Tax Act 1979 section 85...
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