CGT- Pre entry losses

Introduction

This case deals with pre-entry losses in Capital Gains Tax. There are specific anti-avoidance rules to restrict the use of pre-entry losses in group situations. In Prizedome, a company joined a group of companies (the first group), which was later taken over by another group (the second group).

The Facts

On 26 September 2000 Limitgood and Prizedome each acquired one-half of the issued share capital of a company from their parent (100%) for a consideration of £1 each. As at that date the company was worthless. The capital gains tax base cost for the parent of the company shares was £486,949,498. The deemed acquisition costs for the taxpayers was £243,474,749 each.

On 27 September 2000, another Group acquired the shares in Limitgood and Prizedome for a combined consideration of £4 million. On ceasing to be members of the other Group, Limitgood and Prizedome were each deemed to have disposed of their holdings in the recently acquired company at market value and thus to have realised capital tax losses. Those losses were preentry losses of Limitgood and Prizedome in relation to the new Group. Limitgood and Prizedome each claimed losses of £113,921,249 in their corporation tax self-assessment returns for the accounting period to 30 September 2000, being limited by reason of depreciatory dividends.

On 12 October 2000 other companies in the new chargeable gains Group realised gains totalling £28,956,478 which were treated as accruing to Limitgood by reason of elections. The new group was then subsumed into another group. After that time, Limitgood claimed to set off losses of £28,956,478 against the gains. Further losses were used in later years against chargeable gains arising in other group companies.

Revenue contended that the losses were pre-entry losses of the new Group and hence could not be set against the chargeable gains.

It was held in the High Court that the losses of the two companies before they became members of one group could not be set off against chargeable gains made by other companies on disposals made after those companies and the taxpayers had all become members of the second group. In reaching this conclusion, emphasis was placed on the underlying purpose of the legislation and the more literal approach was rejected.

The taxpayer companies appealed to the Court of Appeal.

The Issue

This appeal turns on the construction of specific provisions in the Capital Gains Tax Acts which placed restrictions on the set-off of “pre-entry losses.”

The Decision

The Schedule to the Act made provision in relation to losses accruing to a company before it became a member of a group of companies. The aim of the inserted provisions was to restrict the tax benefits which could be obtained by a group of companies buying a company which had capital losses. The 1992 Act, as amended, restricted the tax benefits of set off by ring fencing pre-entry capital losses brought into a group of companies. Specific rules covered the take-over of one group by another group, the reconstruction of companies and anti-avoidance measures.

The particular point in this case arose where a company joined a group of companies (the first group), which was later taken over by another group (the second group). It then became necessary to determine which was “the relevant group” in relation to the preentry losses.

HMRC's case, in brief, was that the date of entry of Limitgood and Prizedome into the first group was not changed to the date of the later second group takeover of the first group. The second group was not “the relevant group” in relation to Limitgood and Prizedome's pre-entry losses. “The relevant group”, in relation to the pre-entry losses of L and P, which the appellants wished to set off, is the first group. The relevant time remains the date on which Limitgood and Prizedome became members of the first group, not the later date on which the first Limited became a member of the second group.

The appellants contended that Limitgood and Prizedome, as members of the first group, were treated as having become members of “the relevant group” at the time when the first group became a member of the GH group, i.e. the relevant group” should be given its natural, ordinary and straightforward meaning.

The Court of Appeal found in favour of the Revenue and dismissed the appeal.

The proper construction of the legislation was the straightforward interpretation of the language that gave a more sensible meaning and purpose: the date of the entry of Limitgood and Prizedome into the first group was not changed by the first group becoming a member of the second group. The pre-entry losses of the companies were in relation to the first group and were identified as losses incurred before the date of entry into the first group group. That remained the case after the first group was taken over by the second group.

The judgment is available online at http://www.bailii.org/ew/cases/EWCA/Civ/2009/177.html.