In an appeal against an assessment under s. 178 of the Taxation of Chargeable Gains Act 1992 (‘TCGA 1992’), the special commissioners decided as a preliminary issue that a company was not resident in the UK when it disposed of its business to the taxpayer. Therefore it did not form a chargeable gains group for tax purposes at that time and a charge to UK corporation tax could only arise if it carried on a trade in the UK through a branch or agency (which was not a question before the court). Further the assessment under appeal was made in time since s. 178(10) was not exhaustive and did not oust the ordinary six year time limit in s. 34 of the Taxes Management Act 1970 (‘TMA 1970’).

Facts

NDSP was a Hong Kong incorporated company set up as a joint venture to pursue the commercial applications of certain mathematical ciphers. Through a series of complex transactions, NDSP sold its business to the taxpayer company which was incorporated in England and UK resident at all relevant times.

The transactions gave rise to two capital gains tax assessments. The first assessment was made on NDSP's London branch in May 1998 on the basis that NDSP was not resident in the UK. The second assessment was made on the taxpayer in April 1999 on the basis that it had left the NDSP group (having acquired the NDSP business) so that a charge to tax arose under TCGA 1992, s. 178. That was on the basis that NDSP was resident in the UK at the time it transferred its business to the taxpayer (and hence was in a chargeable gains tax group with the taxpayer at that time as it was a requirement of such a group that the relevant companies were UK resident). Appeals were entered in time against both of those assessments. Since they appeared to be inconsistent as to the residence of NDSP, it was directed that the appeals be heard together.

Issues

Whether NDSP was resident in the UK when it disposed of its business to the taxpayer on 8 July 1992 (‘the residence issue’); and whether TCGA 1992, s. 178(10) had the effect that notwithstanding the ordinary time limit for assessments in TMA 1970, s. 34, the time limit for an assessment to corporation tax chargeable on the taxpayer in consequence of s. 178 expired on 9 July 1998 (six years after the taxpayer ceased to be a member of the group) so that the assessment under appeal (made on 15 April 1999) was out of time (‘the s. 178 limitation issue’).

Decision

The special commissioners (Adrian Shipwright and Edward Sadler) (ruling accordingly) said that the relevance of the two issues was that if NDSP were UK resident when it disposed of its business, then NDSP and the taxpayer would at that time form a chargeable gains group. An exit or degrouping charge would then arise on the transfer of the shares in the taxpayer to a third party by NDSP when the taxpayer left the group. The issue would then arise whether the assessment on the taxpayer in respect of the degrouping charge was made in time. If NDSP were non-resident in the UK at the relevant time there would be no chargeable gains group and a charge to UK corporation tax could only arise if it carried on a trade in the UK through a branch or agency.

A company was within the charge to UK corporation tax if it was resident in the UK or carrying on a trade in the UK through a branch or agency (now permanent establishment) subject to any applicable Double Tax Agreement. The transfer of assets between members of a UK group did not (and did not in 1992) give rise to a charge to corporation tax on chargeable gains at the time of the intra group transfer. A ‘clawback’ charge arose on the recipient company if it left the group within six years of the intra group transfer (see TCGA 1992, s. 178 for companies leaving the group for the period in question).

Under s. 178(10), notwithstanding any limitation on the time for making assessments, an assessment to corporation tax chargeable in consequence of that section might be made at any time within six years from the time when the chargeable company ceased to be a member of the group. For there to be a group of companies for that purpose, the conditions in TCGA 1992, s. 178 needed to be fulfilled. Here, as at the relevant time NDSP held more than 75 per cent of the taxpayer's shares, if NDSP were UK resident there would be such a group of companies at that time. TMA 1970, s. 34 provided that ordinarily an assessment to tax might be made at any time not later than six years after the end of the chargeable period to which the assessment related.

The residence issue

The residence issue required the consideration of three questions: the correct test to be applied in deciding the residence of NDSP; the evidential burden of showing that and on whom it fell; and the result of applying the test to the facts found.

The generally accepted test for corporate residence for the purposes under consideration where a company was incorporated outside the UK was that the company was resident at the situs of the central management and control of the company in question. Further, following the judgment of Chadwick LJ in Wood v Holden (HMIT) [2006] BTC 208, it was essential to recognise the distinction between cases where management and control of the company was exercised through its own constitutional organs (the board of directors or the general meeting) and cases where the functions of those constitutional organs were ‘usurped’ – in the sense that management and control was exercised independently of, or without regard to, those constitutional organs. In this case it had been found as a primary fact that there was no usurpation of the board so the second category was not in point (Wood v Holden and De Beers Consolidated Mines Ltd v Howe [1906] AC 455 considered).

It was for the taxpayers to show that the assessments had been wrongly made, although the evidential burden could shift to HMRC. The commissioners had reached a positive decision that NDSP was resident outside the UK at all relevant times, not that there had been a failure to discharge the evidential burden but, in any event, in all the circumstances, the evidential burden had been discharged.

The s. 178 limitation issue

Section s. 178(10) was not exhaustive and did not oust the general rule in TMA 1970, s. 34. The subsection said that an assessment might be made any time within six years of the company leaving the group. It did not say ‘may only’ be made within six years of the company leaving the group. Section s. 178(3) charged the company leaving the group as if it had disposed of the asset it acquired intragroup immediately after it received the assets.

The effect of s. 178(10) was to extend the period in which an assessment could be made in many cases. If the recipient left the group five years after the intragroup transfer of the relevant assets, TMA 1970, s. 34 would give a year in which to make the assessment. Subsection (10) extended the period to six years from the date of leaving the group and there seemed to be clear policy reasons why Parliament should intend that to be the case. There was no policy reason why s. 178(10) should be restrictive of the general rule.

The effect of s. 178 was not to allow collection of tax as a secondary liability but to impose a primary liability on the company leaving the group. A charge to tax was imposed on the company leaving the group by s. 178(3) as a primary and not a secondary liability. The contrast between s. 178(3) and (9) showed that clearly.

(2006) Sp C 561. Decision released 6 September 2006.