Unilever (UK) Holdings Ltd v Smith (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 14 December 2001 |
| Date | 14 December 2001 |
| Court | Chancery Division |
Chancery Division.
Burton J.
Robert Venables QC and James Kessler (instructed by James Berkeley) for the taxpayer.
Nicholas Warren QC and David Ewart (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Aberdeen Construction Group Ltd v IR Commrs TAX(1978) 52 TC 281
Batts Combe Quarry Ltd v Ford ELR[1943] Ch 51
Borland's Trustee v Steel Brothers & Co Ltd ELR[1901] 1 Ch 279
Dunstan v Young, Austen & Young Ltd TAXTAX[1989] BTC 77; (1988) 61 TC 448
Everett v Griffiths ELR[1924] 1 KB 941
Fitch Lovell Ltd v IR Commrs WLR[1962] 1 WLR 1325
IR Commrs v Beveridge TAX(1979) 53 TC 178
Westcott v Woolcombers Ltd TAXTAX[1987] BTC 493; (1987) 60 TC 575
White v Bristol Aeroplane Co Ltd ELR[1953] Ch 65
Corporation tax - Chargeable gain - Shares - Reorganisation of share capital - Ordinary stock in company acquired by taxpayer before 6 April 1965 - Scheme of arrangement in relation to company effected on 29 April 1965 to cancel preference share capital - Calculation of chargeable gain or loss on disposal of shares - Whether calculation by straight line apportionment over complete period of ownership - Whether acquisition cost market value of stock at date of scheme of arrangement - Whether scheme was reorganisation - Whether taxpayer's holding concerned in reorganisation - Whether holding following scheme was new holding - Taxation of Chargeable Gains Act 1992, Taxation of Chargeable Gains Act 1992 section 126 schedule 2 subsec-or-para 19(3)s. 126, Sch. 2, para. 19(3).
This was an appeal by the taxpayer against a decision of special commissioners ((2000) Sp C 267) dismissing its appeal against an assessment in respect of profits chargeable to corporation tax for the period 1 January to 31 December 1998, for which year the taxpayer sought to set against its chargeable gains a loss on the disposal of shares held in another company.
In 1992 the taxpayer company disposed of its ordinary stock in B Ltd which it had acquired before 6 April 1965. On 29 April 1965, B Ltd's share capital had been subject to a scheme of arrangement, approved by the court, to cancel the company's preference share capital, leaving in issue only the ordinary stock held by the taxpayer. The taxpayer paid £6,924,773 to the holders of the preference capital as provided by the scheme. After the scheme of arrangement the taxpayer was in sole and unqualified control of B Ltd whereas it had before no more than 62 per cent of the voting rights and was subject to the rights and entitlements enjoyed by the preference stockholders. The authorised and issued share capital was reduced to the extent of the cancellation of the preference stock but the authorised capital was increased to the same nominal value (although the newly authorised ordinary shares remained unissued). In 1998 the taxpayer realised a chargeable gain on the disposal of another company and sought to set off the loss made on the disposal of the B Ltd stock in 1992.
The taxpayer appealed against the assessment raising a question as to the method of calculating the chargeable gain and the base cost of the B Ltd stock. The taxpayer claimed that the events of 1965 justified a base cost referable to the market value of the stock at the time of the scheme of arrangement relating to B Ltd on the basis that the scheme of arrangement had been a reduction of share capital and a reorganisation within Taxation of Chargeable Gains Act 1992 section 126s. 126 of the Taxation of Chargeable Gains Act 1992. In order for the taxpayer to take April 1965 as its base cost, and thus operate the calculations in accordance with Taxation of Chargeable Gains Act 1992 schedule 2 subsec-or-para 19(2)para. 19(2)(b)(i) and (ii) of Sch. 2 to the 1992 Act, it had to establish that its holding of £6m ordinary stock in B Ltd became a new holding withinTaxation of Chargeable Gains Act 1992 section 126 subsec-or-para 1s. 126(1) resulting from a reorganisation, being shares which as a result of the reorganisation represented the original shares which were held before and concerned in the reorganisation. If the taxpayer had come to have such a new holding after 5 April 1965, then the straight line apportionment was taken from original acquisition up to 29 April 1965 but, by virtue of the special provisions in para. 19 relating to new holdings arising since 6 April 1965 in relation to original shares acquired prior to 6 April 1965, the valuation of the loss on disposal in 1992 would be calculated as from 29 April 1965.
The special commissioners dismissed the appeal. The legislative provisions required a transaction by which original shares existed at the start and the holders of those shares became holders of a new holding as a result of the transaction. Here the preference stock was cancelled and, as a result, the ownership of B Ltd was left in the hands of the holders of the ordinary stock. There was no reorganisation within the meaning of Taxation of Chargeable Gains Act 1992 section 126s. 126. The taxpayer appealed to the High Court.
Held, dismissing the appeal:
1. On a purposive construction of Taxation of Chargeable Gains Act 1992 section 126s. 126 it was clear that a reorganisation such as an alteration of rights, as provided for in s. 126(2)(b), did not involve any acquisition or disposal in the normal sense, but a new holding would be deemed to have come into existence, and thus to have been acquired or at any rate "come to be held" withinTaxation of Chargeable Gains Act 1992 schedule 2 subsec-or-para 19para. 19 of Sch. 2 to the Taxation of Chargeable Gains Act 1992. (Westcott v Woolcomber Ltd [1987] BTC 493; (1987) 60 TC 575 referred to.)
2. Paragraph 19 was to be construed simply as consequential upon, and not a part of the context or purpose of Ch. II of Pt. IV. The purposive construction of Taxation of Chargeable Gains Act 1992 section 126s. 126 was limited to the requirement to read and construe it in and with its statutory context, namely the rest of Ch. II and in particular as part of the scheme and structure of that Chapter. (Dunstan v Young, Austen & Young Ltd TAX[1989] BTC 77; (1988) 61 TC 448 applied.)
3. What had occurred here was an alteration in the enjoyment of the rights, and not an alteration of the rights attached to the shares themselves. There was no alteration of the rights attached to the ordinary stock when the prior preference shares were cancelled. The amendment of the memorandum and articles consequent on the cancellation was a purely mechanical exercise, amounting to no alteration or variation of rights. The voting rights remained exactly as before, and were no more varied by the removal of the votes of preference shareholders than they would have been by the creation, removal or regrouping of any other voting shareholders, by the ordinary processes of issue, acquisition, sale or transfer.
4. Reduction of a company's share capital did not, on a true construction of Taxation of Chargeable Gains Act 1992 section 126s. 126 within the context of Ch. II and in particularTaxation of Chargeable Gains Act 1992 section 127 section 128 subsec-or-para 3ss. 127 and 128(3), include cancellation of an entire class of share capital. In the event of such cancellation, there was no new holding in respect of those shares, and the statutory framework, for the purpose of which s. 126 provided the definition, depended upon, and did not work without, a new holding. Accordingly, where nothing other than the cancellation of a class of share capital was relied upon (together with any knock-on effects which themselves are short of amounting to a reorganisation) there was no reorganisation.
5. Irrespective of whether there was a reorganisation, the ordinary stock was not "concerned in" it, and in any event no "new holding" of ordinary stock resulted from it. In order that the shares should become a "new holding", they must have changed in some way. They must be shown to have been different as a result of the fact that they were "concerned in" the reorganisation, in order to be a new holding. Considering para. 19(3) a new holding had to be different in a respect additional or alternative to the simple question of number. For the shares to be "concerned in" the reorganisation, there had to be a change in those shares and no change took place in relation to the ordinary stock in this case. Therefore even if there was a reorganisation by reference to the reduction in capital, the ordinary stock was not concerned in that reorganisation. For the same reasons there was no new holding because, for there to be a new holding which resulted from the reorganisation, there had to be a change or difference as between the old shares and the new.
6. If the court had found that there was a new holding, that would have been by virtue of a difference in or change to the original shares constituting sufficient to amount to such new holding, and therefore the £6,924,773 would have been paid by the taxpayer, albeit to a third party, as consideration for such difference or change withinTaxation of Chargeable Gains Act 1992 section 128 subsec-or-para 1s. 128(1), i.e. in consideration of the element which created the new holding out of the original shares.
Burton J:
1. This is an appeal by Unilever (UK) Holdings Ltd ("Unilever"), for whom Robert Venables QC and James Kessler have appeared, as they did below, against a decision given on 19 December 2000 by the special commissioners (Stephen Oliver QC and Malachy Cornwall-Kelly) in favour of the Revenue, for whom Nicholas Warren QC appeared below, and also, with David Ewart, before me. The special commissioners ((2000) Sp C 267) dismissed an appeal by Unilever against an assessment dated 14 February 2000 in respect of profits chargeable to corporation tax for the period 1 January to 31 December 1998, for which year Unilever sought to set against its chargeable...
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