Crown Bedding Co Ltd v Inland Revenue Commissioners

 

Crown Bedding Co Ltd v Inland Revenue Commissioners

COMPANY; Shares: TAXATION; Other Taxation

COURT OF APPEAL

LORD GREENE MR, SOMERVELL AND COHEN LJJ

6, 7, 8 MARCH 1946

Revenue – Excess profits tax – Acquisition of shares by a company in another company already controlled indirectly – Uncertainty as to liability to excess

profits tax – Whether main benefit expected to accrue from the transaction was avoidance or reduction of liability of tax – Finance Act, 1941, (c 30), s 35 –

Finance Act, 1944 (c 23), s 33.

The appellant company CB acquired certain shares in another company in which a large number of shares were already held by a subsidiary wholly owned by

the appellants. By acquiring these shares the appellant company put itself in the position of a group of companies for the purposes of excess profits tax. The

company, thought aware at the time that in a certain event an excess profits tax benefit would accrue to the group, did not expect that the benefit would ever

materialise owing to the improbability or the group remaining liable to excess profits tax. The Commissioners of Inland Revenue made a direction on the

ground, inter alia, that, under the Finance Act, 1944, s 33(3), the “avoidance or reduction of liability” was to be deemed to have been the main purpose or one

of the main purposes of the transaction. The company appealed under the Finance Act, 1941, s 35(3), to the Special Commissioners, who found as a fact that a

tax benefit was to be expected and, comparing that benefit with any alleged commercial benefit, took the view that the tax benefit was the main benefit. On

appeal, it was contended for the appellant company that on a proper construction of sect 33(3) of the 1944 Act, a benefit could not be expected to accrue when

the avoidance or reduction of tax was not a probability but a possibility:—

Held – (i) on a proper construction of sect 33(3), the “main benefit” meant that which, in the opinion of the tribunal ultimately deciding the question, might

have been expected by a person surveying all the facts and knowing all the law on the subject at the time the shares were acquired.

(ii) the word “expected” could not be construed in the sense that a hypothetical observer must have had that degree of confidence in the future as to

expect that the benefit would materialise.

(iii) there was ample evidence on which it could be found that the tax benefit was the main benefit which might have been expected to accrue.

Notes

This is the first decision on sect 33 of the Finance Act, 1944, which amended the Finance Act, 1941, s 35. Under sect 33 (3) it is sufficient to prove that the

main benefit which might have been expected to accrue from, inter alia, the 􀂭 452􀀉 transfer or acquisition of shares in a company, was avoidance or reduction

of liability to tax. It is no longer necessary to prove the element of purpose. It is now held that “might have been expected” does not refer to the expectation

in fact entertained by those carrying out the transaction, but the benefit which might have been expected by some third party in possession of all the relevant

facts and law at the time. This would appear to be in accordance with the spirit of the section, which substitutes a statutory presumption for the former proof

as to the main purpose of the transaction intended by the parties.

For the Finance Act, 1941, s 35, and for the Finance Act, 1944, s 33, see Halsbury’s Statutes, Vol 34, p 131, and Vol 37, p 329.

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Appeal

Appeal by the taxpayer from a decision of Macnaghten J dated 16 November 1945. The facts are fully set out in the judgment of Lord Greene MR.

J Millard Tucker KC and J W P Clements for the appellants.

Terence Donovan KC and Reginald P Hills for the respondents.

8 March 1946. The following judgments were delivered.

LORD GREENE MR. The Finance Act, 1941, s 35, gave power to the Commissioners of Inland Revenue to give directions in certain cases with a view to

counteracting the effect of transactions designed to avoid liability to excess profits tax. The direction could only be given where the Commissioners were of

opinion that the main purpose for which the transaction was effected was “the avoidance or reduction of liability to excess profits tax.” If they formed such an

opinion, they could, if they thought fit, give a direction to make appropriate adjustments so as to counteract the effect of the attempted avoidance. By sect

35(3):

‘Any person aggrieved by a direction of the Commissioners under this section may appeal to the Special Commissioners, whether on the ground that

the main purpose of the transaction or transactions was not the avoidance or reduction of liability to tax or on the ground that no direction ought to have

been given or that the adjustments directed to be made are inappropriate.’

In the Finance Act, 1944, certain amendments to those provisions were enacted. Sect 33(1) and (2), introduced these amendments. It included as one of

the grounds on which the Commissioners could form an opinion the case where the purpose was not merely the main purpose of the transaction but “one of the

main purposes” of the transaction. Subsect (3) contains a further and very stringent amendment and it is upon that subsection that the present question arises.

It reads, so far as material, as follows:

‘If it appears in the case of any transaction or transactions being a transaction which involves, or transactions one or more of which involve: (a) the

transfer or acquisition of shares in a company … that, having regard to the provisions of the law relating to excess profits tax, other than the said section

thirty-five, and this section, which were in force at the time when the transaction or transactions was or were effected, the main benefit which might

have been expected to accrue from the transaction or transactions during the currency of excess profits tax was avoidance or reduction of liability to the

tax, the avoidance or reduction of liability to excess profits tax shall be deemed for the purposes of the said section thirty-five to have been the main

purpose or one of the main purposes of the transaction or transactions.’

The effect of that is this. Whereas under the original sect 35 of the 1941 Act, even with the amendments introduced by subsect (2) of sect 33 of the 1944 Act,

it would have been necessary in such a case as this to prove to the satisfaction of the Commissioners of Inland Revenue or, on appeal, to the satisfaction of the

Special Commissioners, that the main purpose, or one of the main purposes, of the transaction, was in fact the avoidance or reduction of tax liability, under

subsect (3) in the cases there mentioned the necessity of proving the subjective element of purpose in the minds of the actors is removed. It is sufficient to

prove that the main benefit which might have been expected to accrue was “avoidance or reduction of liability to tax.” Directly that is proved, the matter of

purpose is deemed to have been satisfied.

The transaction in the present case was one under which the appellant company, the Crown Bedding Co Ltd acquired certain shares in the South Wales

Flock Co Ltd from three gentlemen of the name of Seccombe and their mother, who held a small number. Those three gentlemen were three out of four of the

directors of Crown Bedding Co Ltd. That company had a wholly owned subsidiary called the Midland Flock Co Ltd which in its turn held a large number of

shares in the South Wales Flock Co Ltd. For the purposes of the Acts, the Crown Bedding Co controlled both the Midland Co and the South 􀂭 453􀀉 Wales

Co. Accordingly, the Seccombes, as directors of the Crown Bedding Co were in the position indirectly to control the actions of the South Wales Co. By

acquiring those shares from the directors and Mrs Seccombe, the Crown Bedding Co with its associated companies—there were others besides the Midland Co

and the South Wales Co—put itself in the position to be treated as a group of companies for the purposes of excess profits duty.

Broadly speaking, without going into details, the effect of that grouping is that the profits of the group are taken together. One of the benefits to the

taxpayer of such a grouping consists in the fact that an unsuccessful company in the group can claim to have its deficiency set against the profits of the more

successful members of the group. It was therefore the case that, if the Crown Bedding Co Ltd could secure these shares but only if they could secure these

shares, they would be in a position to claim and set against the profits of the group as a whole any deficiencies which the South Wales Co suffered in the

course of its business. It was also extremely probable at the time that the South Wales Co would in fact suffer deficiencies, but it was uncertain (and indeed

regarded apparently as inprobable), whether the remaining members of the group would, in the circumstances at the time, be likely to earn profits the amount

of which would make it advantageous to them to have the deficiency of the South Wales Co to fall back upon so as to diminish their liability to tax.

The Commissioners of Inland Revenue made a direction based upon the view, first of all, that avoidance or reduction of liability to excess profits tax was

the main purpose or one of the main purposes of the transaction. That particular branch of their opinion dropped out of the case when the matter came on

appeal before the Special Commissioners, because the Crown did not apparently attempt to rest its case on the ground of purpose in fact. The other ground

given by the Commissioners of Inland Revenue in their direction was that “the avoidance or reduction of liability” under subsect (3) of sect 33 was to be

deemed to have been the main purpose or one of the main purposes. That is the question which was considered by the Special Commissioners.

I should have added one other matter of fact. There was evidence in the case that the directors thought, or were advised, that it would be advantageous to

the Crown Bedding Co and to the South Wales Flock Co. I suppose, or at any rate to one or other of them—it does not matter which—to get rid of the

minority shareholding of the Seccombes and their mother. That is the only commercial benefit which could have accrued from this transaction other than the

avoidance of excess profits duty. I can find nowhere in the case, nor do the Commissioners find anything to suggest, that any benefit of any kind other than

excess profits duty and the alleged benefit arising from the acquisition of these minority shares came into the picture at all. With regard to the benefit to be

obtained by getting rid of these minority shareholders, it is important to observe that, with the exception of Mrs Seccombe, who held a small number of shares,

the holders of the majority of the shares, the three Seccombes, were in fact the people controlling the Crown bedding Co and its subsidiaries. They were the

directors. The Special Commissioners took the view that the benefit, if any, to be expected from getting rid of these minority shareholders, was of a very

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trivial and hypothetical nature. I must confess that nothing that counsel for the appellants has said has persuaded me that there was any real appreciable

benefit in getting rid of these minority shareholders.

The finding of the Commissioners was expressed in this way:

‘In May, 1941, three directors of a controlling company sold to that company their shares in a subsidiary company and the question to which we

have to find the answer is which benefit could at that time be reasonably regarded as the greater, the tax benefit or the commercial benefit. The special

difficulty in this case is that, after hearing the evidence, and especially the evidence of Mr. Cooke, it is not the comparative greatness of the benefits

which we must consider but their comparative smallness. We hold that this appeal fails because while we accept Mr. Cooke’s evidence that the prospect

of a tax benefit was small the prospect of a commercial benefit was still smaller, so small indeed as to be practically negligible.’

The commercial benefit to which the Special Commissioners referred in that finding is quite clearly the commercial benefit to be expected from the

elimination of the minority shareholders, and they find as a fact—and there is no possible ground for differing from them in this court—that that benefit was so

􀂭 454􀀉 small as to be practically negligible. There is ample evidence on which they could come to that finding and we could not possibly disturb it.

The appeal, however, is based on other considerations. Before I come to consider the arguments put before us by counsel for the appellants, I would like

to refer to one or two passages in the case. Para 8 refers to the evidence of two of the Seccombes to this effect:

‘The directors knew at the time of this transaction that the South Wales Flock Co. had a standard for excess profits tax purposes of £3,000

approximately. They also knew that by reason of this transaction this standard would be added to that of the Crown Bedding Co., and its other

subsidiaries.’

That is not quite accurate, but the inaccuracy does not really affect the substance of the point. The paragraph goes on:

‘… and that as the South Wales Flock Co. had ceased to trade and substantial excess profits tax deficiencies would result an excess profits tax

benefit would arise if the group of companies remained liable to excess profits tax, but for the reasons stated in paras. 9 and 10 hereof, it was not then

expected that the group would remain liable to excess profits tax, and the question of excess profits tax was not considered.’

That paragraph, notwithstanding an unimportant mis-statement, makes it quite clear also that the directors were fully conscious at the time of the fact that in a

certain event an excess profits tax benefit would accrue to the group. That event was if the group of companies remained liable to excess profits tax. It is

quite clear from that paragraph that they had that knowledge in their minds, but they also had something else in their minds and that was an expectation,

namely, that the group would not remain liable to excess profits tax. The effect of the evidence appears to be that, with full knowledge of the advantage that

would accrue, they put that out of their minds as a purpose of the transaction, because they did not expect that that benefit would ever materialise owing to the

improbability of the group remaining liable to excess profits tax. Accordingly, they say: “The question of excess profits tax was not considered.”

I might pause there to deal with one point. Taking that evidence at its face value, it goes no further than this, that the directors did not expect that they

would obtain a tax benefit from this transaction. But counsel for the appellants did not argue that the opinion of the directors was to be treated in any way as

conclusive for the purposes of the subsection. In other words, when the subsection speaks of the main benefit which might have been expected it does not

mean the main benefit which was in fact expected by those carrying out the transaction but means the main benefit, in the opinion of the tribunal which

ultimately has to decide, which might have been expected by a person surveying all the facts and knowing all the law on the subject at the time. I do not mean

that the views of directors who are familiar with the facts would be inadmissible in evidence. All I am saying is that the fact that the directors expected or did

not expect a particular result can by no means be conclusive of the question, although it may be evidence which the Commissioners should take into account in

forming their opinion.

The next paragraph of the case I wish to refer to is para 9. It sets out the difficulties of the group of companies with the possibility that they would not be

able to retain their factories or sell their products as well as they had sold them before. It also refers to certain war damage and sums up by saying:

‘The outlook was very disturbing … Later, however, [I think that must mean later than May, 1941, but nevertheless in 1941] the outlook changed as

the result of engineering contracts of which there had been no expectation at the time of the transactions in dispute. In the result, there was excess

profits tax liability for 1941 amounting to over £12,000.’

That means this. The reduction of excess profits tax which the directors knew would take place in a particular event, but did not consider would take place

because they thought that particular event was improbable, had in fact been realised, because the event which they considered to be improbable had in fact

taken place.

Para 10 sets out the evidence given by the auditor to the Crown Bedding Co. He says:

‘… that he knew before June, 1941, [that was the date of the acquisition of the shares] that it was proposed to close down South Wales Flock Co.,

and to sell the shares of Mr. Pinchin and the Seccombe family to Crown Bedding Co. When told of 􀂭 455􀀉 this proposal he advised in favour of

transferring the family shares at the same time as the Pinchin shares for the reason that there was a moral obligation to treat all shareholders alike.’

I must confess that is a reason which seems to me to be just nonsense, and the Commissioners obviously paid not the slightest attention to it. But that enables

me to say this in passing. The point was suggested by counsel for the appellants as to whether the benefits which have to be considered and compared under

the subsection should include benefits other than pure commercial benefits and extend, for instance, to some moral benefit or the satisfaction of some moral

obligation. I do not find it necessary, on the facts of this case, to express any opinion whatever on that question, because the only peg on which it could have

been hung in the present case was that statement of the auditor to the Crown Bedding Co about the moral obligation, and that is a matter to which I can attach

not the slightest importance.

The evidence of the auditor to the Crown Bedding Co then goes on as follows:

‘It would, in his view, be a benefit to the Crown Bedding Co., to have 100 per cent. control and thus avoid having a minority of shareholders whose

interests might conflict with those of the parent company.’

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That is the commercial benefit which the Commissioners, quite naturally, in my opinion, found to be negligible. The evidence continues:

‘As the time of the transaction in dispute the group standard was known to be between £60,000 and £70,000, though the precise figure was not

finally agreed until 1942 owing to changes in legislation; that if an excess profits tax benefit was to be derived from the transactions it would be

necessary for the group to have made a profit in excess of that figure … Almost the whole of the standard profits of the group were derived from the

Crown Bedding Co. In Apr. and May, 1941, he could not have stated the trading position of the Crown Bedding Co., and its connected companies. He

knew that there was a decrease in sales and had the fall in sales continued there might well have been no profit at all.’

In view of that, the auditor might have had some difficulty, if he had been asked, in answering the question whether he thought that some sort of benefit would

probably occur in the matter of excess profits tax.

I think the case must be considered on the footing that those concerned did not expect that excess profits tax benefit would accrue. They realised that, on

the probabilities of the case, any excess profits tax benefit was unlikely to accrue and was not worth their consideration. The Special Commissioners quite

clearly found as a fact that, in their opinion, a tax benefit was to be expected and, comparing that benefit with the alleged commercial benefit, they took the

view that the tax benefit was the main benefit.

Counsel for the appellants attacks that finding by going straight to the construction of the section, and he says that under the section it is not open to the

Special Commissioners to find that the main benefit which might be expected to accrue was avoidance or reduction of tax where avoidance or reduction of tax

was not a probability but only a possibility. He says in this case the directors thought that it was so remote as to be negligible and they did not take it into

account. He says, on the facts as found, a reasonable man, knowing all the facts and putting himself in the position in which things were at the relevant date,

would have come to the conclusion that he could not expect any benefit in the way of avoidance or reduction of tax to accrue: the ground being that in order

to bring the section into operation there must be expectation of a benefit by way of avoidance or reduction of tax in the sense that a reasonable man would

expect such avoidance or reduction to accrue, not that he would think that it might, in certain unlikely events, accrue but that it would, in fact, in his opinion,

be likely to accrue.

In my opinion, that is much too narrow a construction to put upon these words. After all, the question of probability or possibility is a matter really

which can be considered as resembling a scale. At the top of the scale is certainty. At the bottom of the scale is improbability so extreme that no sensible

person would ever take it into account. But, subject to that, the precise point on the scale at which you can say that a thing is probable rather than possible and

the precise point at which you say that a probability falls to the level of a mere possibility depends on the view taken by a hypothetical observer. It seems to

me that it is quite impossible to put on the word “expected” the sense 􀂭 456􀀉 that a hypothetical observer must have had that degree of confidence in the

future as to expect that the benefit would materialise.

In the present case the company, by this transaction, acquired shares the possession of which in its portfolio was a partial safeguard against excess profits

tax. It seems to me that the Commissioners must have taken the view that no reasonable person, looking at the position as it then stood, would have

disregarded that benefit as a benefit arising from the transaction. It is perfectly true that the possession of these shares in its portfolio did not at the moment

give any tax benefit to the company. But it was an effective protection and would prove an effective protection in the matter of tax if a certain event

happened, namely, if the profits of the group exceeded a certain amount so that the benefit of the deficiency of the South Wales Co would be effective.

The Commissioners had to decide whether that was a benefit in the first place which might have been expected to accrue, and they clearly came to the

opinion that it was. In my view, on the evidence and on the true construction of these words, they were perfectly entitled to do so. I cannot find that they in

any way misdirected themselves as to what this language means. They found that there was a benefit and that that benefit would result, in certain events, in

the avoidance or reduction of liability to excess profits tax. Whether those events were probable or whether they were possible does not seem to me to decide

the case at all. If the Commissioners in considering the possibility of benefit came to the conclusion that to the mind of a reasonable man that benefit was so

remote and so unlikely as not to be worth considering, they would naturally put it out of consideration. On the other hand, once the possibility moves up the

scale and advances in the direction of a probability, it seems to me there is a wide area within which they, as judges of fact and of matters of degree, are

entitled to form a conclusive opinion. That is what they did in the present case.

That that view is right, I think is confirmed when one considers the other benefit which counsel for the appellants said was the real benefit to be expected,

namely, the commercial benefit of getting rid of these minority shareholders. But that benefit, again, was a contingent benefit. It would only be a benefit if

the minority shareholders disagreed with some policy proposed or were obstructive in some way. The benefit would only materialise in some such event as

that. That benefit, therefore, was a benefit which could only be expected to accrue on the hypothesis that certain events took place.

If the argument of counsel for the appellants be right, it would appear that for the purposes of this section no benefit was to be expected to accrue from

the transaction at all. The tax benefit was not to be expected to accrue because the obtaining of that benefit depended on certain unlikely contingencies. A

commercial benefit would not be likely to accrue because that again depended on certain contingencies as to which nobody could say whether they would be

likely to happen or not. Each of the benefits under discussion was in the nature of a safeguard against possible future events.

In my opinion, it was for the Commissioners to say which was the main benefit which might have been expected to accrue. I cannot find that they in any

way misdirected themselves. They had ample evidence on which they could find that of the two benefits the tax benefit was the main benefit. Their opinion

and the opinion of the judge who upheld them appear to me to be unassailable. Curiously enough, the judge went further (it is not necessary for us to go

anything like so far) because he appears to have taken the view, not that there was no evidence on which the Commissioners could find as they did, but that

there was no evidence on which they could have found otherwise. That extreme view was not put before us by counsel on behalf of the Crown, and I do not

find it necessary to go as far as that the Commissioners’ ground was the right ground. The judge certainly confirmed it, and perhaps confirmed it with certain

over-emphasis, but, nevertheless, he came to the right conclusion.

In my opinion, the appeal must be dismissed with costs.

SOMERVELL LJ. I agree with the judgment that has just been delivered and with the reasons which Lord Greene MR has given. I only desire to add a

sentence or two on the question of construction which was pressed upon us by Counsel for the appellants, in amplification of that part of the judgment of Lord

Greene MR in which he demonstrated that, if counsel was right, where there 􀂭 457􀀉 were only possibilities of benefit then no benefit “might have been

expected” within the natural meaning of these words and their meaning in this section. If that argument were right—and I agree fully with the reasons which

have been given against it—it would introduce into this section a dividing line between probabilities and possibilities which would be extremely difficult to

apply and which there are no words in the section to suggest exists. I simply put that forward as one possible added reason for rejecting the construction which

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was pressed upon us.

I agree that the appeal should be dismissed with costs.

COHEN LJ. I agree and I have nothing to add.

Appeal dismissed with costs.

Leave to appeal to the House of Lords.

Solicitors: Ward, Bowie & Co Agents for Duggan, Elton & James, Birmingham (for the appellants); Solicitor of Inland Revenue (for the respondents).

F Guttman Esq Barrister.

[1946] 1 All ER 458