Wood and another v Holden (Inspector of Taxes)

This is an appeal from an order made on 8 April 2005 by Mr Justice Park on an appeal under section 56A of the Taxes Management Act 1970 (" TMA 1970") from a decision of the special commissioners (Mr Theodore Wallace and Dr Nuala Brice) of 18 May 2004. The special commissioners had dismissed the appeals of Mr Ron Wood and his wife, Mrs Gail Wood, from amended assessments to capital gains tax made by the inland revenue on 17 October 2001. The judge allowed the appeal of Mr and Mrs Wood from that decision. The revenue appeals from the order of 8 April 2005 with the permission of this Court (Lord Justice Lloyd) granted on 1 July 2005.

Mr and Mrs Wood were assessed to tax under section 13 of the Taxation of Capital Gains Tax Act 1992 (" TCGA 1992") on gains said to have accrued on a disposal on 23 July 1996 of shares in Ron Wood Greetings Card Holdings Ltd ("Holdings"). The relevant disposal was a sale of the shares by Copsewood Investments Ltd ("CIL"), a company registered in the British Virgin Islands, to Eulalia Holding BV ("Eulalia"), a company incorporated in the Netherlands. The shares were sold by CIL to Eulalia for a consideration of £23.7 million, with a provision for uplift if Eulalia sold the shares on within three years. In the event Eulalia sold the shares to Birthdays Group Limited on 21 October 1996 for £30,799,384.

It was common ground that – if, for the purposes of TCGA 1992, gains did accrue to CIL on that disposal – then the effect of section 13, read with section 86 and paragraph 1(3) of schedule 5, is that chargeable gains were properly treated as accruing to each of Mr and Mrs Wood as the settlor of family settlements, the trustees of which were non-resident. The issue was whether the disposal was brought within section 171(1) TCGA 1992 by the provisions of section 14 of that Act.

Section 171(1) TCGA 1992 provided, so far as material, that where a member of a group of companies disposed of an asset to another member of the group, both members should be treated for the purposes of corporation tax on chargeable gains as if the asset acquired by the member to whom the disposal was made were acquired for a consideration of such amount as would secure that on the other's disposal neither a gain nor a loss would accrue to that other. Section 14 TCGA 1992 is in these terms:

"14(1) This section has effect for the purposes of section 13.

(2) Sections 171 to 174 and 175(1) shall apply in relation to non-resident companies which are members of a non-resident group of companies, as they apply in relation to companies resident in the United Kingdom which are members of a group of companies.

(3)…

(4) For the purposes of this section –

(a) a 'non-resident group' of companies

(i) in the case of a group, none of the members of which are resident in the United Kingdom means that group, and

(ii) in the case of a group, 2 or members of which are not resident in the United Kingdom, means the members which are not resident in the United Kingdom;

(b) 'group' shall be construed in accordance with section 170 without subsections (2) (a), (9) and (12) to (14)."

On 23 July 1996 Eulalia was a wholly-owned subsidiary of CIL; its shares having been acquired by CIL on 18 July 1996. The revenue did not challenge the taxpayers' contention that CIL was not resident in the United Kingdom. But the revenue did not accept that Eulalia was not resident in the United Kingdom. It followed, on the revenue's view, that CIL and Eulalia (together) were not "non-resident companies which are members of a non-resident group of companies" for the purposes of section 14(2) TCGA 1992; so the disposal of the Holdings shares by CIL to Eulalia was not brought within section 171(1) of that Act.

It is common ground that the question whether or not Eulalia was resident in the United Kingdom on 23 July 1996 for the purposes of TCGA 1992 turns, in the first instance, on "where its real business [was] carried on… where the central management and control actually abides". That was the test adopted by the House of Lords in De Beers Consolidated Mines Ltd v Howe (Surveyor of Taxes) [1906] AC 455 (per Lord Loreburn, Lord Chancellor, at 458). But if, on the application of that test, Eulalia were found to be resident in the United Kingdom, then the provisions of section 294(1) of the Finance Act 1994 would require that question to be determined by reference to the double tax convention of 7 November 1980 between the United Kingdom and the Netherlands ( SI 1980/1961). Under article 4(3) of the double tax convention Eulalia would be deemed to be a resident of the state "in which its place of effective management is situated". It is not clear – at least, not clear to me – whether the article 4(3) test differs in substance from the De Beers test; and, if the two tests are not, in substance, the same, I find it very difficult to see how, in the circumstances which the special commissioners had to consider, they could lead to different answers.

As I have said, the revenue did not accept that Eulalia was not resident in the United Kingdom on 23 July 1996. It was on that basis that the inspector amended (under section 28A(2) TMA 1970) self-assessments to tax made on behalf of Mr and Mrs Wood for the year 1996/97. Mr and Mrs Wood were assessed on the basis that the whole of the purchase consideration payable by Eulalia for the Holdings shares was a chargeable gain. £27,874,000 of that gain was apportioned to Mr Wood; the balance, £2,919,700, was apportioned to Mrs Wood. They were assessed to tax, respectively, in the amounts of £11,149,600 and £1,167,881.

Mr and Mrs Wood appealed to the special commissioners from the amendments under section 31(1) and (4) TMA 1970. Section 50(6) of that Act is in these terms, so far as material:

"50(6) If, on an appeal, it appears to the majority of the Commissioners present at the hearing, by examination of the appellant… or by other evidence –

(a) that, by reason of an amendment under section 28A(2)… of this Act, the appellant is overcharged by a self-assessment ;

…

the assessment… shall be reduced accordingly, but otherwise the assessment… shall stand good."

It was common ground before the special commissioners that section 50(6) TMA 1970 had the effect that it was for the taxpayers to establish on the appeal that Eulalia was not resident in the United Kingdom on 23 July 1996: it was not for the revenue to establish that Eulalia was resident in the United Kingdom. Given the way in which the special commissioners expressed their conclusion, the question on whom did the burden of proof lie has assumed some importance. Counsel for the taxpayers (who did not appear before the special commissioners) has sought to argue in this Court (as he did before the judge) that the special commissioners were wrong to treat the burden of proof as they did.

The agreed statement of facts

The parties had agreed a statement of facts in advance of the hearing before the special commissioners:

"1. Ron Wood Greetings Card Ltd ('Greetings') was a trading company operating the Birthdays chain of card shops. Mr and Mrs Wood held 380,920 and 40,000 ordinary shares respectively in the company. These shares formed approximately 96% of the ordinary share capital. Other shares were held by a number of employees and a personal acquaintance of Mr Wood, Mr Bryan Robson.

2. On 27 March 1995 Mr and Mrs Wood engaged Price Waterhouse Corporate Finance to locate a buyer for the company.

3. On 18 October Mr and Mrs Wood set up a number of settlements (the Ron Wood Family Settlements Nos 1–8 the Gail Wood Settlements Nos 1–2 and the Ron Wood Discretionary Settlement). The amount settled on each trust was £1,000. Apart from the Discretionary Settlement, either Mr or Mrs Wood had a life interest in each settlement. The trustee of the 10 life interest settlements was Aiglon Trustees (BVI) Limited (which changed its name on 6 March 1996 to Barclays Private Trust (BVI) Limited) a wholly owned subsidiary of Barclaytrust, who were based in Geneva. Barclaytrust was the trustee of the Discretionary Settlement.

4. On 31 October 1995 the trustees of the above settlements incorporated CIL, a company registered in the British Virgin Islands. The share capital was split into A shares which were held by the interest in possession settlements and B shares which were held by the discretionary settlement. The B shares carried all the rights to assets of CIL in the event of a winding up.

5. Ron Wood Greetings Card Holdings Ltd ('Holdings') (formerly Coverphone Limited) was formed as an off the shelf company on 22 September 1995. The company had an authorised share capital of 100,000 £0.01 ordinary shares. Mr Wood acquired 200 £0.01 ordinary shares on 24 October 1995. A further 90,297 of these shares were allotted to Mr Wood and the remaining 9,503 shares allotted to Mrs Wood on 24 October 1995 for cash,

6. On 24 October 1995 Mr and Mrs Wood gifted 45,248 and 4,751 shares respectively in Holdings to CIL.

7. On...