Whitehall Electric Investments Ltd v Owen
| Jurisdiction | England & Wales |
| Judgment Date | 08 April 2002 |
| Date | 08 April 2002 |
| Court | Special Commissioners |
special commissioners decision
Dr Nuala Brice.
Felicity Cullen (instructed by Freshfields Bruckhaus Deringer) for the appellant.
David Ewart (instructed by the Solicitor of Inland Revenue) for the respondent.
1 Whitehall Electric Investments Ltd ("the appellant") appeals against an assessment to corporation tax in respect of chargeable gains made on a disposal dated 18 November 1996 ("the 1996 disposal"). The assessment was raised because the Inland Revenue were of the view that losses carried forward relating to a disposal on 10 December 1990 ("the ultimate disposal") were not sufficient to offset the gains made on the 1996 disposal. In particular, the Inland Revenue were of the view that, when the allowable loss on the ultimate disposal was reduced, having regard to two previous depreciatory transactions (in 1987 and 1988), it was just and reasonable to make a further reduction of an amount equivalent to the indexation allowance between the dates of the depreciatory transactions and the ultimate disposal.
2 At the time of the ultimate disposal the legislation relating to the reduction of losses attributable to depreciatory transactions was contained in s. 280 of the Income and Corporation Taxes Act1970 (the 1970 Act). The relevant parts provided:
Losses attributable to depreciatory transactions
Transactions in a group
280(1) This section has effect as respect a disposal of shares in, or securities of, a company (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 6 April 1965; and for this purpose "depreciatory transaction" means-
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(a) any disposal of assets at other than market value by one member of a group of companies to another,
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(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 subsections (1) and (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 …
(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 6 April 1965 which has enhanced the value of the company's assets and depreciated the value of the assets of any other member of the group.
3 In 1990 the appellant disposed of the whole of the issued share capital of a company called Sir Isaac Pitman Ltd ("Pitman"). This was the ultimate disposal within the meaning of s. 280(1). It was agreed that the value of the shares in Pitman had been materially reduced by two depreciatory transactions, effected in 1987 and 1988 respectively, where the assets of Pitman had been disposed of at other than market value by one member of a group of companies to another. It was also agreed that, at the time of the 1987 and 1988 depreciatory transactions, the diminutions in the value of the assets of Pitman amounted to £2,846,000 and £366,740 respectively, making a total of £3,212,740. It was further agreed that the values of the shares in Pitman were reduced by the depreciatory transactions by the same amounts.
4 The appellant argued that the allowable loss on the ultimate disposal of the shares in Pitman should be reduced by an amount of £3,212,740 as that was the amount of the diminution in the value of Pitman's assets which was attributable to the two depreciatory transactions within the meaning of s. 280(5). The Inland Revenue, however, argued that it was just and reasonable, within the meaning of s. 280(4), that the allowable loss on the ultimate disposal should be further reduced by an additional amount of £923,569, which was the amount equal to the indexation allowance on the amounts of £2,846,000 and £366,740 respectively, between the dates of the 1987 and 1988 depreciatory transactions and the ultimate disposal; thus the Inland Revenue argued that the allowable loss accruing on the ultimate disposal should be reduced by a total of £4,136,309.
5 Thus the issues for determination in the appeal were:
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(2) whether the amount of the reduction in the allowable loss on the ultimate disposal was limited to the amount by which the assets in Pitman had been diminished in value by the two depreciatory transactions within the meaning of s. 280(5), namely £3,212,740 (as argued by the appellant); or
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(3) whether it was just and reasonable within s. 280(4) to make a further reduction of an amount equal to the indexation allowance on the values of the depreciatory transactions between the dates of the depreciatory transactions and the ultimate disposal, making a total reduction of £4,136,309 (as argued by the Inland Revenue).
6 A blue bundle of documents was produced which included an agreed statement of facts which was referred to at the hearing. The bundle also contained copies of certain correspondence between the parties most of which was not referred to at the hearing.
7 From the evidence before me I find the following facts.
8 The appellant was at all material times a wholly owned subsidiary of Pearson plc ("Pearson"). Pearson also had another wholly owned subsidiary called Longman Group Ltd ("Longman"). Longman had a wholly owned subsidiary called Longman Group UK Ltd ("Longman UK").
9 On 28 June 1985 Longman acquired the whole of the issued share capital of Pitman from an unconnected third party for the sum of £12,204,253. Pitman's activities included the carrying on of a publishing business and the holding of 20 per cent of the shares in Ibis Mailing Group Ltd ("Ibis").
10 In January 1987 Pitman transferred the assets of its publishing business to Longman UK at book value (the 1987 depreciatory transaction). The book value of these assets was £2,846,000 below their market value and therefore the 1987 depreciatory transaction diminished the value of Pitman's assets (within the meaning of s. 280(5)) by an amount of £2,846,000. The parties agreed that the value of the shares in Pitman were materially reduced (within the meaning of s. 280(1)) by the same amount.
11 In September 1988 Pitman transferred its shares in Ibis to Longman at book value (the 1988 depreciatory transaction). The book value of the shares of Ibis was £366,740 below the market value and therefore the 1988 depreciatory transaction diminished the value of Pitman's assets (within the meaning of s. 280(5)) by an amount of £366,740. The parties agreed that the value of the shares in Pitman were materially reduced (within the meaning of s. 280(1)) by the same amount.
12 On 6 December 1990 the appellant acquired from Longman the whole of the issued share capital of Pitman. Section 273 of the 1970 Act provided that, where a member of a group of companies disposed of an asset to another member of the group, the consideration was of such an amount as to secure neither a gain nor a loss. Thus the appellant's base cost of the acquisition of the shares in Pitman was the same as the cost in 1985 to Longman, namely £12,204,253. On 10 December 1990 the indexation allowance on that amount was £4,405,735 making a total of £16,609,988.
13 On 10 December 1990 the appellant disposed of the whole of the issued share capital of Pitman to an unconnected third party for £6,419,156 (the ultimate disposal). The incidental costs were £189,794. Thus the initial calculation of the allowable loss on the ultimate disposal was:
| Sale proceeds | £6,419,156 |
| Less incidental costs | £189,794 |
| Net sale proceeds | £6,229,362 |
| Less deemed base cost including indexation | £16,609,988 |
| Allowable loss | £10,380,626 |
14 Under the provisions of s. 280(4) and (5) of the 1970 Act the allowable loss of £10,380,626 has to be reduced having regard to the 1987 and the 1988 depreciatory transactions.
15 On 18 November 1996 the appellant realised a chargeable gain on the disposal of another asset (the 1996 disposal) and wished to bring forward the allowable losses on the ultimate disposal. The appellant claimed that the allowable losses on the ultimate disposal were sufficient to offset against the chargeable gains on the 1996 disposal. However, the Inland Revenue were of the view that the allowable losses on the ultimate disposal were not sufficient to offset the chargeable gains on the 1996 disposal with the result that there remained a chargeable gain of £850,855 not offset by carried forward losses. Accordingly, the Inland Revenue assessed the appellant to corporation tax in respect of gains of £850,835 and it is against that assessment that the appellant appeals.
16 For the appellant Miss Cullen agreed that the allowable loss of £10,380,626 on the ultimate disposal should be reduced by the amounts of £2,846,000 and £366,740, that is, by a total of £3,212,740. That was the amount, she said, by which the values of the assets in Pitman were diminished as result of the 1987 and the 1988 depreciatory transactions. However, she argued that there should be no further reduction by an amount equal to the indexation allowance on the amounts of the depreciatory transactions between the dates of those transactions and the date of the ultimate disposal.
17 Miss Cullen first referred to s. 280(4) and argued that the "just and reasonable" discretion given by that subsection was not wide because that would not comply with the general principle that the law (and especially tax law) should be certain and also because that would not give due effect to the...
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