The Court of Appeal affirmed a decision of Lawrence Collins J ([2006] BTC 131) that hold-over relief was not applicable to the gift of shares in a private company as part of a capital gains tax avoidance scheme where the transferee company was controlled by a person who was connected with the person making the disposal.

Facts

The taxpayers (a husband and wife) appealed against amendments to their self-assessments in connection with a capital gains tax avoidance scheme involving the gift of shares in a private company, BGF Ltd, to a UK resident company held within an insurance bond issued by an Irish insurance company (IL) that had been taken out by each of the taxpayers and assigned to an Isle of Man company within an Isle of Man settlement. The shares in BGF had been sold in 1998 for £27m.

Section 165 of the Taxation of Chargeable Gains Act 1992 gave hold-over relief for certain gifts. Section 167 restricted the relief in the case of gifts to companies where the transferee was a company controlled by a person who was neither resident nor ordinarily resident in the UK, and was connected with the person making the disposal. Under TCGA 1992, s. 286(7) any two or more persons acting together to secure or exercise control of a company were treated in relation to that company as connected with one another and with any person acting on the directions of any of them to secure or exercise control of the company.

The Crown contended that, on the facts, s. 167(2)(b) was satisfied because IL was connected with the taxpayers by virtue of s. 286(7) since they were acting together to secure or exercise control of each of the underlying companies; and the opening words of s. 167(2) were satisfied because IL as 100 per cent shareholder controlled the underlying company within the meaning of ICTA 1988, s. 416(2).

The special commissioner concluded that, on the facts, the taxpayers and IL were acting together to secure or exercise control of the underlying companies so that they were connected persons and s. 167(2) prevented hold-over relief from applying on the gift of shares. Therefore they disallowed the taxpayers’ claim under s. 165 ((2005) Sp C 462).

The taxpayer appealed to the High Court raising a point of law concerning the compatibility of TCGA 1992, s. 167(2) with art. 43 of the EC Treaty on freedom of establishment which the commissioner had refused to entertain. The judge concluded that, in the circumstances of the case, the application of s. 167 did not unlawfully restrict the right of establishment of IL contrary to art. 43 ([2006] BTC 131).

The Court of Appeal gave permission to appeal on the art. 43 point. The taxpayers sought, inter alia, to raise the new point that, properly understood, s. 286(7) was a deeming provision with a specific and limited purpose, i.e. to assist in the interpretation and operation of s. 286(5) and (6). Section 286(7) had no wider role and could not be relied upon to establish a relevant connection between IL and the taxpayers, as persons making the disposal of the BGF shares for the purposes of s. 167(2)(b). They further argued that on the proper construction of the phrase ‘secure or exercise control’ in s. 286(7) the special commissioner had erred in law in finding that IL and the taxpayers were acting together to secure or exercise control of the underlying companies since IL held all the shares and voting power.

Issues

Whether s. 286(7) could be relied upon to establish a relevant connection between IL and the taxpayers; whether the meaning of ‘secure’ in s. 286(7) was ‘safeguard’, rather than ‘acquire’ or ‘obtain’ and whether the subsection did not apply to the position where one person, who alone had control because he owned all the shares and all the voting power in the company, allowed another person to exercise some or all of his shareholder rights and powers; and whether the art. 43 point could be considered by the Court of Appeal.

Decision

The Court of Appeal (Chadwick and Longmore L JJ and Lindsay J) dismissed the appeal.

Effect of s. 286(7)

It was not in dispute that s. 286(7) applied in the context of an enquiry under s. 286(5) and (6), but the fact that s. 286(7) applied in the context of an enquiry under s. 286(5) and (6) did not lead to the conclusion that that was the only context in which s. 286(7) applied. The first and most obvious indication that the legislature did not intend to restrict the application of s. 286(7) to the purposes of s. 286(5) and (6), or to the purposes of s. 286 as a whole, was that the subsection contained no such restriction. The fact that s. 286(7) might take effect as a ‘deeming provision’ did not lead to the conclusion that it was only in the context of an enquiry under s. 286(5) and (6) that the subsection could have that effect. It led only to the conclusion that s. 286(7) could only be given effect in the context of an enquiry whether X and Y were to be treated as connected in relation to company C. The enquiry under s. 167(2)(b) was such an enquiry, namely, whether X (who controlled company C) was connected with Y (who was making a disposal to company C as transferee).

It followed that the court was not persuaded that there was anything in the language of s. 286 as a whole, or in subsection (7) in particular, which led to (or even supported) the conclusion that the only purpose of subsection (7) was to assist in the interpretation and operation of subsections (5) and (6) which immediately preceded it. It was clear that, on its true construction, s. 286(7) could be relied upon in order to establish a relevant connection between IL and the persons making the disposal of the BG shares (the taxpayers) for the purposes of s. 167(2)(b).

Securing or exercising control

The taxpayers’ argument on the construction of s. 286(7) was rejected. The word ‘secure’ could be construed to mean ‘safeguard’ or ‘obtain’. There was no reason in the context why it should necessarily be confined to either sense to the exclusion of the other (Steele (HMIT) v EVC International NV [1996] BTC 425 considered). Also there was no reason why the concept of two or more persons ‘acting together to. .. exercise control of a company’ should, necessarily, be confined to cases where each of the persons acting together had less than a controlling shareholding, so that (absent some combination between them) none would be able to exercise control individually. The concept was sufficiently wide to include cases where one person (who had shareholder or voting control) agreed to exercise that control in accordance with the wishes of another.

In any event the special commissioner's finding that IL and the taxpayers were acting together to secure or exercise control was not open to challenge in the Court of Appeal. It was not open to them to seek to reopen the special commissioner's findings of fact – on the basis of a new point of law – unless they could show not only that the special commissioner was plainly wrong in his approach (as a matter of law) but also (i) that he made all the primary findings of fact that would be needed in order to decide the point on the correct view of the law and (ii) on the basis of those findings the only conclusion which he could properly reach was that for which the taxpayer now contended. Even if the taxpayers could show that the special commissioner was plainly wrong in his approach as a matter of law, they could not satisfy the remainder of that test. It was impossible to be confident that the special commissioner made all the primary findings of fact that would be needed in order to decide the point on what was now said to be the correct view of the law. Therefore permission to appeal on that issue was refused.

Article 43 EC

As regards the Community law issue, the court discharged the permission to appeal granted in relation to art. 43 EC on the ground that the judge should not have allowed that point to be introduced on the appeal before him. As the judge did not treat the art. 43 point as a point of pure law, not dependent on the evidence, he should have refused to entertain it. As the appeal court was not persuaded that it was a point of pure law, the point should not be considered on appeal. It followed that it was both unnecessary and inappropriate to decide whether the judge was correct to reach the conclusion which he did. However, the court had not been persuaded by the arguments that the judge's reasoning could be faulted. On a true analysis any restriction (if made out) under TCGA 1992, s. 167 would be a restriction on IL's freedom to provide services; not a restriction on its freedom of establishment.

Furthermore, as it was neither necessary nor appropriate for the court to decide the art. 43 point, it did not need a ruling from the European Court of Justice and the application for a reference was refused.

Court of Appeal (Civil Division).
Judgment delivered 17 January 2007.