Spc00661

CAPITAL GAINS TAX – construction of share sale agreement – calculation of amount to be included in consideration on sale – appeal allowed. 

THE SPECIAL COMMISSIONERS

T M Collins 
		Appellant

	- and -

           
THE COMMISSIONERS OF
HER MAJESTY’S REVENUE AND CUSTOMS     
	Respondents

				Special Commissioner:     RICHARD BARLOW

Sitting in Birmingham on 12 November 2007

Dougal Powrie of Powrie Appleby LLP for the Appellant

Peter Death of the appeals unit for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	The appellant appeals, under paragraph 9 of  Schedule 1A of the Taxes Management Act 1970, against a decision contained in a closure notice issued by the respondents under paragraph 7(3) of that Schedule by which they refused the appellant’s claim for a reduction in his capital gains tax liability for the year 1998/99.

2.	The appellant was a director and shareholder of a company called Remington Collins Ltd (hereafter ‘the 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.

3.	On 25 March 1999 Mr Collins and the other shareholders of the Company entered into a share sale agreement with a company called Beckett Financial Services Group Limited (hereafter the Purchaser) for the sale of all the shares in the Company.  

4.	The following provisions of that agreement are relevant to the issues in this case:

“3.  Consideration

3.1. The consideration for the Shares shall be calculated and delivered in accordance with the provisions of Schedule 2.

4.4. At completion the Purchaser shall

4.1.1. Pay to Mr Collins and/or the company at his direction and to [another shareholder] on account of the cash consideration for the Shares the sums specified in Schedule 2.

Schedule 2 

3.  On completion the Purchaser shall, on account of the Consideration:

3.1.1.  Pay the sum of £15,267 by cheque to Mr Collins:

3.1.2.  Pay the sum of £95,179 to the company, at the direction of Mr Collins.  The purchaser shall then procure that, immediately following Completion, the Company makes a pension contribution on behalf of Mr Collins of £120,480 (to a scheme or policy designated by Mr Collins).  In the event that the Company receives the benefit of deducting part or all or (sic) that expense for corporation tax purposes it shall when it receives the benefit thereof, pay a cheque equivalent to the amount of the benefit to Mr Collins up to a maximum of £25,301. 

5.	The appellant accepts that the £15,267, which represented his share of the value of the fixed assets of the Company, is properly to be brought into his capital gains tax calculations, subject to the normal rules.

6.	The appellant also accepts that the purpose of structuring the payments in clause 3.1.2 in this way was that only the Company could make a pension contribution on his behalf but that it was recognised that, if the Company simply paid £120,480 to his pension fund before the sale of the shares, the assets of the Company at the date of sale of the shares would thereby be diminished, at least somewhat to the detriment of Mr Collins’s co-shareholder because the share price was partly based on those assets.  On the other hand it was recognised that the true cost to the Purchaser as the new owner of the shares in making the payment might not be £120,480 because there was expected to be a saving of corporation tax by the Company as a consequence of making that payment, the benefit of which would, in terms of economic reality, accrue to the Purchaser as the new owner of the shares.  Mr Death pointed out that it seemed somewhat illogical that Mr Collins should receive the benefit of the additional £25,301 if what was intended was that the payments should be structured so as to make the cost of the pension contribution neutral to the Purchaser so far as possible.  I would add that it might have been illogical that the other shareholder did not receive part of that benefit.  As I understand it, Mr Collins has accounted for the receipt of the £25,301 in his capital gains tax calculations. 

7.	Both parties agree that what is in dispute in this case is limited to the £95,179 paid by the Purchaser on completion to the Company at the direction of Mr Collins.

8.	The respondents contend that that was a payment made to Mr Collins as part of the consideration for the sale of his shares and therefore that it was chargeable with capital gains tax and Mr Collins contends that that sum was not paid to him.

9.	Both parties agree that the correct approach to deciding that issue is to apply the principles laid down by Lightman J in Spectros International plc –v- Madden [1997] STC 114.  The complicated facts of that case are not relevant but the principles are set out thus (at page 136 a-e):

“What is the relevant consideration may depend upon the terms and form of the transaction adopted by the parties.  The parties to a proposed transaction frequently can achieve the same practical and economic result by different methods. … [He gives examples] … The law respects the freedom of the parties to a transaction to frame and formulate their agreement as they wish and suit their own legitimate interests (taxation and otherwise) and, so long as the form adopted is genuine, and not a sham, honest, and not a fraud on someone else and does not contravene some established principle of public policy, the Court will give effect to the method adopted.  If the question is what method has been adopted and the transaction is in writing, the answer must be found in the true construction of the document or documents read in the light of all the relevant circumstances.  If the terms of the documents are clear, that is the end of the question.  If however there is any doubt or ambiguity in the language used read in its proper context, it may 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”.   
	
Another relevant passage is at page 138 (a-b) where the Judge summarises the correct approach to be adopted as follows:

“In the light of these authorities, I think I must approach the question before me as a matter of construction of the composite of the three documents to which I have referred; I must identify and give effect to the form of the transaction which the parties have entered into and what they have sought to do; and in this process I must have regard first and foremost to the terms and language of the composite documents read as a whole in their proper context, but I am also to take into account business sense and reality and most particularly the value of the shares”. 

10.	In this case Mr Collins did not receive £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 (albeit that that may then have been agreed to be paid to Mr Collins inconsistently with the intended rationale behind the transaction).

11.	Relying on the principle that where the terms of a document are clear “that is the end of the question” the respondents contend that the £95,179 was a consideration received by Mr Collins because it was paid at his direction and he then benefited from that payment because it enabled the Company to pay the pension contribution.  

12.	I note that it has not been suggested that the Company could not have paid the £120,480 to the pension fund without the funding from the Purchaser.  The rationale behind structuring the deal in this way was as stated in paragraph 6 above and not any lack of funds on the part of the Company.

13.	Mr Powrie argued that the terms of the document are clear and that “that is the end of the question” because although the £95,179 was only payable by the Purchaser when Mr Collins directed it should be paid it was nonetheless a payment by the Purchaser to the Company and under the clear terms of the document Mr Collins 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.  Paragraph 4.1.1 reinforces that because it draws a distinction between payments to Mr Collins on the one hand and “to the company at his direction” on the other.  That makes it clear that the payment of the £95,179 was never intended to be a payment to Mr Collins but rather was always intended to be and was a payment to the Company. 

14.	I agree with Mr Powrie.  The terms of the document are that the £95,179 as part of the consideration in paragraph 3 of Schedule 2 was to be paid “on completion” and there seems no reason why the payment needed to be directed by Mr Collins at all.  It may well be that the draftsman had it in mind that Mr Collins would need to decide which pension fund the £120,480 should be paid into and that there was no point in making the £95,179 payment until he had decided that.  However, if that was the rationale of requiring Mr Collins to make a direction for payment of the £95,179, it might have been expected that the payment of the £95,179 to the Company and the £120,480 by the company could both be delayed but the pension contribution was also to be paid immediately following completion, so that Mr Collins had no opportunity to delay making the direction if the strict terms of the document were to be complied with.  It remains the case that he need not have been required to make the direction at all in order for the intended result to be achieved.

15.	The effect of the document was in any case that the £120,480 was to be paid to the pension fund and that it was to be partly funded by the £95,179 but I hold that the plain wording and effect of the document was that Mr Collins did not receive the £95,179 and his role was only to trigger the payment between the Purchaser and the Company.

16.	I hold that it is not necessary to consider the inherent probabilities of businessmen or to take into account business sense and reality in order to determine the precise nature of the transaction because it is clear from the words used in the document to be construed.  However, if those considerations were to be brought into the reasoning process the conclusion I would reach would be the same because the rationale for the form of the transaction, which I have set out briefly in paragraph 6 above, re-enforces the interpretation of the document itself and does not contradict it.

17.	I therefore allow the appeal.  

RICHARD BARLOW
SPECIAL COMMISSIONER

Released: 22 January 2008

SC/3209/2006