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No going back
No going back
The executors of a former shareholder and director, Norman Charles Morgan, appealed against an estimated capital gains tax assessment for 1987-88 in the sum of £1.5 million. The assessment was raised following the sale of 2,316 ordinary shares in Century Locks Limited on 9 September 1987 and a similar sale of 1,190 shares in the same company and on the same date by Mr Morgan's wife, Mrs Susannah Mabel Morgan. Independent taxation of husband and wife did not, of course, apply when the disposal took place so that the assessment was raised on the executors of Mr Morgan, who died on 14 February 1994.
The Inland Revenue was of the view that the acquisition cost of the shares in Century Locks Limited was the acquisition cost of the shares in J Fox and R H Morgan Limited because the shares in Locks had been acquired under an arrangement within the meaning of section 86, Capital Gains Tax Act 1979.
Conversely, the appellants argued that section 86 did not apply because there had been no scheme of reconstruction within the meaning of section 86, because Fox and Morgan had been partitioned between two new companies. It followed that, on 1 April 1980, the shares in Locks had been acquired in consideration of the disposal of shares in Fox and Morgan and that the acquisition cost of the shares in Locks was the market value at that time of the shares in Fox and Morgan.
Fox and Morgan had carried on business through two divisions, the locks division and the pressings, stamping and enamelling division. The enamelling section of the latter division was owned by Century Enamel Limited (Enamel) a wholly owned subsidiary of Fox and Morgan.
In 1979 it was decided, for commercial reasons, that each division should be carried on through a separate company owned by a different group of shareholders.
Accordingly, the advisers of Fox and Morgan wrote to the Inland Revenue requesting a clearance under the predecessor of section 88, Capital Gains Tax Act 1979. Those clearances were granted in terms very similar to section 86. Section 267, Taxes Act 1970 was also relevant as on a reconstruction or amalgamation of the type under review, provided conditions were satisfied, then for the purposes of corporation tax on chargeable gains the two companies were treated as if there was neither a gain nor a loss and as if the acquisition of the assets by the transferring company had been the acquisition by the acquiring company.
Accordingly, if there was a scheme of reconstruction or amalgamation, then there was no disposal by the shareholders of their holdings and there was also no disposal by the company of the business or the business assets.
The Inland Revenue's clearance letter referred to 'an element of concession'; this appeared to reflect the contents of paragraph 2 of Statement of Practice D14 which has now been incorporated into Statement of Practice SP 5/85. Paragraph 2 of Statement D14 expresses the view that the division of a company's undertaking into two or more companies owned by different sets of shareholders was not a reconstruction.
Following the various transactions Mr and Mrs Morgan held all the ordinary shares in Century Locks Limited, together with some preference shares. Preference shares were also owned by three other individuals.
The other company, R H Morgan Limited, had as its managing director Mr B C Morgan and he and his wife owned both ordinary and preference shares and there were four other shareholders. There were no common shareholders to Century Locks Limited and R H Morgan Limited.
Counsel for the appellants referred to substantial case law, but the main plank of the argument by the Inland Revenue was that there had been a reconstruction. He pointed out that Statement of Practice D14 had been prompted by the decision in Brooklands Selangor Holdings Limited v Commissioners of Inland Revenue [1970] 1 WLR 429 and was not an extra-statutory concession.
The Special Commissioners, Dr Nuala Brice and Mr Theodore Wallace, took the view that conceptually there appeared to be no reason why a partition of one company into two or more companies should not be treated as a reconstruction of the first company for the purposes of section 86, Capital Gains Tax Act 1979. In their view, when one existing company entered into two arrangements, each with the persons holding one class of shares in the existing company, and under the arrangements two new companies issued shares, one new company to the holders of one class of shares and the other new company to the holders of another class of shares in the existing company, then such an arrangement fell within section 86.
The Special Commissioners went on to consider various relevant cases, which also led to the phrase 'reconstruction or amalgamation' in section 55, Income Tax Act 1927. However, their underlying reasoning was that section 86, Capital Gains Tax Act 1979 applied to facts such as those in the current appeal and this was the issue that was determined.
The appeal was therefore dismissed.
(R Fallon and C M Kersley (Executors of N C Morgan deceased) (SpC 271).)
