Collins v R & C Commrs
A special commissioner decided that, on its the true construction, the plain wording and effect of a share sale agreement was that a disputed sum of £95,179 should be paid to the company and used partly to fund the taxpayer's pension scheme and should not be treated as paid to him so that he was entitled to a reduction in his capital gains tax liability in respect of that sum.
Facts
The taxpayer was a director and shareholder of a company and in April 1997 he announced his intention to retire from the company and began discussions about pension contributions to be made in respect of past service. On 25 March 1999 the taxpayer and the other shareholders of the company entered into a share sale agreement with a second company for the sale of all the shares in the company. On completion the purchaser was to pay to the taxpayer and/or the company at his direction and to another shareholder on account of the cash consideration for the shares the sum of £15,267 by cheque to the taxpayer and £95,179 to the company, at the direction of the taxpayer. The purchaser then had to procure that, immediately following completion, the company made a pension contribution on behalf of the taxpayer of £120,480 (to a scheme or policy designated by the taxpayer). In the event that the company received the benefit of deducting part or all of that expense for corporation tax purposes it was, when it received the benefit thereof, to pay a cheque equivalent to the amount of the benefit to the taxpayer up to a maximum of £25,301.
The taxpayer appealed, under TMA 1970, Sch. 1A, para. 9, against a decision contained in a closure notice issued by the Revenue under para. 7(3) by which they refused the taxpayer's claim for a reduction in his capital gains tax (CGT) liability for the year 1998-99.
The taxpayer accepted that the £15,267, which represented his share of the value of the fixed assets of the company, was properly to be brought into his CGT calculations, subject to the normal rules. Both parties agreed that the present dispute was limited to the £95,179 paid by the purchaser on completion to the company at the direction of the taxpayer. The Revenue contended that that was a payment made to the taxpayer as part of the consideration for the sale of his shares and therefore that it was chargeable with CGT. The taxpayer contended that that sum was not paid to him.
Issue
Whether the taxpayer was entitled to a reduction in his CGT liability.
Decision
The special commissioner (Richard Barlow) (allowing the appeal) said that the law respected the freedom of the parties to a transaction to frame and formulate their agreement as they wished and to suit their own legitimate interests. So long as the form adopted was genuine and honest, and did not contravene some established principle of public policy, the court would give effect to the method adopted. If the question was what method had been adopted and the transaction was in writing, the answer had to be found in the true construction of the documents in the light of all the relevant circumstances. If the terms of the documents were clear, that was the end of the matter, but if there was any doubt or ambiguity in the language used, read in its proper context, it might be possible to resolve that doubt or ambiguity by reference to the inherent probabilities of businessmen entering into the transaction in one form rather than another (Spectros International plc v Madden [1997] BTC 74 applied). In this case the taxpayer had not received £95,179 and the benefit of a contribution of £120,480 paid to his pension fund. What he received was a contribution to his pension fund of £120,480 paid by the company which was funded by the payment to the company of £95,179 by the purchaser shortly after it became the owner of the shares and by the corporation tax benefit from making the payment.
The terms of the document were clear and that was the end of the question because, although the £95,179 was only payable by the purchaser when the taxpayer directed it should be paid it was nonetheless a payment by the purchaser to the company and, under the clear terms of the document, the taxpayer had no right to direct that the payment should be of any other amount or that it should be paid to any other person. All the direction did was to trigger the payment to the company. That was reinforced by the distinction drawn between payments to the taxpayer on the one hand and ‘to the company at his direction’ on the other. That made it clear that the payment of the £95,179 was never intended to be a payment to the taxpayer but rather was always intended to be and was a payment to the company.
(2008) Sp C 661.
Decision released 22 January 2008.