Sainsbury (J.) Plc v O'Connor
| Jurisdiction | England & Wales |
| Judgment Date | 06 June 1990 |
| Date | 06 June 1990 |
| Court | Chancery Division |
Chancery Division.
Millett J.
Mr Peter Whiteman QC and Mr Brian Green (instructed by Denton Hall Burgin & Warrens) for Sainsburys.
Mr Andrew Park QC and Mr Alan Moses QC (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Brooklands Selangor Holdings Ltd v IR Commrs WLR[1970] 1 WLR 429
Wood Preservation Ltd v Prior (HMIT) TAX(1968) 45 TC 112
Corporation tax - Group relief - Requirement of 75 per cent beneficial ownership of shares in subsidiary - Option over five per cent of shares in subsidiary granted by taxpayer to partner in joint venture - Meaning of beneficial ownership - Whether option prevented taxpayer being beneficial owner of 75 per cent holding - Whether option constituted "arrangement" barring entitlement to group relief - Income and Corporation Taxes Act 1970 section 258Income and Corporation Taxes Act 1970, sec. 258 (now Income and Corporation Taxes Act 1988 section 402Income and Corporation Taxes Act 1988, sec. 402); Finance Act 1973 section 28 subsec-or-para (2) schedule 12 subsec-or-para 5 schedule 12 subsec-or-para 5Finance Act 1973, sec. 28(2)(a), Sch. 12, para. 5(1), (3) (nowIncome and Corporation Taxes Act 1988 section 413 subsec-or-para (7) schedule 18 subsec-or-para 5 schedule 18 subsec-or-para 5Income and Corporation Taxes Act 1988, sec. 413(7)(a), Sch. 18, para. 5(1), (3)).
This was an appeal by the taxpayer company ("Sainsburys") from the decision of a special commissioner that a claim for group relief in respect of losses incurred by a company in which Sainsburys held 75 per cent of the shares should be refused as a result of the grant of an option to the holder of the remaining 25 per cent to acquire a further five per cent. The special commissioner concluded that the relevant option agreement constituted an "arrangement" falling within theFinance Act 1973 schedule 12 subsec-or-para 5Finance Act 1973, Sch. 12, para. 5.
The loss-making company, Homebase Ltd, was established as a joint venture between Sainsburys and a Dutch subsidiary of a Belgian company ("GB"). It was initially intended to be a 70/30 per cent venture but that would have prevented Sainsburys from qualifying for group relief in respect of trading losses which Homebase was expected to incur in the first few years of trading.
It was therefore decided that Sainsburys should take 75 per cent of the share capital and GB 25 per cent. An agreement ("the principal agreement"), lasting for ten years renewable for successive periods of three years, was entered into on 4 October 1979. On termination of the agreement, Sainsburys was to acquire GB's interest at a price reflecting the net value of Homebase as a going concern. During the currency of the agreement certain "reserved matters", including payment of dividends, effectively required GB's approval.
At the same time Sainsburys granted an option to GB to acquire a further five per cent of the shares for the amount paid up on the shares by Sainsburys, increased by interest at a specified rate and reduced by the gross amount of any dividends paid in respect of the shares. The option was exercisable for five years from the fifth anniversary of the incorporation of Homebase. In the event the option was not exercised and was formally terminated soon after it became exercisable.
The issue before the special commissioner and the court was whether Sainsburys was entitled to group relief in respect of Homebase's losses in seven accounting periods between 21 January 1981 and 22 March 1986.
There were two questions: whether, notwithstanding the option and the restrictions attached to its shareholding by the principal agreement, Sainsburys was the "beneficial owner" of its 75 per cent holding in Homebase as required by the Income and Corporation Taxes Act 1970 section 258Income and Corporation Taxes Act 1970, sec. 258read with Income and Corporation Taxes Act 1970 section 532 subsec-or-para (3)sec. 532(3); and whether Sainsburys failed to satisfy the additional requirements for group relief imposed by theFinance Act 1973 section 28 subsec-or-para (2)Finance Act 1973, sec. 28(2).
The special commissioner held that Sainsburys was the beneficial owner of 75 per cent of the shares, but that the option constituted an "arrangement" within Finance Act 1973 schedule 12 subsec-or-para 5Sch. 12, para. 5(3) of the 1973 Act and group relief was precluded by Finance Act 1973 section 28 subsec-or-para (2)sec. 28(2).
The Crown contended that beneficial ownership could not exist in the absence of equitable ownership. It required more than the ownership of an empty husk bereft of those rights normally attaching to equitable ownership. An option was an irrevocable offer open to acceptance by the exercise of the option and the grantor was under a contractual obligation not to put it out of his power to do what he had offered to do.
On the second question, the Crown contended that the option was an arrangement in respect of all Sainsburys' shares in Homebase, or possibly five per cent of them. If the option were exercised, Sainsburys' entitlement to profits available for distribution and assets on a winding up would be different from what it would be if the option were not exercised. Consequently, the option was an arrangement in respect of shares by virtue of which Sainsburys' entitlement to profits/assets in a subsequent accounting period could be different as compared with its entitlement if the option were not exercised. Accordingly, the condition for the application of Finance Act 1973 schedule 12 subsec-or-para 5para. 5(3) was satisfied and it must be assumed (Finance Act 1973 section 28 subsec-or-para (3)subsec. (3)(a)) that the option would be exercised, resulting in a variation of the rights attaching to the shares so thatFinance Act 1973 schedule 12 subsec-or-para 5para. 5(1) applied. Thus, while the arrangement subsisted, the additional requirement of Finance Act 1973 section 28 subsec-or-para (2)sec. 28(2)(a) was not satisfied.
Held, allowing Sainsburys' appeal:
1. The special commissioner was correct in holding that Sainsburys was the beneficial owner of 75 per cent of the shares in Homebase. Sainsburys retained all the rights normally attaching to equitable ownership. It would have been entitled to 75 per cent of the distribution to the members of Homebase on a winding up and to 75 per cent of any dividends paid. Moreover, from a commercial point of view, Sainsburys was entitled to include 75 per cent of the net assets (and trading profits if any) in its consolidated group accounts.
2. Sainsburys' beneficial entitlement to dividends was not affected by the fact that the principal agreement provided that, if the option were exercised, the share price would be reduced by the amount of any dividend paid. That was a matter affecting the price, not the beneficial ownership.
3. The option was not an "arrangement" contemplated byFinance Act 1973 schedule 12 subsec-or-para 5Sch. 12, para. 5 since GB's rights were not attached to any specific shares held by Sainsburys. But even if the rights were to be deemed to be attached specifically to these shares, there was no arrangement or understanding that the option would be exercised so that there was no certainty that Sainsburys' position in a future accounting period would (as opposed to could) be different from that in the relevant accounting period. Making the assumption in Finance Act 1973 schedule 12 subsec-or-para 5para. 5(3)(a) that "effect would be given" to the option agreement did not require it to be assumed that the option would be exercised; only that the agreement would be carried into effect according to its terms.
4. Finance Act 1973 schedule 12Schedule 12 had effect only for supplementing the additional requirements ofFinance Act 1973 section 28 subsec-or-para (2)sec. 28(2) concerned with actual or potential variation of rights. It was not concerned with the original requirement of beneficial ownership contained in Income and Corporation Taxes Act 1970 section 258sec. 258 of the 1970 Act.
1. On 6 to 10 November 1989, I, one of the special commissioners, heard the appeals of J Sainsbury plc ("Sainsburys") against refusals by HM Inspector of Taxes of claims to group relief under Income and Corporation Taxes Act 1970 section 258sec. 258 of the Income and Corporation Taxes Act 1970 in respect of the losses of a subsidiary company, Homebase Ltd, for the following eight accounting periods:
It was common ground before me that the claim in respect of the last period should be allowed.
2. At all material times, 75 per cent of the issued ordinary share capital of Homebase Ltd was held by Sainsburys. The remaining 25 per cent was held by a Dutch company, a subsidiary of GB-INNO-BM SA ("GB"), which is a Belgian company. By an agreement ("the principal agreement") dated 4 October 1979 between Sainsburys and GB, the parties thereto agreed to set up and manage the business of Homebase Ltd as a joint venture. By a further agreement (the "option agreement") of the same date Sainsburys granted to GB an option to purchase, and GB granted to Sainsburys an option to require GB to purchase, five per cent of the issued share capital of Homebase Ltd. Neither option was exercisable before the fifth anniversary of the incorporation of Homebase Ltd (that is to say, in events, not before 12 November 1984). Neither option was ever exercised; and by a deed dated 9 August 1985 the rights of both parties under the option agreement were formally terminated.
3. Four issues were in contention before me:
-
(i) whether, notwithstanding the option agreement and the incidents attached to its shareholding by the principal agreement, Sainsburys was the "beneficial owner" of the whole of its 75 per cent holding in Homebase Ltd, as required by the provisions of the Income and Corporation Taxes Act 1970...
To continue reading
Request your trial
-
Sainsbury (J.) Plc v O'Connor
...Corporation Taxes Act 1988, sec. 402, 838, 413(7)(a), . 18, para. 5(3) respectively). This was an appeal against a decision of Millett J ([1990] BTC 363) that the taxpayer company ("S") was entitled to group relief notwithstanding that options, not exercisable for five years and in fact nev......
-
Michaels and Another v Harley House (Marylebone) Ltd
...concerned with the meaning of "beneficial ownership" in provisions relating to group relief from corporation tax, Sainsbury v O'Connor 1991 1 WLR 963, 978 – 9. In that case Sainsbury and a Belgian company held 75% and 25% respectively of a joint venture company. Sainsbury had an option, no......
-
Commissioner of Taxation v Linter Textiles Australia Ltd ((in Liquidation))
... ... The Full Court dismissed the Commissioner's appeal against the judgment of Hely J 2 ... His Honour upheld an ‘appeal’ by the respondent taxpayer (‘Linter Textiles’) against ... (1986) 5 NSWLR 309 at 311; cf the remarks of Nourse LJ in Sainsbury (J) Plc v O'Connor [1991] 1 WLR 963 at 978 ... 36 DKLR ... ...
-
J Sainsbury Plc v O'Connor (Inspector of Taxes)
...relief. The Court of Appeal so held in dismissing an appeal by the Crown from the judgment of Mr Justice Millett (The Times June 8, 1990; [1990] STC 516) that had allowed an appeal by Sainsbury's from a determination of a special commissioner upholding a tax inspector's refusal to claims fo......