Shepherd v Lyntress Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 26 June 1989 |
| Date | 26 June 1989 |
| Court | Chancery Division |
Chancery Division.
Vinelott J.
Mr. David Milne Q.C. and Mr. Kevin Prosser (instructed by Allen & Overy) for the taxpayers.
Mr. Francis Ferris Q.C. and Mr. Alan Moses (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Attorney-General v. Avelino Aramayo & Co. ELR[1925] 1 K.B. 86
Chinn v. Hochstrasser (H.M.I.T.) ELR[1981] A.C. 533
Coates (H.M.I.T.) v. Arndale Properties Ltd. TAXTAX(1984) 59 T.C. 516; [1984] BTC 438
Craven (H.M.I.T.) v. White; I.R. Commrs. v. Bowater Property Developments Ltd;
Baylis (H.M.I.T.) v. Gregory WLRTAXWLRTAX[1987] 3 W.L.R. 660, [1987] BTC 226 (C.A.), [1988] 3 W.L.R. 423; [1988] BTC 268 (H.L.)
Furniss (H.M.I.T.) v. Dawson TAXELRTAX[1983] BTC 330 (C.A.); [1984] A.C. 474; [1984] BTC 71 (H.L.)
I.R. Commrs. v. Burmah Oil Co. Ltd. TAXTAX(1981) 54 T.C. 200; [1982] BTC 56
I.R. Commrs. v. Westminster (Duke) ELR[1936] A.C. 1
Ramsay (W.T.) Ltd. v. I.R. Commrs. ELR[1982] A.C. 300
Reed (H.M.I.T.) v. Nova Securities Ltd. TAXTAX(1985) 59 T.C. 516; [1985] BTC 121
Westcott (H.M.I.T.) v. Woolcombers Ltd. TAXTAX[1986] BTC 130; [1987] BTC 493
Corporation tax - Losses - Shares in company which had become of little value transferred by parent to subsidiary - Shares in subsidiary sold to another group in two stages within three days - Loss on shares crystallised at first stage - Between the two stages worthless shares sold to another subsidiary - Two-stage sale adopted for both fiscal and commercial purposes - Whether Ramsay principle applied to treat the first stage as a nullity - Income and Corporation Taxes Act 1970,Income and Corporation Taxes Act 1970 section 278sec. 278,Capital Gains Tax Act 1979 section 62Capital Gains Tax Act 1979, sec. 62.
These were appeals from two decisions of the Special Commissioners. The Crown appealed against their decision in the appeal of Lyntress Ltd. ("Lyntress") that the principle of W.T. Ramsay Ltd. v. I.R. Commrs.ELR[1982] A.C. 300 did not apply to a series of transactions intended to establish a loss to be used by the News International plc ("News") group after the acquisition by News of all the share capital of Lyntress. News appealed against the Commissioners' decision that the Ramsay principle did apply to the sale of shares by Lyntress through the Stock Exchange by ignoring the transfer of the shares to Lyntress by News and regarding the sale of the shares as a sale by News.
The taxpayer company ("Lyntress") was a wholly-owned subsidiary of Grendon Trust Ltd. ("Grendon"). Grendon had acquired the share capital of a public company, Monotype, which by the late 1970s had become run down and the shares were virtually worthless, but it was thought that, with the injection of capital, Monotype could be made viable. Grendon, which could not itself utilise a substantial capital loss, hoped to take advantage of the loss shown on the Monotype shares while retaining an interest in the company in case it should recover. In August 1978, Grendon sold 41 per cent of its holding of Monotype shares to Lyntress. In November 1978 Lyntress transferred its shares in Monotype to a company ("MH") in exchange for shares in MH. MH was a financing vehicle, controlled by investors unconnected with Grendon which, it was hoped, could be used to revive Monotype's business.
The sale of the Lyntress shares to News was carried out in two stages. On 26 November 1979 News acquired from Grendon 35 per cent of the share capital of Lyntress, breaking the group relationship between Lyntress and Grendon. Lyntress thus realised a loss of some £4m in respect of its investment in MH which crystallised by virtue of the Income and Corporation Taxes Act 1970, Income and Corporation Taxes Act 1970 section 278 subsec-or-para (3) section 278 subsec-or-para (4)sec. 278(3), (4)(c). The remaining 65 per cent of the share capital of Lyntress was acquired by News on 28 November.
Meanwhile, on 27 November, Lyntress sold its holding of shares in MH to a company, Manilsa, a subsidiary but not a 75 per cent subsidiary, of Grendon. Grendon thus avoided difficulties which might have arisen consequent on rights of pre-emption contained in the articles of association of MH restricting the sale of its shares, while at the same time retaining an interest in the possible recovery of MH.
Lyntress appealed against assessments for the accounting periods ending 30 June 1980 and 1981. The question for determination was whether the apparent loss on the disposal of the MH shares was an allowable loss or whether the Ramsay principle operated to disregard the acquisition by Lyntress of the shares in Monotype and their transfer to MH as fiscal nullities.
The Commissioners held that the loss arising on the sale of the MH shares by Lyntress was an allowable loss but it could not be set off against the gains realised on the share disposals which they had held were made by News.
News held shares in three companies ("LWT", "News Corporation" and "Broken Hill") which by the late 1970s had appreciated substantially in value. It was decided that News should acquire Lyntress and transfer shares in the three companies to Lyntress in order to set off the loss suffered by Lyntress on the Monotype shares on leaving the Grendon group against gains realised on the disposal of the shares in the three companies.
On 31 October News had also acquired from other parties all the issued share capital in a company, Salcombe, which had available capital losses.
On 10 March 1980 News sold part of its holding in LWT to Salcombe and part to Lyntress which Salcombe and Lyntress sold on the UK Stock Exchange two days later.
In April and May 1981 News sold part of its holding in News Corporation to Salcombe and part to Lyntress and its holding in Broken Hill to Lyntress. Salcombe and Lyntress then disposed of those shares on the Australian Stock Exchange.
News appealed against assessments for the accounting period 1 January to 30 June 1980 in respect of chargeable gains on the disposal of the LWT shares by Lyntress and Salcombe on the Stock Exchange, and similarly for the period to 30 June 1981 in respect of the News Corporation and Broken Hill shares. The assessments were made on the basis that the sale of the shares to Salcombe and Lyntress were steps inserted into a series of transactions, with no commercial purpose, for the avoidance of tax within the principles in W.T. Ramsay Ltd v. I.R. Commrs. ELR[1982] A.C. 300 andFurniss (H.M.I.T.) v. Dawson TAX[1984] BTC 71.
The Special Commissioners held in principle that Ramsay applied so that the gains arising on the disposal of the LWT, News Corporation and Broken Hill shares by Lyntress were in effect realised by News.
The 1980 assessment on News was discharged as it was held that it was not open to the Revenue to make an assessment because an agreement had been reached within the Taxes Management Act 1970, Taxes Management Act 1970 section 54sec. 54 but the 1981 assessment was upheld.
On appeal to the High Court in the Lyntress case, the Crown contended that the steps taken on 26, 27 and 28 November 1979 were all part of a single transaction which had as its intended and pre-ordained end the sale of all the shares in Lyntress to News on 28 November. Into that transaction was inserted the sale of 35 per cent of the Lyntress shares to News on 26 November. The reason for that, it was submitted, was to avoid the operation of the Capital Gains Tax Act 1979 section 62 subsec-or-para (3)Capital Gains Tax Act 1979, sec. 62(3)(disposals between connected persons). Accordingly, the sale of the first tranche of shares was an artificial step with no commercial purpose, and the Ramsay principle applied.
The issue in the News appeal was whether the gains realised on the sale of the shares in LWT, News Corporation and Broken Hill in the year to 30 June 1981 should be treated as a gain made by Lyntress and Salcombe or whether, applying the Ramsay principle, transfer of the shares to Lyntress and Salcombe should be disregarded to treat the gains as accruing to News.
Held, dismissing the Lyntress appeal and allowing the News appeal:
1. The sale of the Lyntress shares to News in two stages and the sale of the MH shares to Manilsa by Lyntress between those two stages achieved a commercial purpose, namely avoiding the effect of the pre-emption rights provided by the articles of association of MH while at the same time avoiding the fiscal trap of section 62 subsec-or-para (3)sec. 62(3). Lyntress left the Grendon group when News acquired 35 per cent of its shares and there was a deemed disposal of the shares of MH owned by Lyntress giving rise to an allowable loss. That loss remained an allowable loss after News had acquired all the shares of Lyntress, and gains accruing to Lyntress when a member of the News group could be set against it. (W.T. Ramsay Ltd. v. I.R. Commrs. ELR[1982] A.C. 300 distinguished.)
2. The transfer of the shares of LWT, News Corporation and Broken Hill to Lyntress and Salcombe and their subsequent sale over a period of time was not in each case part of a single composite transaction within the Ramsay principle. It was not enough to say that the shares were transferred to Lyntress and Salcombe with the intention that they should be sold so that the gain could be offset against the losses of those companies. There was no suggestion in the evidence and no finding by the Commissioners that any arrangements had been made for the sale before the transfer. It followed that the gains on the shares of LWT, News Corporation nd Broken Hill transferred to Lyntress and Salcombe by News and sold in the open market by Lyntress and Salcombe were gains realised by Lyntress and Salcombe and not by News. (Craven (H.M.I.T.) v. White TAX[1988] BTC 268 followed.)
After judgment in the two...
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