Unilever (UK) Holdings Ltd v Smith (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Jonathan Parker,Lord Justice Clarke,Lord Justice Auld,T |
| Judgment Date | 11 December 2002 |
| Neutral Citation | [2002] EWCA Civ 1787 |
| Docket Number | Case No: A3 2001 2861 CHRVF |
| Court | Court of Appeal (Civil Division) |
| Date | 11 December 2002 |
[2002] EWCA Civ 1787
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT
CHANCERY DIVISION (Mr Justice Burton)
Royal Courts of Justice
Strand,
London, WC2A 2LL
Lord Justice Auld
Lord Justice Clarke and
Lord Justice Jonathan Parker
Case No: A3 2001 2861 CHRVF
Mr Robert Venables QC and Mr James Kessler (instructed by Mr James Berkeley of the Appellant's Legal Department) for the Appellant
Mr Nicholas Warren QC and Mr David Ewart (instructed by the Solicitor of Inland Revenue) for the Respondent
INTRODUCTION
This is an appeal by Unilever (UK) Holdings Ltd ("Unilever") against an order made by Burton J dated 14 December 2001 dismissing Unilever's appeal against a decision of the Special Commissioners dated 19 December 2000. Permission for a second appeal was granted by Carnwath LJ on 20 February 2002.
By their decision, the Special Commissioners dismissed Unilever's appeal against an assessment to corporation tax on chargeable gains for the calendar year 1998. In formal terms the issue in the case is whether Unilever is entitled to set against its chargeable gains for that year a loss incurred on the disposal in June 1992 of its 100 per cent holding of ordinary shares in British Oil and Cake Mills Ltd ("BOCM"). That in turn depends on the fiscal effect of a reduction of BOCM's capital which took effect on 29 April 1965 pursuant to a scheme of arrangement approved by the court under section 206 of the Companies Act 1948, whereby two classes of preference shares ranking in priority to the ordinary shares were cancelled, leaving the ordinary shares (all of which had for many years been held by Unilever) as the only issued shares in BOCM. Since the preference shares carried voting rights, one of the consequences of their cancellation was to increase the combined voting power of the ordinary shares from 62 per cent to 100 per cent, with the consequence that BOCM thereupon became a wholly-owned subsidiary of Unilever.
The primary question is whether, as Unilever contends, on the cancellation of the preference shares on 29 April 1965 there was, for the purposes of Schedule 2 to the Taxation of Chargeable Gains Act 1992 ("the 1992 Act"), a deemed disposal and reacquisition of the ordinary shares at market value. If there was, then the application of the straight-line method of time-apportioning chargeable gains or (as in this case) allowable losses arising on the disposal of assets held as at 6 April 1965 will be materially altered, with the result that Unilever will be able to claim a very much greater allowable loss on the disposal of the shares in 1992. On this appeal, however, we are not concerned with the figures; only with the question of principle.
Should Unilever succeed on the primary question, a secondary question arises as to whether a sum of around £6.9M paid by Unilever to the holders of the preference shares pursuant to an undertaking which was incorporated in an order sanctioning the scheme of arrangement is a deductible expense in calculating Unilever's allowable loss. The Revenue has issued a Respondent's Notice in relation to this secondary question.
The Special Commissioners' decision ("the Decision") and the judge's judgment ("the Judgment") are reported in full in [2002] STC 113 and for the purposes of this judgment I shall take them as read, referring to them only to the extent necessary to render this judgment intelligible. I do, however, wish to pay respectful tribute to the Special Commissioners and to the judge for the detail of their exposition and for the rigour of their analysis of the various points which arise.
THE RELEVANT STATUTORY PROVISIONS
The relevant statutory provisions are to be found in the 1992 Act and in Schedule 2 to the 1992 Act. The provisions of particular relevance are sections 126 to128 in Chapter II of Part IV of the 1992 Act, which form part of a group of sections headed ' Reorganisation or reduction of share capital', and paragraph 19 in Schedule 2.
For a full citation of the relevant provisions, together with their legislative history, I refer once again to the Decision and to the Judgment. For convenience of reference, however, I set out the relevant provisions once again below, with the critical words in italics.
Disposal where capital sums derived from assets
(1) Subject to sections 23 and 26(1), and to any other exceptions in this Act, there is for the purposes of this Act a disposal of assets by their owner where any capital sum is derived from assets notwithst and ing that no asset is acquired by the person paying the capital sum, and this subsection applies in particular to —
(a) capital sums received by way of compensation for any kind of damage or injury to assets or for the loss, destruction or dissipation of assets or for any depreciation or risk of depreciation of an asset,
(b) capital sums received under a policy of insurance of the risk of any kind of damage or injury to, or the loss or depreciation of, assets,
(c) capital sums received in return for forfeiture or surrender of rights, or for refraining from exercising rights, and
(d) capital sums received as consideration for use or exploitation of assets.
(2) In the case of a disposal within paragraph (a), (b) (c), or (d) of subsection (1) above, the time of disposal shall be the time when the capital sum is received as described in that subsection.
(3) In this section "capital sum" means any money or money's worth which is not excluded from the consideration taken into account in the computation of the gain.
Acquisition and disposal costs etc.
(1) Except as otherwise expressly provided, the sums allowable as a deduction from the consideration in the computation of the gain accruing to a person on the disposal of an asset shall be restricted to —
(a) the amount or value of the consideration, in money or money's worth, given by him or on his behalf wholly and exclusively for the acquisition of the asset, together with the incidental costs to him of the acquisition or, if the asset was not acquired by him, any expenditure wholly and exclusively incurred by him in providing the asset,
(b) the amount of any expenditure wholly and exclusively incurred on the asset by him or on his behalf for the purpose of enhancing the value of the asset, being the expenditure reflected in the state or nature of the asset at the time of the disposal, and any expenditure wholly or exclusively incurred by him in establishing, preserving or defending his title to, or to a right over, the asset,
(c) the incidental costs to him of making the disposal.
…………
Application of sections 127 to 131:
(1) For the purposes of this section and sections 127 to 131 "reorganisation" means a reorganisation or reduction of a company's share capital, and in relation to the reorganisation —
(a) "original shares" means shares held before and concerned in the reorganisation,
(b) "new holding" means, in relation to any original shares, the shares in and debentures of the company which as a result of the reorganisation represent the original shares (including such, if any, of the original shares as remain).
(2) The reference in subsection (1) above to the reorganisation of the company's share capital includes –
(a) any case where persons are, whether for payment or not, allotted shares in or debentures of the company in respect of and in proportion to (or as nearly as may be in proportion to) their holdings of shares in the company or of any class of shares in the company, and
(b) any case where there are more than one class of share and the rights attached to shares of any class are altered.
(3) ………
Equation of original shares and new holding
(1) Subject to sections 128 to 130, a reorganisation shall not be treated as involving any disposal of the original shares or any acquisition of the new holding or any part of it, but the original shares (taken as a single asset) and the new holding (taken as a single asset) shall be treated as the same asset acquired as the original shares were acquired."
Consideration given or received by holder
(1) Subject to subsection (2) below, where, on a reorganisation, a person gives or becomes liable to give any consideration for his new holding or any part of it, that consideration shall in relation to any disposal of the new holding or any part of it be treated as having been given for the original shares, and if the new holding or part of it is disposed of with a liability attaching to it in respect of that consideration, the consideration given for the disposal shall be adjusted accordingly.
(2) ……
(3) Where on a reorganisation a person receives (or is deemed to receive), or becomes entitled to receive, any consideration, other than the new holding, for the disposal of an interest in the original shares, and in particular –
(a) where under section 122 he is to be treated as if he had in consideration of a capital distribution disposed of an interest in the original shares, or
(b) where he receives (or is deemed to receive) consideration from other shareholders in respect of a surrender of rights derived from the original shares,
he shall be treated as if the new holding resulted from his having for that consideration disposed of an interest in the original shares (but without prejudice to the original shares and the new holding being treated in accordance with section 127 as the same asset).
SCHEDULE 2 TO THE 1992 ACT
PART III
OTHER ASSETS
Apportionment by reference to straightline growth of gain or loss over period of...
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