Tesco Plc v Crimmin (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 13 June 1997 |
| Date | 13 June 1997 |
| Court | Chancery Division |
Chancery Division.
Sir Richard Scott V-C.
Andrew Park QC and Hugh McKay (instructed by Herbert Smith) for Tesco.
Nicholas Warren QC and Michael Furness (instructed by the Solicitor of Inland Revenue) for the Crown.
The following case was referred to in the judgment:
IR Commrs v McGuckian TAX[1997] BTC 346
Corporation tax - Chargeable gains - Depreciatory transaction - Method of application of indexation allowance where loss was to be adjusted to reflect diminution of value attributable to depreciatory transaction - Whether losses resulting from depreciatory transaction extinguished later gains - Taxation of Chargeable Gains Act 1992 section 176 section 53 subsec-or-para (2)Income and Corporation Taxes Act 1970, s. 280 - Finance Act 1982, s. 86 (Taxation of Chargeable Gains Act 1992 section 176 section 53Taxation of Chargeable Gains Act 1992, ss. 176 and 53, 54).
This was an appeal by the taxpayer ("Tesco") against a decision of the special commissioners that the sale of a group company, whose value had been artificially diminished by a "depreciatory transaction" within the meaning of the Taxation of Chargeable Gains Act 1992 section 176Income and Corporation Taxes Act 1970, s. 280, could not operate to create an allowable loss by the application of the indexation provisions in Taxation of Chargeable Gains Act 1992 section 53 subsec-or-para (2)FA 1982, s. 86.
Tesco was the owner of all the issued shares in THL. THL owned all the shares in TSL, which owned the goodwill and assets of the trade carried on under Tesco's name.
On 12 February 1991 THL sold the shares in TSL to Tesco for £1.6m, a price very much lower than the open market value of TSL (the depreciatory transaction). On 14 February 1991 Tesco sold the shares in THL to a purchaser outside the group ("BAT") by an arms length transaction. The price, which was not to exceed £40m, would in any event show a large loss if the depreciatory transaction was taken at its face value.
The issue concerned the interaction between the Taxation of Chargeable Gains Act 1992 section 176Income and Corporation Taxes Act 1970, s. 280, aimed at depreciatory transactions, and the indexation provisions in the Income and Corporation Taxes Act 1988 section 53 subsec-or-para (2) rule angeFinance Act 1982, s. 86, of which subs. (4) applied the indexation allowance to the unindexed gain which had first to be established.
If there was an indexed chargeable gain, Taxation of Chargeable Gains Act 1992 section 176s. 280 would have no application, whether or not there had been a depreciatory transaction, because there were no provisions preventing depreciatory transactions between associated companies from artificially reducing the amount of chargeable gains: only the artificial creation of allowable losses were targeted byTaxation of Chargeable Gains Act 1992 section 176s. 280.
Tesco contended that gains realised in the period to 27 February 1993 were extinguished by bringing forward an allowable loss arising on the disposal of THL to BAT on 14 February 1991.
Held, dismissing Tesco's appeal:
1. The words "any allowable loss accruing on the disposal" inTaxation of Chargeable Gains Act 1992 section 176s. 280(4) meant that, before the Taxation of Chargeable Gains Act 1992 section 176s. 280 machinery was applied, the allowable (indexed) loss accruing from the disposal in question had first to be calculated. Moreover, by Taxation of Chargeable Gains Act 1992s. 280(5) the allowable loss should not reflect any diminution in the value of the THL shares which was attributable to a depreciatory transaction. The measure of the extent to which the sale of THL to BAT was depreciatory was the excess of the market value as at 12 February 1991, an amount appreciably higher than its base value as at 31 March 1982, over the price paid by Tesco of £1.6m. The effect of theTaxation of Chargeable Gains Act 1992 section 53 subsec-or-para (2) rule angeFinance Act 1982, s. 86(2)(a) was that the "unindexed gain or loss" was a gain or loss unaffected byTaxation of Chargeable Gains Act 1992 section 176s. 280(4 of the 1970 Act.
2. Therefore, where Taxation of Chargeable Gains Act 1992 section 176s. 280 was applicable, it had to be construed to fulfil its intended role, namely to prevent allowable losses being produced by depreciatory transactions. If a depreciatory transaction did not go so far as to produce an unindexed allowable loss but simply eliminated or reduced a potential unindexed gain, and on a subsequent disposal the indexation allowance produced an allowable loss where pre-indexation there would have been none, Taxation of Chargeable Gains Act 1992 section 176s. 280, in reducing or eliminating that indexed allowable loss, would discharge the role for which it was intended, namely negating the use of depreciatory transactions to produce allowable losses.
By originating motion pursuant to the Taxes Management Act 1970 section 56ATaxes Management Act 1970, s. 56A (as substituted by SI 1994/1813SI 1994/1813 with effect from 1 September 1994), the taxpayer, Tesco plc, appealed to the High Court against the following decision of the special commissioners (Mr DA Shirley and Dr JF Avery Jones sitting in private, (1996) SpC 68) released on 6 February 1996.
1. In form this is an appeal by Tesco plc ("Tesco") against an assessment to corporation tax for the year ending on 25 February 1993 in which it realised chargeable gains of £4,627,996. Tesco contends that these gains should be extinguished by allowable losses brought forward which include losses on the sale of its subsidiary company Tesco Holdings Ltd ("THL") to BAT Industries plc ("BAT") on 14 February 1991.
2. The question to what extent, pursuant to Taxation of Chargeable Gains Act 1992 section 176s. 280 of the Income and Corporation Taxes Act 1970, an allowable loss accruing on that disposal should be reduced having regard to a depreciatory transaction which took place on 12 February 1991 when THL sold its subsidiary, ("TSL") (and some dormant subsidiaries) to Tesco at an aggregate price of £1,669,986, being book value and well below market value (some £2,000m) since TSL owned the goodwill and assets of the trade carried on under the name "Tesco".
3. It is Tesco's case that an allowable loss did accrue. The Crown contends that the loss is eliminated by Taxation of Chargeable Gains Act 1992 section 176s. 280.
4. We give our decision in principle. No figures are agreed but subject to that we shall use, as illustrative, figures contained in a document put in during his reply by leading counsel who appeared on behalf of Tesco. No case was cited in argument.
5. Taxation of Chargeable Gains Act 1992 section 176Section 280 so far as material hereto reads as follows:
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(1) This section has effect as respects a disposal of shares in, or securities of, a company [THL] (in this section referred to as an "ultimate disposal") if the value of the shares or securities has been materially reduced by a depreciatory transaction effected on or after 6th April 1965; and for this purpose "depreciatory transaction" means
(a) any disposal of assets [shares in TSL] at other than market value by one member [THL] of a group of companies to another [Tesco], or
(b) … any other transaction satisfying the conditions of subsection (2) below:
We omit the proviso to subs. (1) and subs. (2) and (3).
(4) If the person making the ultimate disposal is, or has at any time been, a member of the group of companies referred to in subsection (1) or (2) above, any allowable loss accruing on the disposal shall be reduced to such extent as appears to the inspector, or on appeal the Commissioners concerned, to be just and reasonable having regard to the depreciatory transaction.
We omit the proviso appended to the subsection.
(5) The inspector or the Commissioners shall make the decision under subsection (4) above on the footing that the allowable loss ought not to reflect any diminution in the value of the company's assets which was attributable to a depreciatory transaction … but allowance may be made for any other transaction on or after 31st March 1982 which has enhanced the value of the company's assets and depreciated the value of the assets of any other member of the group.
For Tesco it is accepted that the sale of the shares in TSL by THL to Tesco was a "depreciatory transaction", since it materially reduced the value of the shares in THL. It is also common ground that this section does not effect reductions in what would be chargeable gains but for a depreciatory transaction.
Taxation of Chargeable Gains Act 1992 section 15Section 28 of the Capital Gains Tax Act 1979 as in force in February 1991 provides as follows:
Taxation of Chargeable Gains Act 1992 section 1528(1)The amount of the gains accruing on the disposal of assets shall be computed in accordance with this Chapter, and subject to the other provisions of this Act and Taxation of Chargeable Gains Act 1992 section 53 subsec-or-para (2) section 54sections 86 and 87of the Finance Act 1982.
(2) Every gain shall, except as otherwise expressly provided, be a chargeable gain.
We omit subs. (3) which is not relevant.
Taxation of Chargeable Gains Act 1992 section 16Section 29 deals with losses. We read the first two subsections.
(1) except as otherwise expressly provided, the amount of a loss accruing on a disposal of an asset shall be computed in the same way as the amount of a gain accruing on a disposal is computed.
(2) Except as otherwise expressly provided, all the provisions of this Act which distinguish gains which are chargeable gains from those which are not, or which make part of a gain a chargeable gain, and part not, shall apply also to distinguish losses which are allowable losses from those which are not and to make part of a loss an allowable loss, and part not: and references in this Act to an allowable loss shall be construed accordingly.
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...index might not be relevant to particular assets which had diminished in value. 20 Miss Cullen distinguished Tesco plc v Crimmin TAX[1997] BTC 369 (ChD) as, in that appeal, the depreciatory transaction took place only two days before the ultimate disposal and so it was not in issue (as in t......