Special Commissioners' Decisions

ALLISON PLAGER summarises two recent cases.
Advantageous buyback
The OMEGA Group is a plc which trades in computer software. It had an exempt approved pension scheme established in 1949. Exempt approved status under section 592, Taxes Act 1988 gives the fund exemption from income tax on income derived from investments, provided that the Revenue is satisfied that such income is held for the purposes of the scheme. Mercury Asset Management was the appointed discretionary fund manager for the scheme.
In February 1996, Mercury purchased on behalf of the scheme, 100,000 50 pence ordinary shares in Powergen at £5.39 a share. 20,000 more shares at £5.35 were purchased in March. The shares were bought in anticipation of a successful bid by Powergen to acquire Midlands Electricity plc. However, the Board of Trade eventually blocked the bid and, in May, Powergen disposed of its shares in Midlands, indicating that it had abandoned its proposed takeover. Two days later at 2.41 pm, Powergen offered to repurchase 4.8 per cent of its fully paid issued capital (the first buy-back). Dealers had to decide very quickly whether or not to participate, as the buy-back was completed by 5.22 pm. A second buy-back was announced in June, when Powergen offered to buy back ten per cent.
Mercury decided to participate in both buy-backs, as the reason for buying the shares in the first place, i.e., the expected takeover of Midlands, and their subsequent expected rise in value had not materialised.
In July 1996, the appellants submitted a claim to the Revenue for tax credits of £53,437 for the first sale, and £43,475 for the second sale, and the tax credits were paid in August 1996.
The Revenue said that the circumstances of the sale were as mentioned in section 704A because they had received an abnormal amount by way of dividend; the Revenue also said that the appellants had obtained a tax advantage. The appellants denied both charges, arguing that the sales were carried out for bona fide commercial reasons, in the ordinary course of managing investments, and that the obtaining of a tax advantage was not the main object.
The Special Commissioners first considered whether or not the pension scheme had received an abnormal amount within the meaning of section 704A. They said that the appellant's purchases were on the open market, at open market prices; the sales were at prices fixed by Powergen but the shares were offered by Powergen to the market at prices close to those prevailing at relevant times. This was necessary to attract sellers, as otherwise, sellers would have sold on the open market. Under corporation tax legislation, the price paid by Powergen comprised two elements: a capital element equal to the amount of the nominal capital value of the shares, and a qualifying distribution. The nominal share price was fixed, so the qualifying distribution had to provide the incentive for sellers to sell to Powergen as opposed to on the open market. The qualifying distribution was therefore effectively fixed by the open market, and was in the Commissioners' view normal. Thus the appellants did not receive an abnormal amount by way of qualifying distribution.
The Commissioners then looked at section 709(4)(b) to decide if the amount of qualifying distribution received substantially exceeded a normal return on the consideration provided by the appellants for the shares. After comparing the relevant figures, they decided that the return was normal. The legislation referred to 'normal return' and not 'normal income return' and overall the return in this case including the repayable tax credits was normal.
Finally, the length of time that the appellants held the shares was considered under section 709(6)(b), with the Commissioners concluding that with regard to the time that the shares had been held, the return did not substantially exceed the normal return.
The Commissioners referred to the decisions in Commissioners of Inland Revenue v Universities Superannuation Scheme Ltd [1997] STC 1 and Lomax v Peter Dixon 25 TC 353, but said that these did not really assist them.
As the Special Commissioners had concluded that the circumstances were not as in section 704A, i.e., that the appellants had not received an abnormal amount by way of the qualifying distribution, and that the distribution did not exceed a normal return on the consideration paid by the appellants given the length of time that they had held them, section 703 did not apply and the appeal must be allowed.
However, the Special Commissioners did consider the remaining issues.
They decided that the pension scheme had obtained a tax advantage, agreeing with the Revenue's reliance on Universities Superannuation Scheme. The third issue concerned whether or not the sales had been made for bona fide commercial reasons or in the ordinary course of managing investments. The Commissioners decided that the appellants had done what any prudent investor would have done in the circumstances, and were acting in the course of managing investments. The appellants were not obliged to sell the shares, but there were sound investment reasons to do so.
Finally, the Commissioners considered whether or not a main object of the sale was to gain a tax advantage. They concluded that even though the transactions were carried out in the ordinary management of investments, this did not preclude the main object of being to gain a tax advantage. With this in mind, they noted that the tax credits were crucial to the buyback arrangement, and that the investment manager was obliged to get the best price for his client. Thus, the gaining of a tax advantage was one of the main objects of the sales.
However, these did not affect the outcome of the appeal, which was already decided in favour of the appellants.
(The Trustees of the Omega Group Pension Scheme [2001] STC 121.)
Deemed ownership
The appellant, his wife and the appellant's brother sold three plots of land on 16 April 1987. The appellant and his brother were the trustees for sale of two plots and part of the third which they held in trust for the appellant, his brother and his wife as tenants in common in unequal shares. The appellant and his wife were given the remainder of the third plot on 1 May 1987, which they held as trustees for sale for themselves as beneficial joint tenants.
On 28 December 1988, the appellant and his wife created two overseas settlements, and a year later they entered into six assignments under which they assigned to the trustee of the overseas settlements one half of their beneficial interests in the three plots. The sales were completed between November 1990 and December 1992, by which time outline planning permission had been obtained.
The Inland Revenue said that the appellant and his wife disposed of the land that they owned on the date of the contract, i.e., 16 April 1987, whereas the appellant argued that on that date and on 1 May 1987 they disposed only of one half of the beneficial interests, which they owned at the date of completion. Counsel for the appellant was clearly faced with a difficult argument. It does not appear that the contract was conditional in any respect and so counsel was left with an argument that the contract only fixed the time of the disposal for capital gains tax purposes. The identity of those making the disposal had to be determined at the date of completion.
The Special Commissioner first considered the inter-relation of the law of property with the capital gains tax legislation. The law of property proceeds on the basis that where the property is held in trust, the legal title is conveyed by the trustees. The holders of the beneficial interests could expect the trustees to apply the purchase money in accordance with the terms of the trust, but the beneficiaries were concerned only with the sale proceeds. The capital gains tax legislation provides deeming provisions only for the purpose of that legislation.
Section 46, Capital Gains Tax Act 1979 (now section 60, Taxation of Chargeable Gains Act 1992) provided that where assets are held by a trustee for another person or persons who are absolutely entitled as against the trustee, the property is treated as vested in the beneficiary and the acts of the trustee are treated as acts of the beneficiary. All gains, losses and liability concern the beneficiary, not the trustee.
This was relevant to the circumstances, since prior to the events in 1987, the property was an asset held by trustees, namely the appellant and his brother, for themselves as tenants in common in equal shares. Thus the appellant and his brother were absolutely entitled as against the trustees. The property was vested in the beneficiaries, and whatever the trustees did would be treated as acts of the beneficiaries.
With regard to the six assignments of December 1989, the deeming provisions of section 27, Capital Gains Tax Act 1979 (now section 28, Taxation of Chargeable Gains Act 1992) were relevant. This provides that the disposal is made at the time of the contract; thus the three plots had already been disposed of in April 1987. The fact that after the date of the contract the appellant and his wife assigned parts of their beneficial interests to the trustee could not alter this.
Thus the deemed owners of the property were the appellant, his wife and his brother, and they were liable for capital gains tax. The disposal was made at the time of the contract, and the three plots were disposed of in April 1987. The fact that the appellant and his wife later assigned parts of their beneficial interests to the overseas trustees could not alter this.
Therefore the deemed owners of the property were the appellant, his wife and his brother, and they were liable for capital gains tax, and the deemed owners of the additional property were the appellant and his wife. The disposals were made on 16 April 1987 and 1 May 1987 of the whole of their interests in the land, irrespective of the fact that in between the time of the date of contract and the date of completion, they assigned one half of their beneficial interests to the trustee of the overseas settlements.
The appeal was dismissed.
(Michael Jerome (SpC 284).)

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