Strand Futures and Options Ltd v Vojak
| Jurisdiction | England & Wales |
| Judge | The Honourable Mr Justice ETHERTON,Mr Justice Etherton |
| Judgment Date | 07 February 2003 |
| Neutral Citation | [2003] EWHC 67 (Ch) |
| Docket Number | Case No: 2002/APP/0295 |
| Court | Chancery Division |
| Date | 07 February 2003 |
[2003] EWHC 67 (Ch)
IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION
Royal Courts of Justice
Strand, London,WC2A 2LL
The Honourable Mr Justice Etherton
Case No: 2002/APP/0295
Mr Janek Matthews (instructed By Gregory Rowcliffe & Milners) For The Appellant Mr Christopher Tidmarsh Qc (instructed By Solicitor Of Inland Revenue)For The Claimant
Approved Judgment
Hearing Dates: 15th 16th January 2003
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
This is an appeal by Strand Futures & Options Limited ("SFOL") from a decision of the Special Commissioners (Dr John F Avery Jones CBE and Mr Malcolm J F Palmer) given on 13 February 2002 dismissing an appeal by SFOL against a corporation tax notice of assessment for the accounting period ending 31 December 1995. The relevant facts
On 31 October 1986 SFOL acquired by allotment 29.9% of the issued share capital of City of London Options Limited ("CLO"). By 1995 SFOL held 179,400 shares in CLO, still comprising 29.9% of the issued share capital.
In 1995 SFOL proposed to sell half of its shareholding in CLO to Financielle Participaties Amsterdam GV ("FPA") for £871,630 and, the other half to CLO for a similar amount.
The proposal was duly carried out. On 29 September 1995 CLO purchased 89,700 of its own shares from SFOL for £871,630. FPA purchased SFOL's remaining 89,700 shares in CLO for £871,630.
On 17 January 1997 SFOL's corporation tax computation for the accounting period ending 31 December 1995 was submitted. It excluded from the capital gains computation the payment received from CLO on the purchase of its shares.
On 3 February 1997 HM Inspector of Taxes informed SFOL's agents that the payment received from CLO in consideration of the disposal of the shares in CLO should be included in the computation of capital gains for the purposes of the charge to corporation tax.
A corporation tax notice of assessment on SFOL for the accounting period ending 31 December 1995 was issued on 17 September 1997 in an estimated amount of £1.7 million, with net capital gains of £1.6 million. The assessment was made on the basis that the payment received from CLO on its purchase of its shares was to be treated in the manner indicated by the Inspector on 3 February 1997.
By letter dated 29 September 1997, SFOL lodged an appeal against the assessment.
On 13 February 2002, as I have said, the Special Commissioners dismissed SFOL's appeal, and confirmed the assessment in the agreed figure of £1,431,686. The issue
The issue in dispute is whether, when SFOL received payment from CLO for CLO's purchase of its own shares in 1995, that payment had to be included in the consideration for the disposal of those shares for the purposes of the charge to corporation tax on chargeable gains. The Revenue, in line with its Statement of Practice SP 4/89, maintains that the payment should be so included. SFOL contends that no part of that payment should be included.
Representation
Before me, as before the Special Commissioners, Mr Janek Matthews, counsel, appeared for SFOL; and Mr Christopher Tidmarsh Q.C. appeared for the Revenue.
Disposal?
The Revenue's case is that the purchase by CLO of its shares from SFOL gave rise to a chargeable gain accruing to SFOL. Generally speaking, for there to be a chargeable gain there must be a disposal of assets: Taxation of Chargeable Gains Act 1992 (" TCGA 1992") s.1. The Revenue's case is that the sale of the shares constituted a disposal of assets by SFOL. SFOL's case is that there was no actual disposal on ordinary gains tax principles.
It is common ground that, upon the purchase by CLO of its own shares, the shares had "to be treated" as cancelled: Companies Act 1985 ss. 160(4) and 162(2).
Mr. Matthews submitted that, in those circumstances, the sale of the shares by SFOL did not transfer to CLO any assets, and the true nature of the transaction was that CLO was making a payment for cancellation of non-redeemable shares.
In support of that proposition, Mr. Matthews referred me to the Inland Revenue Capital Gains Manual para. 58601. This states that no chargeable gain or loss can arise to a UK company when it purchases its own shares, because the effect of the Companies Act 1985 s.160(4) is that the shares purchased are to be treated as cancelled, and so the company does not acquire the shares on the purchase and does not dispose of them on cancellation.
Mr. Matthews, drawing a distinction between an actual disposal for gains tax purposes and a deemed disposal, referred me to TCGA 1992 s.22 (which provides that there is a disposal of assets where an owner derives a capital sum from assets notwithstanding that no asset is acquired by the person paying the capital sum), and TCGA s.24 (which provides that there shall be a deemed disposal on the occasion of the entire loss, destruction, dissipation or extinction of an asset).
The Special Commissioners concluded that the sale by SFOL to CLO of the CLO shares constituted an actual disposal for the purposes of tax on chargeable gains. In my judgment, they were plainly right.
For the purposes of the tax on chargeable gains, "disposal" bears its ordinary meaning: Berry v. Warnett [1982] 1 WLR 698, 701 (Lord Wilberforce).
I understand that it is not in dispute that there was a contract between SFOL and CLO for the sale of the shares. On an ordinary use of language, the sale of the shares pursuant to that contract was a disposal of the shares by SFOL. The contract and transaction was one of sale, notwithstanding that, upon completion of the sale, the shares were "to be treated" as cancelled.
I do not consider that para. 58601 of the Inland Revenue's Capital Gains Manual, or TCGA 1991 ss.22 or 24 establish the contrary. Para. 58601 of the Manual deals only with the tax position of the purchasing company, and not with the tax position of the vendor. It is to be noted that para. 58655 of the same Manual states that: "A company may repay or redeem its share capital. This is not the same procedure as purchasing its own shares. As far as the shareholder is concerned a purchase of its own shares represents a sale of those shares to the company. The sum received from the company is the proceeds of that sale."
The provisions of TCGA ss. 22 and 24 do not embrace the facts of the present case, which involve an actual sale of shares, pursuant to a contract for sale, and a "deemed" cancellation of the shares upon and following completion of the contract for sale.
Mr. Tidmarsh, in compliance with his duty to bring relevant cases to the attention of the Court, even if possibly adverse to his case, referred me to Powlson v Welbeck Securities Ltd. [1986] 60 TC 269. In that case, the Court of Appeal accepted the Crown's submission that the release of an option, which was not accompanied by any corresponding acquisition of the right in question, but had the effect of extinguishing it, was not an actual disposal for gains tax purposes. In my judgment, that case is of no assistance in the present proceedings. The transaction with which I am concerned was not one of release or, by analogy, redemption, but one of sale and purchase of shares and deemed cancellation of the shares following completion.
The tax position of an individual receiving a distribution
Both counsel, in advancing their respective arguments in relation to corporation tax, made reference to the tax position of an individual shareholder who receives payment from the company on the purchase of its shares from him. There is no disagreement between the parties as to the tax position of such an individual at the time in question, namely the year to 31 December 1995. Accordingly, it is convenient to consider, at the outset, the tax position of such an individual at that time.
Under s.20(1) of the Income and Corporation Tax Act 1988 ("TA 1988"), income tax under Schedule F is chargeable in respect of dividends and other distributions; and, for the purposes of income tax, all such distributions are to be regarded as income, however they fall to be dealt with in the hands of the recipient. Paragraph 1 of Schedule F is as follows:
"1. Subject to section 95(1)(a), income tax under this Schedule shall be chargeable for any year of assessment in respect of all dividends and other distributions in that year of a company resident in the United Kingdom which are not specially excluded from income tax, and for the purposes of income tax, all such distributions shall be regarded as income however they fall to be dealt with in the hands of the recipient."
Save for certain specified exclusions, "distributions" encompass all cash and asset transfers by a company to its members, in particular dividends, including capital dividends, and sums received on a redemption, repayment or purchase of the company's own shares: TA 1988 s.209. Among the specified exclusions is an exclusion of so much of a distribution as represents repayment of capital on shares: s.209(2)(b). Accordingly, in the case of the purchase by CLO of its shares from SFOL, the purchase price of £871,630, less so much of that amount as represented repayment of capital on the shares, was a distribution within TA 1988 s.209.
At the time in question, when a UK resident company made a "qualifying" distribution it was required to pay an amount of corporation tax, called advance corporation tax ("ACT"): TA 1988 s.14. All distributions were "qualifying" distributions, except a distribution which was a distribution only by virtue of TA 1988...
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