Dunlop International AG v HM Inspector Of Taxes, Court of Appeal - Civil Division, July 30, 1999, [1999] EWCA Civ 2043,[1999] STC 909

Resolution Date:July 30, 1999
Issuing Organization:Civil Division
Actores:Dunlop International AG v HM Inspector Of Taxes

IN THE SUPREME COURT OF JUDICATURE QBENI/1999/0292IN THE COURT OF APPEAL (CIVIL DIVISION)ON APPEAL FROM THE HIGH COURT OF JUSTICE(MR JUSTICE LIGHTMAN) Royal Courts of Justice Strand London WC2 Friday, 30 July 1999 B e f o r e: LORD JUSTICE PETER GIBSON LORD JUSTICE PILL LORD JUSTICE CHADWICK - - - - - - DUNLOP INTERNATIONAL AG (FORMERLY DUNLOP INTERNATIONAL LTD) Appellants - v - PARDOE (HM Inspector of Taxes) Respondent - - - - - - (Handed Down Transcript of Smith Bernal Reporting Limited, 180 Fleet Street, London EC4A 2HD Tel: 0171 421 4040 Official Shorthand Writers to the Court) - - - - - - MR DAVID MILNE QC & MISS ELIZABETH WILSON (Instructed by Messrs Eversheds, London, EC4V 4JL) appeared on behalf of the AppellantMR MICHAEL FURNESS (Instructed by Solicitors of the Inland Revenue, Somerset House, London, WC2R 1LB) appeared on behalf of the Respondent - - - - - - J U D G M E N T (As approved by the Court) - - - - - - ©Crown CopyrightLORD JUSTICE CHADWICK: This is an appeal against the order made on 5 March 1998 by Mr Justice Lightman dismissing an appeal under section 56A(1) of the Taxes Management Act 1970 by Dunlop International AG ("DIAG") from the decision of the Commissioners for the special purposes of the Income Tax Acts dated 7 January 1997. The issue on this appeal, as it was both before the special commissioners and the judge, is whether a charge to corporation tax arose, by virtue of the provisions in sections 278 (3) of the Income and Corporation Taxes Act 1970 on the transfer of residence of DIAG from the United Kingdom to Switzerland on 31 May 1978, in respect of a disposal of an asset to DIAG by a subsidiary pursuant to an agreement made on 16 March 1978. The fact that this dispute has taken so extraordinarily long to be litigated has not been explained and is not a matter for which either side reproaches the other.The underlying factsThe facts, which have not been in dispute, are set out at paragraphs 4 - 8 in the decision of the special commissioners: 4. At all relevant times prior to 31 May 1978 DIAG was a company incorporated with limited liability resident in the United Kingdom carrying on business as an investment holding company with investments in UK and overseas companies. During this time it was the principal company of a group of companies ("the International Group") for the purposes of section 272 ICTA 1970 that included Dunlop Plantations Limited ("Plantations"). Until some time between 22 December 1977 and 4 April 1978 the International Group also included four other resident group companies. 5. Prior to 19 October 1973 Plantations owned 80% of the issued shared capital in Dunlop Estates Berhad ("Berhad"), a Malaysian company. On 19 October 1973 Moorgate Industrials Limited ("Moorgate"), a company resident in the UK, acquired from Plantations the shares in Berhad owned by Plantations in consideration for an issue of shares in Moorgate to Plantations. As a result Moorgate became from 19 October 1973 a member of the International Group as a 99.99% subsidiary of Plantations. Moorgate immediately sold part of its newly acquired shareholding in Berhad. The market value of its remaining 51% shareholding in Berhad (the "Berhad shares") as at 19 October 1973 has been agreed with the Shares Valuation Division of the Inland Revenue as £10,981,307. 6. As a result of the transfer of the Berhad shares and the issue of shares in Moorgate to Plantations the International Group included in a vertical chain the three group companies for the purposes of section 272 of (i) DIAG, (ii) DIAG's 100% subsidiary Plantations and (iii) Plantations 99.99% subsidiary Moorgate. 7. Under an agreement dated 16 March 1978 Moorgate contracted to sell the Berhad shares to DIAG for a consideration of £17,390,925. As DIAG and Moorgate were both members of the International Group section 273 ICTA 1970 applied to the sale so as to give rise to a no gain and no loss situation. As a result of this sale of the Berhad shares they became directly held by DIAG and were no longer held by Moorgate at the end of the chain of ownership of the three group companies DIAG, Plantations and Moorgate. 8. On 31 May 1978, in accordance with Treasury consent under section 482 ICTA 1970 and Bank of England exchange control consent, DIAG ceased to be resident in the United Kingdom. . . . The statutory provisionsThe relevant statutory provisions, and their legislative history (so far as material), may be summarised as follows:(1) The Finance Act 1965, section 46(1), introduced corporation tax as a charge on the profits of companies. For the purposes of corporation tax "profits" meant income and chargeable gains; and "chargeable gains" had the meaning given to that expression in Part III of the Act. Chargeable gains were gains accruing, after 6 April 1965, on the disposal of an asset by its owner. Section 22(4) FA 1965 provided that, in the circumstances in which an asset was acquired otherwise than by way of a bargain made at arm's length, a person's acquisition of an asset and the disposal of it to him should, for the purposes of Part III, be deemed to be for a consideration equal to the market value of the asset. (2) Section 55(5) FA 1965 required that, for the purposes of corporation tax, the provisions of the Act relating to capital gains tax should have effect in relation to groups of companies subject to Part I of schedule 13. Paragraph 2(1) in schedule 13 to FA 1965 - later to become section 273(1) ICTA 1970 - made special provision for the transfer of assets between companies within the same group. Such transfers were deemed to take place at a consideration which gave rise to no gain and no loss in the transferor company. The effect was that the transferee company acquired the asset for a consideration reflecting an historic acquisition value by the transferor company or one of its predecessors; so incorporating a latent liability to tax on any chargeable gain on a subsequent disposal.(3) The "no gain - no loss" provisions in paragraph 2(1) in schedule 13 to FA 1965 were intended to postpone the payment of corporation tax on gains accruing in respect of an asset while it was held within a group until such time as the asset was transferred out of the group. But the provisions gave rise to an opportunity to postpone that time indefinitely; and so, in effect, to avoid corporation tax on gains altogether. The avoidance scheme (sometimes known as "the envelope scheme") was described by Mr Justice Millett in NAP Holdings UK Ltd v Whittles [1992] STC 59, at page 70f-h: "A company (P in our example), owning an asset such as a factory which had appreciated in value (from £x to £y), wished to sell it and realise the gain without incurring a charge to tax. P therefore incorporated a new subsidiary (T) and transferred the factory to it in exchange for the issue of shares in T. P then sold T (the factory in its `envelope') outside the group for £y. Neither P's transfer of the factory to T nor P's subsequent disposal of T gave rise to a charge to tax; the former because P's transfer was at a consideration (£x) which produced neither a gain nor a loss (s 273 [formerly para 2(1) schedule 13 FA 1965]), the latter because P's acquisition of T's shares was at market value (£y). The gain was realised by a sale out of the group but tax on the gain was postponed until such time, if ever, as the purchaser chose to remove the factory from its `envelope'."(4) Paragraph 18(2) in schedule 12 to FA 1968 - later to become section 278(3) ICTA 1970 - was enacted in order to...

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