Powlson v Welbeck Securities Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 12 June 1987 |
| Date | 12 June 1987 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal.
Mr. C.N. Beattie Q.C. and Mr. G.R.A. Argles (instructed by Messrs. Courts & Co.) for the company.
Mr. Edward Nugee Q.C. and Mr. C.H. McCall Q.C. (instructed by the Solicitor of Inland Revenue) for the Crown.
Before: Slade, Ralph Gibson and Bingham L.JJ.
The following cases were referred to in the judgments:
Amherst v. James Walker Goldsmith & Silversmith Ltd. ELR[1983] Ch. 305
Golding (H.M.I.T.) v. Kaufman TAX[1985] BTC 92
Marren (H.M.I.T.) v. Ingles TAX(1980) 54 T.C. 76
Paal Wilson & Co. A/S v. Partenreederei Hannah BlumenthalELR[1983] 1 A.C. 854
Corporation tax - Chargeable gains - Capital sum derived from asset - Option - Action to enforce option compromised by consent order - Option surrendered in consideration of payment - Whether sum derived from disposal of option or from rights under consent order - Whether abandonment of option - Whether surrender of option constituted disposal - Whether disposal occurred at time of receipt of sum or of making of order - Finance Act 1965 section 22 subsec-or-para (3) schedule 7 subsec-or-para 14Finance Act 1965, sec. 22(3), Sch. 7, para. 14(3) (now Capital Gains Tax Act 1979 section 20 subsec-or-para (1) section 20137Capital Gains Tax Act 1979, sec. 20(1), 137).
This was an appeal by the taxpayer company from the decision of Hoffmann J. ([1986] BTC 362) that a chargeable gain arose under the Finance Act 1965, Finance Act 1965 section 22 subsec-or-para (3)sec. 22(3) on the surrender of an option for consideration.
The company had an option to acquire an interest in a property development in the City of London. In 1971 the company issued proceedings against the grantors of the option to enforce it, and on 17 January 1974, those proceedings were compromised by an order made with the consent of all the parties in Tomlin form. The terms of the order were that the grantors of the option should pay to the company on or before 31 May 1974 the sum of £2m in consideration of the "release and abandon" of the option by the company. On 31 May the £2m was duly paid.
The company was assessed to corporation tax on chargeable gains arising on the surrender of the option for its accounting period of 12 months ending on 31 March 1975.
The company appealed to the Special Commissioners relying on the Finance Act 1965, Finance Act 1965 schedule 7 subsec-or-para 14Sch. 7, para. 14(3), which provided that the abandonment of an option by the person for the time being entitled to exercise it should not constitute a disposal by that person. The Special Commissioners upheld the company's contention, but Hoffmann J. in the High Court allowed an appeal by the Crown. The company appealed to the Court of Appeal.
It was agreed that the company owned an item of property, namely the option, which constituted an "asset" by virtue of Finance Act 1965 section 22 subsec-or-para (1)sec. 22(1) of the 1965 Act. Prima facie there was a "disposal" of that asset within the extended meaning given to that word by Finance Act 1965 section 22 subsec-or-para (3)sec. 22(3)(c) when a capital sum of £2m was derived from that asset under the terms of the settlement of the action in return for the "surrender of rights".
The company contended that if Finance Act 1965 section 22 subsec-or-para (3)sec. 22(3) applied at all, it would require the company to be treated as having disposed, not of its option, but of its right under the consent order to be paid £2m on or before 31 May 1974, and the receipt of the £2m on 31 May 1974 produced only a capital gain measured by the excess of £2m over the value on 17 January 1974 of the company's right to receive the £2m. The company argued that that gain did not give rise to a chargeable gain since Finance Act 1965 schedule 7 subsec-or-para 11Sch. 7, para. 11(1) to the 1965 Act provided that no chargeable gain should accrue to an original creditor on the disposal of a debt, not being a debt on a security.
The company further submitted that, even if Finance Act 1965 section 22 subsec-or-para (3)sec. 22(3) gave rise to a disposal of the option on 31 May 1974, the company was exempted byFinance Act 1965 schedule 7 subsec-or-para 14Sch. 7, para. 14(3). Finance Act 1965 section 22 subsec-or-para (3)Section 22(3) was expressed to take effect "subject to the exceptions in this Part of this Act". Among the relevant exceptions was that afforded by Finance Act 1965 schedule 7 subsec-or-para 14para. 14(3). The compromise agreement of 17 January 1974 amounted to the "abandonment" by the company of its option, and the exemption applied.
The company also submitted that, by virtue of the Finance Act 1971,Finance Act 1971 schedule 10 subsec-or-para 10Sch. 10, para. 10(1), if any chargeable disposal did occur, it took place, not on 31 May 1974 when the £2m was received, but on 17 January, which was outside the accounting period in respect of which the company was assessed.
Held, dismissing the company's appeal:
1. The receipt of the £2m could not be regarded as having been derived from the right to receive it rather than from the disposal of the option itself.
2. The receipt of the £2m was taxable under Finance Act 1965 section 22 subsec-or-para (3)sec. 22(3) whether or not there had been an "abandonment" of the option within the meaning ofFinance Act 1965 schedule 7 subsec-or-para 14para. 14(3). That paragraph provided an exemption to Finance Act 1965 section 23 subsec-or-para (3)sec. 23(3) dealing with losses, and did not operate to exempt the receipt of a capital sum on such an abandonment.
3. Finance Act 1971 schedule 10 subsec-or-para 10Schedule 10, para. 10(1) to the 1971 Act was expressed to be subject to Finance Act 1965 section 45 subsec-or-para (5)sec. 45(5) of the 1965 Act which provided that in the case of a disposal within Finance Act 1965 section 22 subsec-or-para (3) section 22 subsec-or-para (3) section 22 subsec-or-para (3)para. (a), (b), (c) or Finance Act 1965 section 22 subsec-or-para (3)(d) of sec. 22(3), the time of disposal should be "the time when the capital sum is received as described in that subsection". Since the disposal was one within Finance Act 1965 section 22 subsec-or-para (3)sec. 22(3)(c) which, by virtue of Finance Act 1965 section 45 subsec-or-para (5)sec. 45(5) occurred on 31 May 1974, it occurred in the accounting period in respect of which the company was assessed.
4. (Per Bingham L.J.) To regard the release of an option for consideration, producing a result potentially no less advantageous than its exercise or sale to a third party, as an abandonment would be to mistake form for substance. The transaction in this case was thus excluded from the scope of Finance Act 1965 schedule 7 subsec-or-para 14para. 14(3).
The company appealed against the decision of Hoffmann J. ([1986] BTC 362) on the following grounds:
1. The company by surrendering its option made an actual disposal thereof within the meaning of the Finance Act 1965,Finance Act 1965 section 19 subsec-or-para (1)sec. 19(1). Since it thereby abandoned its option, the Finance Act 1965, Finance Act 1965 schedule 7 subsec-or-para 14Sch. 7, para. 14(3) required the actual disposal to be treated as not constituting a disposal of an asset by the company.
2. If the company did not abandon its option by reason of its having exploited it for value or for any other reason, the disposal of its option took place on 17 January 1974, when it entered into the contract (Finance Act 1971, Finance Act 1971 schedule 10 subsec-or-para 10Sch. 10, para. 10(1)) to dispose of its option, the contract being one of record contained in the consent order made by the High Court of Justice. The date of the contract did not fall within the company's chargeable accounting period of 12 months ended on 31 March 1975 for which the assessment under appeal has been made, and so when the company received £2m on 31 May 1974, theFinance Act 1965, Finance Act 1965 section 22 subsec-or-para (3)sec. 22(3) required the company to be treated as disposing, not of its option, but of its right under the consent order to be paid £2m on or before 31 May 1974. For the following two reasons no chargeable gain accrued to the company on such disposal.
(a) The Finance Act 1965, Finance Act 1965 schedule 6 subsec-or-para 14Sch. 6, para. 14(5) required the company to bring the whole £2m into the computation of its chargeable gain if it disposed of its option as indicated in para. 2 above, and the same amount could not be brought into the computation of a chargeable gain on the disposal of some different asset.
(b) The Finance Act 1965, Finance Act 1965 schedule 7 subsec-or-para 11Sch. 7, para. 11(1) provided that no chargeable gain should accrue to an original creditor on the disposal of a debt not being a debt on a security.
4. In case the court should reject the above grounds of appeal and hold that the capital sum of £2m was derived, within the meaning of theFinance Act 1965, Finance Act 1965 section 22 subsec-or-para (3)sec. 22(3), from the company's option, the company will contend that the judge erred in law in holding that the provision in Finance Act 1965 schedule 7 subsec-or-para 14Sch. 7, para. 14(3) to the Act, that the abandonment of an option should not constitute the disposal of an asset, was not one of the exceptions to which Finance Act 1965 section 22 subsec-or-para (3)sec. 22(3) was subject.
Slade L.J.: This is an appeal by Welbeck Securities Ltd. ("the company") from a judgment of Hoffmann J. delivered on 24 July 1986 relating to corporation tax payable on capital gains (reported at [1986] BTC 362).
The facts can be stated very shortly. From April 1961 until 17 January 1974 the company had an option to acquire from Westminster Palace Gardens Ltd. ("Westminster") and PIC (St. Dunstan's) Ltd. ("PIC") an interest in a property development in the City of London. In 1971 the company issued proceedings against Westminster and...
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