.png)
.png)
A firm of estate agent surveyors and design consultants which had incorporated into a company had initiated a negligence claim against a firm of chartered accountants.
The background to the case concerned one of the directors and shareholders, who had resigned from the company as he faced the threat of criminal proceedings.
A firm of estate agent surveyors and design consultants which had incorporated into a company had initiated a negligence claim against a firm of chartered accountants.
The background to the case concerned one of the directors and shareholders, who had resigned from the company as he faced the threat of criminal proceedings.
The remaining directors and shareholders had taken advice from the defendant firm of accountants as to the most prudent method of structuring a company buyback of the shares of the departing director. A further ingredient was that the continuing shareholders had a capital gain for one year which they hoped could be sheltered as part of the tax planning.
Two schemes were proposed. The first was not viable in that it overlooked the 'pooling provisions' in paragraph 9(1) of Schedule 19 to the Finance Act 1985 which regarded different acquisitions of shares of the same class as indistinguishable parts of a single asset. The anticipated loss on a new acquisition of the shares did not therefore actually materialise as the high cost was pooled with an earlier low base cost.
Another scheme was put forward under which each of the claimants transferred his holding in the company to a discretionary trust for his benefit so as to trigger an allowable loss on the disposal to the trust. This scheme was also unworkable because section 62, Capital Gains Tax Act 1979 prevented the deduction of a loss arising on a transaction between connected persons.
From the end of 1990 the company made a loss and its value decreased. In August 1994 the claimants' new accountants submitted a claim to the Revenue that the shares in the company were of negligible value as at 30 April 1993 in order to substantiate a claim under section 24(2), Taxation of Chargeable Gains Act 1992. That claim was rejected but the Revenue subsequently accepted the shares were of negligible value as at 30 April 1994.
Proceedings were commenced against the defendant firm, claiming damages for negligence in relation to its advice on both schemes put forward. The defendant firm admitted negligence in relation to the first scheme, but denied that the timing of the transactions was an issue. In relation to the second scheme, it also admitted negligence but submitted that the shares in the company had become of negligible value in 1993-94, thereby affecting the claim for interest on any award of damages.
In the High Court, where the decision on 29 September 1999 was unreported, the judge held (1) that the defendant firm was negligent in failing to advise on the timing of the share buyback in relation to the first scheme, and (2) that if, alternatively, the defendant had advised on timing, the buyback would have had to have been made in a year when the company had sufficient mainstream corporation tax liability and so the claimants were not accordingly obliged to give credit to the defendant for their advance corporation tax liability on the share buyback against any damages awarded. Additionally, the judge held that he was bound by the decision of the Inland Revenue that the shares became of negligible value during 1994-95.
The defendant firm appealed to the Court of Appeal against the finding that the claimants were not obliged to give credit for the advance corporation tax liability against their damages award because, had the company paid the advance corporation tax liability in 1990 when it would have been credited against the corporation tax liability for that year, an equivalent sum would have had to be found in the spring of 1991 from the claimants' personal resources to keep the company alive.
The claimants cross-appealed against the judge's finding that the shares had not been of negligible value in 1993-94.
In the Court of Appeal, Lord Justices Peter Gibson and Clarke and Mr Justice Maurice Kay held that on the facts of the case, the judge in the High Court had been correct to reject the argument that even if the advance corporation tax liability had been met in 1990, the claimants would have had to find an equivalent sum at a later date in any event.
The Court also held that the judge in the High Court had failed to address the question whether the Revenue would have accepted that the shares were of negligible value at the end of the year 1993-94. There was no reason that the Revenue, having accepted that the shares were of negligible value as at 30 April 1994, would not have been satisfied that there had been no material difference in the position of the company a mere 25 days earlier. Accordingly, the appeal by the defendant firm was dismissed and the cross-appeal by the claimants was allowed.
(Little and Others v George Little Sebire and Co, Court of Appeal, Civil Division, 14 June 2001).
