National Westminister Bank Plc v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 15 December 1993 |
| Date | 15 December 1993 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Dillon, Mann and Hirst L JJ.
Robin Potts QC and Kevin Prosser (instructed by Lovell White Durrant) for the banks.
Anthoy Grabiner QC and Launcelot Henderson (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
A-G v Regent's Canal and Dock Co ELR[1904] 1 KB 263
Ambrose Lake Tin and Copper Co. Re (Clarke's Case) ELR(1878) 8 Ch D 635
Agricultural Mortgage Corporation Ltd v IR Commrs ELR[1978] 1 Ch 72
Central Piggery Co Ltd v McNicoll UNK(1949) 78 CLR 594
Cheshire Banking Co, Re (Duff's Exors' Case) ELR(1886) 32 Ch D 301
Heaton's Steel and Iron Co, Re (Blyth's Case) ELR(1876) 4 Ch D 140
Holmleigh (Holdings) Ltd v IR Commrs TAX(1958) 46 TC 435
IR Commrs v Wilson TAX(1928) 13 TC 789
McEuan v West London Wharves and Warehouses Co (1871) 6 Ch App 655
Merchant Credit Private Ltd v Industrial & Commercial Realty Co Ltd UNK(1983) 7 ACLR 711
Oswald Tillotson Ltd v IR Commrs ELR[1933] 1 KB 134
Ramsay (WT) Ltd v IR Commrs WLR[1979] 1 WLR 974 (CA)
Rose, Re ELR[1952] Ch 499
Spitzel v Chinese Corporation Ltd (1899) 80 LT 347
Income tax - Business expansion scheme - Relief - Shares allotted on 12 March 1993 and registered in the name of nominees after 15 March - Loans offered by banks for purchase of shares - Budget announcement that relief to be withdrawn if loan given for purchase of shares issued on or after 16 March - Whether shares "issued" before 16 March 1993 -Income and Corporation Taxes Act 1988 section 299AIncome and Corporation Taxes Act 1988, s. 299A inserted by Finance Act 1993 section 111Finance Act 1993, s. 111 in relation to shares issued on or after 16 March 1993.
These were appeals by the Revenue from a judgment of Rattee J ([1993] BTC 367), on the application by two banks promoting business expansion schemes ("BES"), that shares were "issued" when they were allotted to participating investors.
In order to counter schemes which qualified as business expansion schemes but which afforded an investor the possibility of realising the investment immediately without infringing the condition laid down in theIncome and Corporation Taxes Act 1988 section 289Income and Corporation Taxes Act 1988, s. 289 that the investment should be held for five years, Finance Act 1993 section 111s. 111 of the Finance Act 1993 introduced into the Income and Corporation Taxes Act 1988 section 299AIncome and Corporation Taxes Act 1988 a new s. 299A which disentitled an individual to relief if a loan was made to him for the purpose of investing in BES shares. The new provision affected shares "issued" on or after 16 March 1993.
NatWest Bank ("the bank") sponsored a business expansion scheme involving five companies. On 2 March 1993 a prospectus was issued jointly by the five companies offering for subscription up to 25 million ordinary shares of 50p each at £1 per share payable in full on application. The companies were qualifying companies for the purposes ofIncome and Corporation Taxes Act 1988 section 289s. 289 of the Taxes Act, as extended to private rented housing by theFinance Act 1988 section 50Finance Act 1988, s. 50,and there was no dispute that the shares were eligible for relief.
The prospectus stated that a loan of 74 per cent of the gross amount of any investment in the scheme would be offered not later than six months after the issue of the shares. The interest payable on the loan was to be fixed at such a rate that the principal and rolled up interest after five years would be exactly covered by a minimum return of £1.08 per share which would be made available by way of realisation of the investment after five years, either by liquidation of the companies or by a purchase of the shares concerned. The bank would take a charge over the shares to secure repayment of the loan. A higher rate taxpayer could thus recover in the form of the loan after six months more than the net cost to him of his investment after taking into account the tax relief under Income and Corporation Taxes Act 1988 section 289s. 289, at the same time avoiding the requirement that the investment should be held for five years.
The shares were to be held by NatWest Nominees Ltd on behalf of the investor and the prospectus contained a provision that acceptance of an application would constitute the making of an agreement between the investor and the nominee on the terms of an agreement to that effect set out in the prospectus. Annexed to the prospectus was an application form of irrevocable offer for shares to be registered in the name of the nominee.
By 10 March 1993 applications for the 25 million shares had been received. Cheques sent by the successful applicants were presented for payment by 15 March. Meanwhile on 12 March a committee of the directors of the five BES companies met and resolved to allot the new shares to the successful applicants. On the same day an undated letter was sent to each of the successful applicants acknowledging receipt of the application and "confirming" that the shares applied for had been allotted. The shares were registered in the name of the nominee at some time after 16 March.
A similar scheme was promoted by Barclays de Zoete Wedd Ltd, part of the Barclays group. The details varied but the same question arose in relation to that scheme.
If the shares were issued on or after 16 March 1993, any shareholder taking up the offer of a loan pursuant to the scheme would lose any relief to which he would otherwise be entitled. The question was therefore, what was meant by the issue of a share, and at what point in time the share was issued.
The banks, together with one of the BES companies involved in the relevant scheme, applied to the High Court by originating summons for a declaration that the shares were "issued" when an investor who had applied for shares was notified that the shares had been allotted to him. The judge held, in favour of the banks, that shares were issued when a person became entitled absolutely and unconditionally to them, either when the shares were allotted or the shareholder was notified of the allotment. He would then be entitled to be registered in the company's register of members, and the registration would be merely recognition and evidence of his previous title.
The banks contended that the register of members which a company was required to keep by the Companies Act 1985 section 352Companies Act 1985, s. 352 was merely a record of membership which carried voting rights. The concept of being a shareholder was different from that of being a member in that, although a person could not be a member before his name was entered in the register, he might be a shareholder. The banks further contended that where there had been an agreement between a company and an investor that one would issue and the other would take certain shares, the parties could not cancel that agreement before registration because that would involve an unauthorised reduction of capital. Thus, where there was such an agreement, the shares in question were issued share capital and must have been issued when the agreement was made
Held, allowing the Revenue's appeals by a majority and granting a declaration that the shares in the BES companies were not issued until after 16 March 1993:
In the statutory context of the present case, the term "issue" was to be taken as meaning something distinct from allotment. Title to the shares was completed or perfected by registration and nothing short of that. A letter of allotment granted a chose in action, the right to have the shares issued to the investor, but the shares would be issued only when the investor was entered on the register. That gave due significance to the requirement, in the Companies Act 1985 section 352Companies Act 1985, s. 352, that the date of registration of each person registered had to be entered in the register of members. Re Ambrose Lake Tin and Copper Co (Clarke's Case)ELR(1878) 8 Ch D 635 per Sir Alexander Cockburn LCJ at p. 638 andOswald Tillotson Ltd v IR Commrs ELR[1933] 1 KB 134 per Slesser and Romer LJJ at p. 157 followed.
Hirst J (dissenting): The availability of the relief should depend on a situation having arisen in which each party was irrevocably bound, on the part of the company, to complete the formalities, and on the part of the taxpayer to submit to their completion. It followed that the shares were issued once there was a binding contract between an investor and the bank, and once an allotment of the shares had taken place.
By notices of appeal dated 11 August 1993 the Revenue appealed against two orders of Rattee J made on 30 July 1993 granting the relief sought by the applicants, National Westminster Bank and Homeshare (UK) I plc in the first case, and Barclays Bank plc and Gracechurch BES No. 1 plc in the second case.
The grounds of the appeal were that the judge erred in law in holding that shares issued to investors who had applied for shares in business expansion scheme companies were issued before 16 March 1993.
Dillon LJ: The court has before it expedited appeals by the Commissioners of Inland Revenue against the orders made by Rattee J on 30 July 1993 in two cases which he had heard together. In the one case the respondents to the appeal are National Westminster Bank plc and a company called Homeshare (UK) I plc; in the other the respondents are Barclays bank plc and a company called Gracechurch BES No. 1 plc. The issue on both appeals is the same, which is not surprising since the appeals involve virtually identical tax schemes for which the documents were prepared by the same firm of solicitors.
The relevant field of tax law is that of relief for investment in Business Expansion Schemes ("BES") under Income and Corporation Taxes Act 1988 section 289s. 289 of the Income and...
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