Westcott v Woolcombers Ltd

JurisdictionEngland & Wales
Judgment Date25 February 1986
Date25 February 1986
CourtChancery Division

Chancery Division.

Westcott (H.M.I.T.)
and
Woolcombers Ltd

Mr. Christopher McCall (instructed by the Solicitor of Inland Revenue) for the Crown.

Mr. Andrew Park (instructed by Messrs. Herbert Smith & Co.) for the taxpayer company.

Before: Hoffmann J.

The following cases were referred to in the judgment:

Finch v. I.R. Commrs. TAXELR[1984] BTC 8046, [1985] Ch. 1

Floor v. Davis TAX(1978) 52 T.C. 609

Ramsay v. I.R. Commrs. ELR[1982] A.C. 300.

Corporation tax - Chargeable gain - Allowable loss - Subsidiary - Sale of shares in wholly-owned subsidiary and then on to another company - Whether transaction was disposal or exchange of shares - Whether disposal deemed to be for consideration giving rise to neither gain nor loss - Whether company incurred allowable loss for corporation tax purposes deductible from its other chargeable gains - Finance Act 1965 schedule 7 subsec-or-para 4 section 4 subsec-or-para (2) section 6 subsec-or-para (1) schedule 13 subsec-or-para 2Finance Act 1965, Schs. 7, para. 4(1), (2), 6(1), 13 para. 2(1) (nowCapital Gains Tax Act 1979 section 78 section 85 subsec-or-para (3) section 273 subsec-or-para (1)Capital Gains Tax Act 1979, sec. 78, 85(3) and 273(1) respectively).

This was an appeal by the Crown from a decision of the General Commissioners of Income Tax for Bradford that the taxpayer company had made an allowable loss in respect of the liquidation of three companies which it was entitled to deduct from its chargeable gains in computing its tax liability.

During 1965 a company, W Ltd., acquired an asset, namely the share capital of three companies, for £1,270,380. In March 1966 W Ltd. transferred those shares to a subsidiary company, T Ltd. in exchange for the allotment of 1999,900 new £1 shares, each credited as fully paid. In 1971 T Ltd. sold the shares in the three companies to the taxpayer company, another subsidiary of W Ltd., for £601,235. In January 1972 the three companies were voluntarily wound up. The market value of the assets received by the taxpayer company by way of distribution in the liquidation was £601,235. That liquidation was a deemed disposal of the shares in the three companies for a consideration of £601,235.

The taxpayer company appealed against an assessment to corporation tax made on it for its accounting period for the six months to March 1972 claiming that it had in respect of the liquidation of the three companies incurred allowable losses for the purpose of corporation tax on chargeable gains which it was entitled to deduct from its other chargeable gains for the purposes of computing the amount of its tax liability.

The General Commissioners for the Division of Bradford upheld the taxpayer company's appeal. They found that the transfers of the shares from W Ltd. to T Ltd. and then from T Ltd. to the taxpayer company were each disposals by one member of the group to another and in each case the acquiring company must by virtue of the provisions inFinance Act 1965 schedule 13 subsec-or-para 2para. 2(1) of Sch. 13 to the Finance Act 1965, be deemed to have given the same consideration as that originally paid by W Ltd. Accordingly, they held that the taxpayer company be deemed to have acquired the shares for £1,270,380 and the liquidations, therefore, gave rise to an allowable loss of the difference between that figure and £601,235.

On an appeal against the Commissioners' decision, the Crown argued thatFinance Act 1965 schedule 13para. 2(1) of Sch. 13 did not apply to the transfer of the shares from W Ltd. to T Ltd. because of the provisions in para. 4 and 6 of Sch. 7 to the Act. It was contended that W Ltd. was to be treated as not having disposed of the shares or as having acquired the shares in T Ltd. Paragraph 2(1) of Sch. 13 did not come into play as it required a disposal by one group company as well as an acquisition by another. Consequently one was left simply with an acquisition by T Ltd. otherwise than by way of a bargain made at arm's length which was deemed by the provision of Finance Act 1965 section 22 subsec-or-para (4)sec. 22(4)(a) of the 1965 Act to have been for market value - that value being £601,235. The result, the Crown contended, was that on the liquidation the taxpayer company made neither a gain nor a loss.

For the taxpayer company it was accepted that for Finance Act 1965 schedule 13 subsec-or-para 2para. 2(1) of Sch. 13 to apply there must have been a "disposal" by W Ltd. to T Ltd. It was argued, however, that properly construed, para. 6(1) and 4(2) of Sch. 7 applied only for the purpose of computing the tax liability of W Ltd. consequent on the exchange of shares and that for all other purposes the transaction constituted a disposal of the shares by W Ltd. to T Ltd.

Held, dismissing the Crown's appeal:

1. Finance Act 1965 schedule 13 subsec-or-para 2Paragraph 2(1) of Sch. 13 to the Finance Act 1965 applied to the 1966 transfer between W Ltd. and T Ltd. The policy behind that provision was to recognise that in the case of transactions between members of a group, the legal theory that each company was a separate entity did not accord with economic reality.

2. The hypothesis contained in Finance Act 1965 schedule 7 subsec-or-para 4para. 4(2) of Sch. 7 to the 1965 Act imposed tax consequences only on those who had exchanged holdings and did not apply to those who had acquired the original shares. Therefore, that provision applied only to W Ltd. for the purpose of computing its tax liability consequent on the share exchange. It did not apply to T Ltd.'s acquisition.

3. The taxpayer company acquired the shares for a consideration valued at £1,270,380 and on their disposal an allowable loss accrued.

CASE STATED

Stated by the Commissioners for the General Purposes of the Income Tax for the Division of Bradford, West Yorkshire, under Taxes Management Act 1970 section 56sec. 56, Taxes Management Act 1970, for the opinion of the High Court of Justice.

1. At meetings of the Commissioners for the General Purposes of the Income Tax for Bradford, West Yorkhire, held at Lloyds Bank Chambers, Bradford, on 9 and 18 July 1980. Woolcombers Limited ("the company") appealed against the chargeable gains content of an assessment to corporation tax for the accounting period 1 August 1971 to 31 March 1972. The chargeable gains content of the said assessment amounted to £15,759.

2. Mr. D.W. Pursglove, a Consultant with Messrs. Deloitte, Haskins & Sells, Chartered Accountants, of Park House, 57/59 Well Street, Bradford, appeared for the company, and the appellant inspector of taxes appeared in person on behalf of the Inland Revenue.

3. The question for our decision was whether the company had incurred allowable losses for the purposes of corporation tax on chargeable gains which it was entitled to deduct from its other chargeable gains for the purposes of the computation for corporation tax for the period referred to in para. 1.

4. [Paragraph 4 set out the documents admitted in evidence.]

5. We find the following facts admitted or proved:

  1. (a) Between March and June 1965 old Woolcombers acquired the whole of the issued share capital ("the shares") of the following companies for the basic consideration set out in column 2:

    Company

    Consideration

    Aked

    £445,005

    Flanagan

    £375,375

    V. & W.

    £450,000

  2. (b) Between March and June 1965 old Woolcombers formed a wholly-owned subsidiary company, Topmakers, with an issued share capital of £100, consisting of 100 Ordinary Shares of £1 each.

  3. (c) About the end of August 1965 the assets of Aked and Flanagan and end September 1965 the assets of V. & W. were transferred to Topmakers for considerations which remained on loan account.

  4. (d) By Agreement dated 23 March 1966 old Woolcombers sold to Topmakers (inter alia) the shares. The total consideration was satisfied by the issue to old Woolcombers of 1999,900 Ordinary Shares of £1 each in the capital of Topmakers credited as fully paid.

  5. (e) By Agreement dated 24 December 1971 Topmakers transferred the shares to the company for a total consideration of £601,235 being the total balance of the loan accounts referred to in subpara. (c) above. The consideration payable by the company remained on loan account.

  6. (f) On 7 January 1972 resolutions were passed for the voluntary winding-up of Aked, Flanagan and V. & W.

  7. (g) On 25 February 1972 the liquidator of Aked, Flanagan and V. & W. released Topmakers from the amounts due by Topmakers on loan account to each of those companies. Topmakers accepted such releases in settlement of the £601,235 due to Topmakers by the company in respect of the transactions referred to in subpara. (e) above.

6. It was contended on behalf of the company:

  1. (a) By virtue of Finance Act 1965 section 19 subsec-or-para (2)sec. 19(2) of the Finance Act 1965 ("the Act") the tax on chargeable gains was extended to companies and that pursuant to section 22 subsec-or-para (9)sec. 22(9) the amount of gains on disposal of assets should be computed in accordance withFinance Act 1965 part I schedule 6Pt. I of Sch. 6 and subject to the further provisions in Finance Act 1965 schedule 7 schedule 8Sch. 7 and 8.

  2. (b) Pursuant to section 23sec. 23 losses on disposal of assets were to be computed in the same way as gains.

  3. (c) The provisions of Finance Act 1965 schedule 7 schedule 7subpara. 4 and 6 of Sch. 7 did not apply to the transactions referred to in subpara. (d) and (e) of para. 5 above as these transactions were wholly between members of the same group of companies and were governed by Finance Act 1965 schedule 13...

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