Westcott v Woolcombers Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 31 July 1987 |
| Date | 31 July 1987 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal.
Mr. C.H. McCall Q.C. (instructed by the Solicitor of Inland Revenue) for the Crown.
Mr. Andrew Park Q.C. and Mrs. Felicity Cullen (instructed by Messrs. Herbert Smith & Co.) for the taxpayer.
Before: Fox and Nourse L.JJ. and Sir Denys Buckley.
The following case was referred to in the judgment of Fox L.J.:
Floor v. Davis (H.M.I.T.) [1978] Ch. 295; TAX(1978) 52 T.C. 609
Corporation tax - Chargeable gain - Allowable loss - Group of companies - Exchange of shares in three subsidiaries for issue of shares in another group member - Sale of shares in the three subsidiaries to a third group member at a loss to the group - Three subsidiaries liquidated - Whether share exchange a disposal - Whether allowable loss - Finance Act 1965 schedule 7 subsec-or-para 4 schedule 7 subsec-or-para 6 schedule 13 subsec-or-para 2Finance Act 1965, Schs. 7, para. 4(2), 6(1), 13, para. 2(1) (see now Capital Gains Tax Act 1979 section 78 section 85 subsec-or-para (3)Capital Gains Tax Act 1979, sec. 78, 85(3), Income and Corporation Taxes Act 1970 section 273 subsec-or-para (1)Income and Corporation Taxes Act 1970, sec. 273(1)).
This was an appeal by the Crown against a judgment of Hoffmann J. ([1986] BTC 130) dismissing the Crown's appeal from a decision of the General Commissioners that a transfer of assets between members of a group of companies in consideration of an issue of shares in the transferee was a disposal producing neither a gain nor a loss.
In 1965 the taxpayer's parent company ("Holdings") acquired the share capital of three companies for a total consideration of £1,270,380. In March 1966 Holdings exchanged the shares in the three companies for an allotment of 1999,900 new £1 shares in one of its subsidiaries, T Ltd. In 1971 T Ltd. sold the shares to the taxpayer for £601,235. In January 1972 the three companies were voluntarily wound up and the market value of the assets received by the taxpayer by way of distribution in the liquidation was £601,235.
The inspector disallowed the taxpayer's claim that, under theFinance Act 1965 schedule 13 subsec-or-para 2Finance Act 1965, Sch. 13, para. 2(1), it was entitled to a capital loss of the difference between £1,270,380 and £601,235. The General Commissioners upheld the taxpayer's appeal. They determined that the transfer of the shares from Holdings to T Ltd. and then from T Ltd. to the taxpayer were each disposals by one member of the group to another, and in each case the acquiring company must be deemed to have given the same consideration as that originally paid by Holdings. Accordingly, they held that the taxpayer was deemed to have acquired the shares for £1,270,380 and the deemed disposal on liquidation of the companies gave rise to an allowable loss under Finance Act 1965 schedule 13 subsec-or-para 2Sch. 13, para. 2(1). The High Court dismissed the Crown's appeal against the Commissioners' decision.
The Crown appealed to the Court of Appeal contending that the Commissioners were wrong in concluding that there was a disposal of the shares in the three companies by Holdings to T Ltd. Because T Ltd. issued shares to Holdings in exchange for the shares in the three companies, the transaction was one to which Finance Act 1965 schedule 7 subsec-or-para 6Sch. 7, para. 6(1) to the 1965 Act applied. Finance Act 1965 schedule 7 subsec-or-para 4Schedule 7, para. 4(2) therefore applied to treat the transaction as not involving a disposal. Thus, because there was no disposal, Finance Act 1965 schedule 13 subsec-or-para 2Sch. 13, para. 2(1), which applied only where there was a disposal, did not apply to the share exchange.
The result, the Crown submitted, was that the taxpayer had acquired the shares for £601,235 and, on receiving the same amount in the liquidation, had realised neither a gain nor a loss.
It was common ground that Finance Act 1965 schedule 7 subsec-or-para 6Sch. 7, para. 6(1) applied to the share exchange. The question was whether Finance Act 1965 schedule 7 subsec-or-para 6 schedule 7 subsec-or-para 4Sch. 7, para. 6(1) and 4(2) displaced Finance Act 1965 schedule 13 subsec-or-para 2Sch. 13, para. 2(1).
Held, dismissing the Crown's appeal:
1. The application of Finance Act 1965 schedule 7 subsec-or-para 6Sch. 7, para. 6(1) to Finance Act 1965 schedule 7 subsec-or-para 4para. 4(2) was subject to "any necessary adaptations". The fiction imposed by Finance Act 1965 schedule 7 subsec-or-para 4para. 4(2) that "the original shares…and the new holding…shall be treated as the same asset…" was not capable of applying where the original shares in the three companies were exchanged for shares in a different company, and, if that requirement could not apply, neither could the fiction that the transaction should not be treated as involving any disposal. It was therefore a necessary adaptation that those two fictions should not be applied to T Ltd. The tax consequences of Finance Act 1965 schedule 7 subsec-or-para 4para. 4(2) thus applied only to Holdings. Accordingly, the transfer of the shares in the three companies by Holdings to T Ltd. was a disposal to T Ltd. which, by virtue ofFinance Act 1965 schedule 13 subsec-or-para 2Sch. 13, para. 2(1), was treated as producing neither a gain nor a loss.
2. The policy of Finance Act 1965 schedule 13 subsec-or-para 2Sch. 13, para. 2(1) was to ignore transactions within a group of companies and to compute gains and losses by comparing the consideration paid when the asset came into the group with the consideration received when it left the group. Tax was then assessed on the company making the disposal. There should be no difference in tax consequences between transfers of shares within a group in consideration of an issue of shares and transfers for some other consideration.
By a notice dated 26 March 1986 the Crown appealed from the decision ofHoffmann J. given on 26 February 1986. The grounds of the appeal were:
That the judge erred in law in holding that the Finance Act 1965 schedule 13 subsec-or-para 2Finance Act 1965, Sch. 13, para. 2(1) applied to the acquisition of shares by Woolcombers Topmakers Ltd. ("Topmakers") from Woolcombers (Holdings) Ltd. ("Holdings") notwithstanding that for that paragraph to apply such to acquisition there must on such acquisition have been a disposal of an asset by Holdings to Topmakers and that the judge should have held that the joint effect of the Finance Act 1965 schedule 7 subsec-or-para 6 schedule 7 subsec-or-para 4Finance Act1965, Sch. 7, para. 6 and 4(2) was that for the purposes of the application of Pt. III of that Act there was no such disposal on the part of Holdings and accordingly Finance Act 1965 schedule 13 subsec-or-para 2Sch. 13, para. 2(1) should not apply to such acquisition.
Fox L.J.: This is an appeal by the Inland Revenue from a decision of Hoffmann J.
In 1965 the company now known as Woolcombers (Holdings) Ltd. ("Holdings") acquired the issued share capital of three companies ("the three companies") for the sum of £1,270,380.
On 23 March 1966 Holdings transferred the shares in the three companies (together with other property) to Woolcombers Topmakers Ltd. ("Topmakers"), which was a wholly-owned subsidiary of Holdings, in consideration of the issue by Topmakers to Holdings of 1999,900 new shares of £1 each in Topmakers credited as fully paid.
On 24 December 1971 Topmakers sold the shares in the three companies to the taxpayer company, Woolcombers Ltd. ("New Woolcombers"), another wholly-owned subsidiary of Holdings, for £601,235.
On 7 January 1972 the three companies went into voluntary liquidation. The market value of the assets received by New Woolcombers on the distribution in the liquidation was £601,235.
The dispute in the case is whether the distribution gave rise to a loss available to New Woolcombers for the purpose of corporation tax on its profits. Such profits can consist either of income or of chargeable gains. The chargeable gains are, for the most part, computed on the rules applicable to capital gains tax. Basically, the consideration for the acquisition of the asset is deducted from the consideration for the disposal of the asset. That computation will result either in a chargeable gain or an allowable loss.
In the present case the relevant disposal by New Woolcombers was the liquidation of the three companies. The liquidation, it is agreed, was deemed to be a disposal by New Woolcombers of the shares in the three companies in consideration of an amount equal to the market value of the proceeds of the liquidation. That amount was £601,235.
The central issue is the amount of the consideration for which New Woolcombers is deemed to have acquired the shares from Topmakers. The answer to that depends upon the construction of three provisions in theFinance Act 1965 (which it is agreed is the operative statute for present purposes). Those provisions are as follows:
Finance Act 1965 schedule 7 subsec-or-para 4Finance Act 1965, Sch. 7, para. 4(2):
Subject to the following sub-paragraphs, a reorganisation or reduction of a company's share capital 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 holdings (taken as a single asset) shall be treated as the same asset acquired as the original shares were acquired.
Company amalgamations - Finance Act 1965, Finance Act 1965 schedule 7 subsec-or-para 6Sch. 7, para. 6(1):
Subject to the following sub-paragraphs, where a company issues shares or debentures to a person in exchange for shares in or debentures of another company, paragraph 4 above shall apply with any necessary adaptations as if the two companies were the same company and the exchange were a reorganisation of its share capital.
Transfers within the group - Finance Act 1965, Finance Act 1965 schedule 13 subsec-or-para...
To continue reading
Request your trial
-
NAP Holdings UK Ltd v Whittles (Inspector of Taxes)
...Co Ltd ELRTAX[1983] 1 AC 501; [1982] BTC 269 Westcott (HMIT) v Woolcombers Ltd TAXTAXTAX(1987) 60 TC 575; [1986] BTC 130 (ChD), [1987] BTC 493 (CA) Corporation tax - Chargeable gain - Group of companies - Transfer of shares in subsidiary within the group in exchange for issue of shares in t......
-
NAP Holdings UK Ltd v Whittles (HM Inspector of Taxes)
...never was any disposal by Overseas of the Astbro shares and therefore the section does not apply. 10 In Westcott v. Woolcombers Ltd. [1986] S.T.C. 182 and [1987] S.T.C. 600 Hoffman J. and the Court of Appeal had occasion to deal with the statutory predecessors of the enactments referred ......
-
Shepherd v Lyntress Ltd
...(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 s......
-
Johnston Publishing (North) Ltd v HM Revenue and Customs
...upon which that principle (commonly known as the “in-group rule”) is based was explained by Mr Justice Hoffmann in Westcott (Inspector of Taxes) v Woolcombers Ltd [1986] STC 182, 190: “The policy of para 2(1) of Schedule 13 [of the Finance Act 1965]”—the precursor of section 171 TCGA 1992 –......