O'Rourke (Inspector of Taxes) v Binks
| Jurisdiction | England & Wales |
| Judgment Date | 15 July 1992 |
| Date | 15 July 1992 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Lloyd, Stuart Smith and Scott L JJ.
Christopher McCall QC and Launcelot Henderson (instructed by the Solicitor of Inland Revenue) for the Crown.
Rex Bretten QC and GRA Argles (instructed by Simpson Curtis, Leeds) for the taxpayer.
The following cases were referred to in the judgments:
Edwards (HMIT) v Bairstow & Anor ELR[1956] AC 14
Luke v IR Commrs ELR[1963] AC 557
Mangin v IR Commr ELR[1971] AC 739
Capital gains tax - Capital distribution - Part disposal - Taxpayer disposed of shares in company takeover - Consideration for shareholding consisted of shares in acquiring company and shares in another company which accounted for 15 per cent of value of holding - Assessment on basis of part disposal of 15 per cent holding - Base cost of shares less than value of distribution - Whether taxpayer entitled to elect to deduct the total base cost in computing chargeable gain arising on part disposal - Capital Gains Tax Act 1979 section 72 subsec-or-para (2) section 72 subsec-or-para (4)Capital Gains Tax Act 1979, sec. 72(2), (4) (replaced by Taxation of Chargeable Gains Act 1992 section 122 subsec-or-para (2) section 122 subsec-or-para (4)Taxation of Chargeable Gains Act 1992, sec. 122(2), (4).
This was an appeal by the Crown against a decision of Vinelott J ([1991] BTC 326) that the Capital Gains Tax Act 1979 section 72 subsec-or-para (4)Capital Gains Tax Act 1979, sec. 72(4) applied whether or not a capital distribution was "small" within Capital Gains Tax Act 1979 section 72 subsec-or-para (2)sec. 72(2).
The taxpayer was a shareholder in a company, Cawoods. On 1 May 1982 Cawoods was acquired by a public company, Redlands in exchange for Redland shares and shares in another company, LASMO. The value of the consideration received by the taxpayer for his Cawoods shares was £1,583,491 of which £246,699 (15.58 per cent of the whole) represented the value of the LASMO shares. The expenditure allowable as a deduction in calculating the base cost of the Cawoods shares to the taxpayer was £214,602.
By virtue of the provisions relating to reorganisation of share capital, the taxpayer's transfer of his Cawoods shares did not constitute a disposal so far as the consideration consisted of Redland shares ("a new holding" as defined by Capital Gains Tax Act 1979 section 77sec. 77 of the 1979 Act). However, the transfer of the LASMO shares to the taxpayer fell to be treated as a capital distribution by Cawoods giving rise to a part disposal under Capital Gains Tax Act 1979 section 72 subsec-or-para (1)sec. 72(1).
Since the allowable expenditure in respect of the shareholding was less than the amount distributed, the taxpayer purported to make an election under Capital Gains Tax Act 1979 section 72 subsec-or-para (4)sec. 72(4) of the 1979 Act to deduct the allowable expenditure applicable to the whole of the shareholding. The inspector refused to accept the election on the ground that the intention of the Act was that Capital Gains Tax Act 1979 section 72 subsec-or-para (4)subsec. (4) only applied in cases whereCapital Gains Tax Act 1979 section 72 subsec-or-para (2)subsec. (2) applied, i.e. where the capital distribution was "small" compared with the value of the shares, and that a capital distribution of 15 per cent of a holding was not "small" withinCapital Gains Tax Act 1979 section 72 subsec-or-para (2)subsec. (2).
A special commissioner allowed the taxpayer's appeal holding that the election was valid. The application of Capital Gains Tax Act 1979 section 72 subsec-or-para (4)subsec. (4) did not depend on the distribution being "small" within the meaning of Capital Gains Tax Act 1979 section 72 subsec-or-para (4)subsec. (2).However, the commissioner held that if Capital Gains Tax Act 1979 section 72 subsec-or-para (4)subsec. (4) were to be limited to cases which would otherwise fall within Capital Gains Tax Act 1979 section 72 subsec-or-para (2)subsec. (2),the election would not be valid because 15 per cent of the value of a shareholding could not be regarded as "small" compared with the value of the shares.
The High Court dismissed the Crown's appeal holding that, although as a matter of first impression it would be natural to read Capital Gains Tax Act 1979 section 72 subsec-or-para (4)subsec. (4) as one of a group of subsections dealing only with cases where the amount of a capital distribution was comparatively small, he was compelled to the conclusion that the words did not justify that conclusion. Although the results were anomalous and even absurd, in the absence of an express limitation, Capital Gains Tax Act 1979 section 72 subsec-or-para (4)subsec. (4) had to be construed as free standing and applicable in all cases. The words had to be given their plain meaning. Similar provisions in other parts of the Act could not found another conclusion, nor could the predecessor provisions of the Act, which was a consolidation Act, be invoked to ascertain the meaning of a provision which was not ambiguous.
The judge further held that a 15 per cent shareholding could not be regarded as "small".
The Crown appealed to the Court of appeal contending that, to give effect to the legislature's presumed intention, words should be read into Capital Gains Tax Act 1979 section 72 subsec-or-para (4)sec. 72(4) limiting its application to small distributions.
Held, allowing the Crown's appeal:
1. The contrast between the construction that would be natural from a reading of Capital Gains Tax Act 1979 section 72 subsec-or-para (4)subsec. (4) in its statutory context and the absence of any express limitation produced an ambiguity rendering it permissible to consider the anomalies which the absence of any limitation on the scope of Capital Gains Tax Act 1979 section 72 subsec-or-para (4)subsec. (4) would produce; to examine the manner in which the 1979 Act dealt with other types of small distributions; and to take account of antecedent legislation. To treatCapital Gains Tax Act 1979 section 72 subsec-or-para (4)sec. 72(4) as applicable to all cases would be inconsistent with the other sections of the 1979 dealing with small distributions: see Capital Gains Tax Act 1979 section 21sec. 21(compensation and insurance money) and Capital Gains Tax Act 1979 section 109sec. 109 (part disposals of land). The equivalent provision in the Finance Act 1965 as originally enacted had produced a similar anomalous position. However, that was remedied by the Finance Act 1966 and, since the 1979 Act was a consolidating Act, it was to be presumed that there was no intention to change the previous law. The ambiguity produced by the absence of any limitation inCapital Gains Tax Act 1979 section 72 subsec-or-para (4)subsec. (4) to small distributions was resolved by the aid to construction afforded by the antecedent legislation. There was no reason why the limitation of Capital Gains Tax Act 1979 section 72 subsec-or-para (4)subsec. (4) to small distributions should not be inferred, thereby giving effect to the intention of the legislature. (Dicta of Lord Reid in Luke v IR Commrs ELR[1963] AC 557 at p. 577 and of Lord Donovan in Mangin v IR Commr ELR[1971] AC 739 at p. 746 applied.)
Per Lloyd LJ: the language of Capital Gains Tax Act 1979 section 72 subsec-or-para (4)subsec. (4), by excludingCapital Gains Tax Act 1979 section 72 subsec-or-para (2)subsec. (2), suggested that Capital Gains Tax Act 1979 section 72 subsec-or-para (2)subsec. (2) would otherwise have applied.
2. The 15 per cent distribution was not to be regarded as "small" within Capital Gains Tax Act 1979 section 72 subsec-or-para (2)subsec. (2). The question of what was a small distribution compared with the value of the shares in respect of which it was made was one of fact and degree for the special commissioners. The commissioner had not erred in law and his decision could not be interfered with.
By a notice of appeal dated 18 July 1991 the Revenue appealed against the decision of Vinelott J entered on 24 June 1991. The grounds of the appeal were:
1. The judge paid no or insufficient regard to the principle of construction that words may be read into a statutory provision where clear reason for so doing was to be found within the statute itself.
2. The judge wrongly held that the Capital Gains Tax Act 1979,Capital Gains Tax Act 1979 section 72 subsec-or-para (4)sec. 72(4), read in the context of Capital Gains Tax Act 1979 section 72 subsec-or-para (2)sec. 72(2) and the Act as a whole, was not capable of more than one interpretation, and accordingly that it was not legitimate to have recourse to the previous legislation consolidated in the 1979 Act as an aid to construction.
3. The judge should in any event have held that the literal construction of Capital Gains Tax Act 1979 section 72 subsec-or-para (4)sec. 72(4) as a free-standing subsection gave rise to a real and substantial difficulty or ambiguity which justified the court in having recourse to its statutory antecedents to resolve the difficulty or ambiguity.
4. The judge erred in holding that, if it was legitimate to have recourse to the antecedent legislation, the relevant provisions were of no assistance. The statutory antecedents of Capital Gains Tax Act 1979 section 72 subsec-or-para (4)sec. 72(4) and comparable provisions in the 1979 Act showed that Capital Gains Tax Act 1979 section 72 subsec-or-para (4)sec. 72(4) was not intended to be free-standing but was intended to be ancillary to Capital Gains Tax Act 1979 section 72 subsec-or-para (2)sec. 72(2).
Scott LJ: This appeal raises a question of construction as to the effect of Capital Gains Tax Act 1979 section 72 subsec-or-para (4)sec. 72(4) of the Capital Gains Tax Act 1979.
The Capital Gains Tax Act 1979 is a consolidating Act bringing together the various statutory provisions regarding capital gains tax. In Capital Gains Tax Act 1979 section 1 subsec-or-para (1)sec. 1(1) of the Act...
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