X Plc v Roe
| Jurisdiction | England & Wales |
| Judgment Date | 01 January 1996 |
| Date | 01 January 1996 |
| Court | Special Commissioners |
special commissioners decision
1. In form this is an appeal by X plc against an assessment to corporation tax for the year ending on 25 February 1993 in which it realised chargeable gains of £4,627,996. X contends that these gains should be extinguished by allowable losses brought forward which include losses on the sale of its subsidiary company XHL to Y plc on 14 February 1991.
2. The question is to what extent, pursuant to section 280 Income and Corporation Taxes Act 1970, an allowable loss accruing on that disposal should be reduced having regard to a depreciatory transaction which took place on 12 February 1991 when XHL sold its subsidiary XSL (and some dormant subsidiaries) to X at an aggregate price of £1,669,986, being book value and well below market value (some £2000m) since XSL owned the goodwill and assets of the trade carried on under the name "X".
3. It is X's case that an allowable loss did accrue. The Crown contends that the loss is eliminated by s.280.
4. We give our decision in principle. No figures are agreed but subject to that we shall use, as illustrative, figures contained in a document put in during his reply by leading counsel who appeared on behalf of X. No case was cited in argument.
5. Section 280 so far as material hereto reads as follows:-
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(1) This section has effect as respects a disposal of shares in, or securities of, a company [XHL] (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 6th April 1965; and for this purpose "depreciatory transaction" means -
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(a) any disposal of assets [shares in XSL] at other than market value by one member [XHL] of a group of companies to another [X], or
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(b) …any other transaction satisfying the conditions of subsection (2) below:
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We omit the proviso to subsection (1) and subsections (2) and (3).
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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 subsection (1) or (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:
We omit the proviso appended to the subsection.
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(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 6th 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.
For X it is accepted that the sale of the shares in XSL by XHL to X was a "depreciatory transaction", since it materially reduced the value of the shares in XHL. It is also common ground that this section does not effect reductions in what would be chargeable gains but for a depreciatory transaction.
Section 28 Capital Gains Tax Act 1979 as in force in February 1991 provides as follows:
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28. (1) The amount of the gains accruing on the disposal of assets shall be computed in accordance with this Chapter, and subject to the other provisions of this Act and sections 86 and 87 of the Finance Act 1982.
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(2) Every gain shall, except as otherwise expressly provided, be a chargeable gain.
We omit subsection (3) which is not relevant.
Section 29 deals with losses. We read the first two subsections.
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(1) Except as otherwise expressly provided, the amount of a loss accruing on a disposal of an asset shall be computed in the same way as the amount of a gain accruing on a disposal is computed.
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(2) Except as otherwise expressly provided, all the provisions of this Act which distinguish gains which are chargeable gains from those which are not, or which make part of a gain a chargeable gain, and part not, shall apply also to distinguish losses which are allowable losses from those which are not, and to make part of a loss an allowable loss, and part not; and references in this Act to an allowable loss shall be construed accordingly.
The Finance Act 1982 introduced an allowance referred to as "the indexation allowance" so as to reduce capital gains in order to take account of the effects of inflation. As originally enacted the allowance reduced gains only. The provisions were restructured by Finance Act 1985 so as to take account of losses. A loss could thereafter be increased by the indexation allowance and a gain could be eliminated and a loss created by the allowance. The material provisions of section 86 Finance Act 1982 as amended by Finance Act 1985 and in force in February 1991 read as follows:-
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86. (1) This section applies to any disposal of an asset - (a) which occurs on or after 6th April 1982, or, if the disposal is by a company, on or after 1st April 1982…
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(2)… (a) "the unindexed gain or loss" means the amount of the gain or loss on the disposal computed in accordance with Chapter II or Part II of the Capital Gains Tax Act 1979 and, if there is neither a gain nor a loss on the disposal as so computed, the unindexed gain or loss shall be nil;…
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(4) The following provisions of this Chapter have effect to provide for an allowance (in those provisions referred to as "the indexation allowance") which, on a disposal to which this section applies, is to be set against the unindexed gain or, as the case may be, added to the unindexed loss so as to give the gain or loss for the purposes of the Capital Gains Tax Act 1979 as follows -
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(a) if there is an unindexed gain, the indexation allowance shall be deducted from the gain and, if the allowance exceeds the unindexed gain, the excess shall constitute a loss;
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(b) if there is an unindexed loss, the indexation allowance shall be added to it so as to increase the loss; and
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(c) if the unindexed gain or loss is nil, there shall be a loss equal to the indexation allowance;…
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Section 87 contains provisions for the calculation of the indexation allowance. It is unnecessary to set them out. No question arises on them.
Section 68 of the Finance Act 1985 introduced the modifications of the indexation allowance and in connection therewith provided in subsection (4) that:
For the purpose of computing the indexation allowance on a disposal of an asset…where, on 31st March 1982, the asset was held by the person making the disposal, it shall be assumed that on that date the asset was sold by the person making the disposal and immediately reacquired by him at its market value on that date.
Finally, in relation to assets held on 31 March 1982 and disposed of on or after 6 April 1988 section 96(2) of the Finance Act 1988 provided that:
in computing for the purpose of capital gains tax the gain or loss accruing on the disposal it shall be assumed that the asset was on 31st March 1982 sold by the person making the disposal, and immediately re-acquired by him, at its market value on that date.
In certain circumstances this provision was not to apply but a taxpayer could elect otherwise and X did so.
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