PURCHASE
OF OWN SHARES from a company – distribution treatment applicable – whether consideration
included in capital gains computation as stated in SP4/89 – yes – appeal dismissed
THE
SPECIAL COMMISSIONERS
STRAND
FUTURES AND OPTIONS LIMITED Appellant
-
and -
PETER
WILLIAM LEWIS VOJAK Respondent
Special
Commissioners: DR JOHN F AVERY JONES CBE
MALCOLM
J F PALMER
Sitting
in public in London on Thursday 17 January 2002
Jan
Matthews of counsel instructed by Fisher Sassoon & Marks, chartered accountants,
for the Appellant
Christopher
Tidmarsh of counsel instructed by the Solicitor of Inland Revenue for the Respondents
©
CROWN COPYRIGHT 2002
DECISION
- This
is an appeal by Strand Options and Futures Limited against an estimated assessment
for the accounting period ended 31 December 1995. The Appellant was represented
by Mr Jan Matthews and the Respondent by Mr Christopher Tidmarsh.
- There
was an agreed statement of facts as follows:
"1. The
Appellant was incorporated on 11 April 1986 under the name Amoptions UK Limited
and changed its name to Strand Options and Futures Limited ("the Appellant")
in December 1990.
2. On
31 October 1986 the Appellant acquired by allotment 29.9% of the issued share
capital of City of London Options Limited ("CLO"). By 1995 the Appellant
held 179,400 shares, still comprising 29.9% of the issued share capital.
3. On
31 March 1995, Messrs Fisher Sassoon and Marks, the agents for CLO and the Appellant
("the agents") made clearance applications under s707 Taxes Act 1988
and s225 (1) (b) Taxes Act 1988 in relation to the Appellant’s proposal to dispose
of its shares in CLO.
4. It
was proposed that the Appellant would sell 50% of its share holding in CLO to
Financielle Participaties Amsterdam BV ("FPA") for £871,630 and that
CLO would purchase the remaining 50% of its own shares from the Appellant for
£871,630.
5. Under
s707 (1) (b) Taxes Act 1988 the Board may confirm whether or not s703 Taxes Act
1988 applies to a transaction in securities. Section 703(1) Taxes Act 1988 applies
in the circumstances specified in s704 Taxes Act 1988 and where a taxpayer is
in a position to obtain a tax advantage because of a transaction in securities,
unless he can show that the transaction was carried out for bona fide commercial
reasons or in the ordinary course of making investments and that none of the transactions
had as their main object or one of their main objects the obtaining of a tax advantage.
If s703 does apply the Board serve a notice pursuant to 703(3) informing the taxpayer
how the advantage will be counteracted.
6. Under
s225(1) Taxes Act 1988 the Board notify a taxpayer whether or not s219 Taxes Act
1988 will apply to the redemption, repayment or purchase of own shares. If s219
applies to a purchase of own shares, the payment will not be treated as a distribution.
7. On
12 April 1995 the Board confirmed that they were satisfied that the provisions
of s219 did not apply to the payment to be made by CLO in respect of its purchase
of its own shares from the Appellant. On 24 April 1995 the Board confirmed that
they were satisfied that the transactions did not require a notice under s703(3)
to be given in respect of them.
8. On
29 September 1995 CLO purchased 89,700 of its own shares from the Appellant for
£871,630. That payment falls to be treated as a distribution except to the extent
that it represents a return of capital originally subscribed, see 209 (2) (b)
Taxes Act 1988. FPA purchased the remaining 89,700 shares in CLO from the Appellant
for a payment of £871,630.
9. On
17 January 1997 the agents submitted the Appellant’s Corporation Tax computation
for the accounting period ended 31 December 1995 excluding the distribution received
from CLO on its purchase of its shares from the capital gains computation.
10. On
3 February 1997, the Inspector informed the agents that SP4/89 applied to this
distribution and that the distribution should be included in the disposal consideration
for capital gains purposes.
11. A
corporation tax notice of assessment on the Appellant for the accounting period
ended 31 December 1995 was issued on 17 September 1997 in an estimated amount
of £1.7 million, with net capital gains of £1.6 million.
12. By
letter dated 29 September 1997, the agents lodged an appeal against the assessment.
The
Issue:
13. The
issue to be determined is whether, when the Appellant received a distribution
from CLO on CLO’s purchase of its own shares in September 1995, that distribution
is to be included in the consideration for the disposal of those shares for the
purposes of the charge to corporation tax on chargeable gains.
14. The
Revenue rely on Statement of Practice SP 4/89 as a correct application of s208
Taxes Act 1988, s8(4) TCGA 1992 and s37(1) TCGA 1992 where a distribution is received
by a corporate shareholder on a company purchase of own shares.
SP4/89
appears as follows:
Company
Purchase of Own Shares: capital gains treatment of distribution received by corporate
shareholder:
"If
the purchase of its own shares by a company resident in the United Kingdom gives
rise to a distribution, and a shareholder receiving such a distribution is itself
a company, the distribution is included in the consideration for the disposal
of the shares for the purposes of the charge to corporation tax on chargeable
gains. In the Revenue’s view the effect of TA s208, TCGA s8(4) is that the distribution
does not suffer a tax charge as income within the terms of s37(1) TCGA 92. The
Revenue will apply this Statement of Practice where a company purchases its own
shares after 19th April 1989."
15. The
Appellant contends that no part of the distribution it received from CLO on the
share buy-back should be included in the consideration for the disposal of the
shares for the purposes of the charge to corporation tax on chargeable gains.
16. There
are no issues in dispute except that set out above. If the Special Commissioners
allow the Appellants appeal, the assessment should be determined on the basis
that the profits chargeable to corporation tax for the accounting period ended
31 December 1995 are £587,692.
- If
the appeal is dismissed, the assessment should be determined on the basis that
the profits chargeable to corporation tax for the accounting period ended 31 December
1995 are £1,431,686."
- Mr
Matthews on behalf of the Appellant put forward three contentions which he summarised
in his skeleton argument as follows:
- The
Appellant contends that a purchase of own shares which is a distribution falls
to be excluded from the charge to corporation tax by reason of section 208 of
the Taxes Act 1988. There is no distinction between this and any other kind of
distribution. The exemption is complete and there is no foundation for bringing
in the distribution as a component in a chargeable gains computation.
- If
this is not accepted, it is further submitted that such a distribution does not
in any event fall within the chargeable gains legislation. It would only do so
if it were treated as a capital distribution within section 122 of the TCGA 1992,
and section 122(5)(b) excludes it from being so. Any other interpretation of the
legislation would produce the arbitrary result that profits extracted from a company
by a share redemption or dividend would be taxed differently to profits being
extracted by a share purchase which was a distribution.
- If
neither of these submissions is accepted, it is finally submitted that section
37 of the TCGA 1992 applies to avoid a charge to corporation tax on chargeable
gains.
- Mr
Matthews first set out the framework of the legislation as it applied in 1995.
It is only necessary to mention that until 5 April 1999, where a UK resident company
made a "qualifying" distribution it was required to pay ACT under section
14 of the Taxes Act 1988. According to section 20(1) of the Taxes Act 1988, income
tax was chargeable under Schedule F in respect of dividends and other distributions;
and for the purposes of income tax, all such distributions are to be regarded
as income, however they fall to be dealt with in the hands of the recipient. Distributions
were (and are) excluded from the charge to corporation tax by section 208 of the
Taxes Act 1988, which states:
"Except
as otherwise provided by the Corporation Tax Acts, corporation tax shall not be
chargeable on dividends and other distributions of a company resident in the United
Kingdom, nor shall any such dividends or distributions be taken into account in
computing income for corporation tax."
Section
231(1) of the Taxes Act 1988 provided that where a company received a qualifying
distribution it was entitled to a tax credit equal to such proportion of the value
of the distribution as corresponded to the rate of ACT then in force for the financial
year when the distribution was made. That tax credit could be utilised in the
following ways:
- For
exempt companies or where express exemption was given for the distribution otherwise
than by section 208 it would be paid to the company under section 231(2).
- To
"frank" its own distributions; section 241.
- To
set against losses etc., thereby enabling the credit to be paid to it; section
242.
Section
208 of the Taxes Act 1988
- Section
208 has already been set out above.
- Mr
Matthews contended that the exemption from corporation tax under section 208 was
a complete one in which case distributions cannot be made indirectly chargeable
to corporation tax by being included in a chargeable gains computation, as part
of the consideration arising on a purchase of own shares. See Hughes v Bank
of New Zealand 21 TC 472, cited recently by Millett LJ in Bricom Holdings
v IRC [1997] STC 1179, at pages 1194 and 1195 (section 231(2)(b) confirms
that section 208 does provide an exemption).
- The
reference in Section 208 that corporation tax is not chargeable on distributions
should be construed widely because corporation tax would not in any event be chargeable
as such on distributions (regardless of section 208). Thus it is chargeable
under section 6(1) of the Taxes Act 1988 on "profits", which
means "income and chargeable gains"; Section 6(4). All items
of income thus have to be aggregated in order to arrive at total profits for the
purposes of section 9(3). So if distributions were within the charging regime
an aggregation of all distributions to arrive at a cumulative figure would have
to be made. Therefore strictly speaking corporation tax could never have been
chargeable on distributions as such, but only on distributions as a component
part of profits. If section 208 must therefore be construed widely to avoid a
corporation "income" tax charge, it should likewise be construed to
avoid a corporation "chargeable gains" charge.
-
Furthermore he contended that because there is only a single corporation tax charge
on total profits of companies (including profits and chargeable gains) there cannot
in any event be a separate charge to corporation tax on chargeable gains. Corporation
tax being such a single charge, the exclusion from that single charge under section
208 must extend to any charge on chargeable gains. Construing section 208 in this
way produces a coherent construction, reflecting the context and scheme of the
legislation: it would effectively put companies on the same footing as individuals.
- The
first limb of section 208 provides a complete exemption from corporation tax.
The second limb is commonly found in statutory exemptions (for examples see sections
321 and 331 of the Taxes Act 1988). The purpose of the second limb is to ensure
that other non-exempted income is not taxed differently or at a higher rate because
the exempt income is included. It has an entirely separate purpose: to exclude
distributions in the computation. This is not relevant to the computation of chargeable
gains.
- Mr
Tidmarsh contended that Mr Matthews’ approach begged the question, which was whether
there was a complete exemption. If section 208 provides a complete exemption,
then the distribution can not be taxed by the back door by including it in a capital
gains computation. The Hughes case turned on the construction of the statute.
The exemption given was absolute. There was a power in section 46 of the Income
Tax Act 1918 for the Treasury to issue any securities "with a condition that
neither the capital nor the interest thereof shall be liable to any taxation,
present or future…". In the context of such an exemption it is not possible
that the interest is exempt only from Case III of Schedule D yet remains taxable
as a component of profits taxed under Case I. Section 208 is in less absolute
terms and does not use the word exemption. It provides first that no corporation
tax shall be chargeable on distributions, and secondly that no such distributions
be taken into account in computing income for corporation tax. The second limb
is expressly limited to tax on income and deals with the point in Hughes.
The first limb says that there is no tax on distributions. The first limb
prevents a charge under Schedule F on distributions and the second limb prevents
the distribution being included in a computation of profits. He disagrees with
Mr Matthews’ interpretation of the second limb as being to ensure that other income
is not taxed differently nor at a higher rate because the exempt income is included.
If that is right it is defective because, for example, distributions are included
in calculating the relevant maximum amounts for the small companies rate of corporation
tax (see section 13(7) of the Taxes Act 1988). He drew attention to the origin
of section 208 in section 47(1) of the Finance Act 1965 where the current section
208 was the first part of the subsection and what is now paragraph 1 of Schedule
F in section 20(1) was the second part. It originally read as follows:
"(1)
Except as otherwise provided by this Part of this Act, corporation tax shall not
be chargeable on dividends and other distributions of a company resident in the
United Kingdom, nor shall any such dividends or distributions be taken into account
in computing income for corporation tax; but income tax for a year of assessment
after the year 1965-66 shall be chargeable under a new Schedule F in respect of
all dividends and other distributions in that year of a company resident in the
United Kingdom which are not charged under Schedule D or Schedule E and are not
specifically exempted from income tax, and for purposes of income tax all such
distributions shall be regarded as income, however they fall to be dealt with
in the hands of the recipient."
This
made it clear that the exemption is limited to Schedule F and inclusion in the
computation of profits.
Reasons
for our decision
- We
find this a difficult question. Our difficulty is supported by the fact that SP4/89
reflects a change from the Revenue’s initial position, and, we were told, is disputed
by textbook writers.
- If
section 208 is intended to give a complete exemption why is it stated to apply
"except as otherwise provided by the Corporation Tax Acts", any why
is the first limb worded to exclude tax on distributions and the second
limb to refer only to income? Mr Tidmarsh referred us to the origin of section
208 in section 47 of the Finance Act 1965. Although the question whether we were
entitled to look at pre-consolidation legislation was not argued we consider that
we are entitled to look on the ground that, while it is not permissible as a matter
of course to refer to the earlier legislation, it is permissible to do so if the
consolidated legislation is ambiguous or obscure, see R v Secretary of State
for the Environment, Transport and the Regions, ex p. Spath Holme Ltd [2001] 2 WLR 15 (see also the application of those principles in relation to tax legislation
in Padmore v IRC (No.2) [2001] STC 280). Lord Cook in the Spath Holme
case at p.40 regarded a provision as ambiguous if reasonably open on orthodox
rules of construction to more than one meaning. We consider this to be the case
particularly as SP4/89 reflects a change in the Revenue view and the Revenue’s
interpretation is disputed by textbook writers. The original legislation makes
it clear that a new charge was being imposed under Schedule F on distributions
that were not exempt or chargeable under another Schedule; this was subject to
corporation tax not being charged on distributions under Schedule F nor
their being taken into account in computing income. It is perfectly accurate to
say that corporation tax is not charged under Schedule F on distributions, meaning
that distributions are left out of account, even though the ultimate charge to
corporation tax is on total profits. The context has nothing to do with taxing
capital gains. Accordingly, we prefer Mr Tidmarsh’s approach that section 208
cannot prevent inclusion of the distribution in the computation of capital gains.
Whether
there is an actual disposal on a purchase of own shares
- Mr
Matthews contended that although the Companies Acts legislation is couched in
terms of a purchase of own shares, there is no actual sale or purchase, in the
sense of a transfer and acquisition of the shares. There is simply a cancellation
of the shares under section 160(4) of the Companies Act 1985 as on a redemption
of shares. The Revenue accept that there is no actual disposal on a redemption,
even though the shares are cancelled. This is further acknowledged by the change
in the stamp duties legislation in section 66 of the Finance Act 1986 to bring
into charge as a conveyance on sale amounts received on a purchase of own shares.
Thus there is no actual disposal of shares, only a deemed disposal to which section
122 of the Taxes Act 1992 prima facie applies. But section 122 does not apply
here because section 122(5)(b) excludes distributions within section 20 of the
Taxes Act 1988, whether received as dividends or as proceeds of a purchase of
own shares.
- Mr
Tidmarsh contended that it is clear from the following provisions of the Companies
Act 1985 that there is an actual disposal on a purchase of own shares. Section
164(1):
"A
company may only make an off-market purchase of its own shares in pursuance of
a contract approved in advance in accordance with this section or under section
165 below."
Section
162:
"(1)
Subject to the following provisions of this Chapter, a company limited by shares…may,
if authorised to do so by its articles, purchase its own shares (including any
redeemable shares).
(2)
Sections 159 to 161 [which deal with redemption of shares] apply to the purchase
by a company under this section of its own shares as they apply to the redemption
of redeemable shares…."
Section
160(4):
"Shares
redeemed under this section shall be treated as cancelled on redemption…."
Section
169(1):
"Within
the period of 28 days beginning with the date on which any shares purchased by
a company under this Chapter are delivered to it, the company shall deliver to
the registrar of companies for registration a return in the prescribed form…."
- Mr
Tidmarsh contended that the contract was for the company to purchase the shares
as the expression "purchase by a company of its own shares" indicated.
The shares are delivered to the company pursuant to the contract and are immediately
cancelled. This amounts to an actual disposal of the shares by the shareholder
to the company. The reason for the specific stamp duty charge is no transfer that
could be stamped is required, not that there is no acquisition by the company.
- Mr
Matthews in reply contended that no vesting of the shares in the company occurred
on a purchase of own shares.
Reasons
for our decision
- It
is not necessary for us to decide whether a disposal always requires a corresponding
acquisition. Nor is it necessary for us to decide whether there is, or is not,
any disposal for capital gains tax when shares are redeemed under powers in section
159 of the Companies Act 1985. We have no doubt that a contract for the purchase
of its own shares by a company within its powers under section 162 of the Companies
Act 1985 is an actual disposal by the shareholder for these purposes. The shareholder
has entered into a clear contract to dispose of all rights in and title to the
shares. If there was any doubt that there is sufficient evidence of any necessary
acquisition by the purchasing company, that is removed by the provisions of sections
162 to 169 of the Companies Act 1985 that Mr Tidmarsh referred us to.
The
application of section 122 of the TCGA 1992
- We
consider next whether there is an exemption under section 122 of the TCGA 1992:
"(1)
Where a person receives or becomes entitled to receive in respect of shares in
a company any capital distribution from the company (other than a new holding
as defined in section 126) he shall be treated as if he had in consideration of
that capital distribution disposed of an interest in the shares….
- In
this section—…
(b)
‘capital distribution’ means any distribution from a company, including distribution
in the course of dissolving or winding up the company, in money or money’s worth
except a distribution which in the hands of the recipient constitutes income for
the purposes of [corporation tax]."
- Mr
Matthews contended that where there is a disposal of shares which involves a distribution
(e.g. a purchase of own shares or a liquidation) the matter must fall within section
122, since this section applies to all distributions other than income distributions
falling within section 209; see section 122(5)(b). See also O’Rourke v Binks
65 TC 165. Since section 122 is part of the legislation specifically applicable
to shares it must override any general rules in the Act regarding the computation
of chargeable gains.
- Mr
Tidmarsh contended that since there is an actual disposal there is no need to
consider whether there is a deemed disposal. He disagreed with Mr Matthews’contention
that section 122 was concerned with computation; it merely deemed a disposal in
circumstances where otherwise there is no disposal.
Reasons
for our decision
- Having
decided that there is an actual disposal, we agree with Mr Tidmarsh that there
is no need to consider section 122.
Section
37 of the TCGA 1992
- Section
37 of the TCGA 1992 as modified by section 8(4) provides:
"There
shall be excluded from the consideration for a disposal of assets taken into account
in the computation of the gain any money or money’s worth charged to corporation
tax as income of, or taken into account as a receipt in computing income or profits
or gains or losses of, the person making the disposal for the purposes of the
Corporation Tax Acts [being "the enactments relating to the taxation
of the income and chargeable gains of companies and of company distributions (including
provisions relating also to income tax")]"; see section 831(1)(a) and
(5) Taxes Act 1988.
- Mr
Matthews contended that the Revenue’s interpretation resulted in a different treatment
of distributions for companies and individuals. He submitted that as there is
in principle no difference between the determination of chargeable gains for companies
and other persons, the computation provisions which apply for individuals and
other persons should equally apply to companies. Thus precisely the same principles
should apply for corporation tax. A receipt which is treated as income for tax
purposes (with tax effectively deducted at source under the ACT procedure) should
not also be brought into the computation of a capital gain. Otherwise, there would
be an artificial distinction between companies and individuals (and also double
taxation).
-
Confirmation of the principle of assimilation of treatment of companies to individuals
and other persons in determining what constitutes a capital gain is provided by
section 8 of the TCGA 1992, in that:
(i)
capital gains principles are to be applied; section 8(3);
(ii)
references in the capital gains tax legislation to income tax are to be construed
as a reference to corporation tax; section 8(4);
(iii)
capital gains tax and corporation tax are to be treated as if they are one tax;
section 8(5).
- He
contended that what is simply the mechanics of assimilating the treatment of companies
to all other persons in a single paragraph by "shorthand" cross-references
should not be construed so restrictively. The legislation should be construed
in a purposive manner so that companies and individuals are treated in the same
way.
- In
relation to the second limb of section 37, first, distributions are taken into
account as income in determining whether a company has franked investment income
(see section 238(1) of the Taxes Act 1988) treated as profits for section 242
which can be set inter alia against trading losses and the other matters
referred to in section 242(2), so enabling the ACT to be recovered. This is also
relevant in reducing losses which in turn reduce the amount of trading profits
actually chargeable to corporation tax in succeeding periods. Secondly, for the
purpose of the small companies rate in section 13 of the Taxes Act 1988, a distribution
which is franked investment income has to be taken into account in determining
whether profits exceed the "lower relevant maximum amount"; section
13(1) and (7). Thirdly, such a distribution would have been relevant for statutory
apportionment or shortfall purposes prior to their abolition - and the computation
of required distribution levels and shareholders’ income tax. In interpreting
section 37 of the Taxes Act 1992, Mr Matthews contended that the matter cannot
turn on the accident of whether, for example, in the particular period the company
had incurred trading losses or had, say, excess charges on income etc. and was
therefore able to utilise the surplus franked investment income, or was potentially
eligible for the small companies rate. Section 37 must be construed in such a
way that it applies generally to include distributions which are franked investment
income.
- Mr
Tidmarsh contended that the distribution was not charged to corporation tax as
income in the first limb, nor was it taken into account as a receipt in computing
income or profits for the purposes of the Corporation Tax Acts for the second
limb. He agreed that in Mr Matthews’ examples, the income was taken into account
but he contended that it was not taken into account as a receipt in computing
income. Under section 242 of the Taxes Act 1988 the distribution was treated "as
if it were a like amount of profits chargeable to corporation tax" rather
than as a receipt. In section 13 the distribution was taken into account in determining
the lower relevant maximum amount but was not taken into account as a receipt
in computing profits. While there is no distinction in principle between a purchase
of own shares from a company and from an individual the result is different since
companies are not taxed on distributions and individuals are taxed.
- In
reply, Mr Matthews contended that distributions are taken into account as a receipt
in computing franked investment income and for the small companies rate. There
is no requirement that the distribution should actually be taxed.
Reasons
for our decision
- We
prefer Mr Tidmarsh’s approach. Section 37 excludes from the computation of capital
gains sums actually taxed as income or taken into account as a receipt in computing
profits that are taxed. Here the distribution was neither taxed nor included as
a receipt in the computation of profits so section 37 does not exclude it from
the computation. The result is what one would expect; if the sum is taxed as income
or included in a computation of profits that are taxed as income, it is not charged
as a capital gain. In this case as there has been no direct or indirect charge
to tax as income there is nothing to prevent a charge as a capital gain.
Result
-
In summary our decision is that –
- section
208 of the Taxes Act does not exempt the distribution element in a purchase of
own shares from tax as a capital gain;
- there
is an actual disposal on the purchase of own shares that is taxed as a capital
gain;
- section
122 of the TCGA 1992 is inapplicable;
- section
37 of the TCGA 1992 does not exempt the distribution from being taxed as a capital
gain.
Accordingly
we dismiss the appeal and confirm the assessment in the agreed figure of £1,431,686.
JOHN
F AVERY JONES
MALCOLM
J F PALMER
SPECIAL
COMMISSIONERS
SC3098/01
Authorities
referred to in skeletons and not referred to in the decision:
20
Cannon Street v Singer Limited [1974] 1 Ch 229
Chevron
v IRC [1995] STC
Ramsay
v CIR 54 TC 101
Bibby
v Prudential Insurance [2000] STC 459
Bird
v IRC [1988] STC 312
IRC
v Colmer [1993] STC 710 (CA)
