The Gazette 1986

g a z e t t e

s e p t e m b e r 1986

of Q. Ltd. i n a share for share (paper for paper) exchange. Following an inquiry from J. Ltd. the negotiations with C. Ltd. were abandoned. They were later resumed when it appeared that the sale to J. Ltd. would not go through. Eventually, in August, 1976, M. Ltd. sold its shares in Q. Ltd. to J. Ltd. for £2m. The proceeds of sale were loaned back by M. Ltd. to the taxpayers. The taxpayers were assessed to Capital Gains Tax on the basis that the disposal of M. Ltd. to J. Ltd. of the shares in Q. Ltd. was a disposal by them, following Furniss. The taxpayers argued that the only disposal was the share for share exchange and that this was not a disposal for tax purposes within the U.K. equivalent of Para. 4 Sch. 2 CGTA J975. 27. [1981] S.T.C. 174 at 180, quoted at [1985] S.T.C. 531, at p.559. 28. [1985] S.T.C. 531, at p.560. 29. Ibid atp.562. 30. [1985] S.T.C. 783. In this case, the taxpayer company in 1980 was engaged in negotiation to sell land to U. Ltd. On 25 March, 1980, the taxpayer company contracted t o sell the land t o 5 companies within the group (the first transaction). I t was accepted that this was done solely t o take advantage o f the £50,000 exemption from development land tax per company. Negotiations broke down because of the inability of U. Ltd. t o pay. By February, 1981, U. Lld.'s circumstances had changed and a sale was completed in November, 1981, at a higher price and on different terms (the second transaction). The Revenue argued the sale should be treated as a direct disposal to U. Ltd. by the taxpayer company and assessed the taxpayer accordingly. 31. Ibid atp.798. 32. [1986] S.T.C. 22. The facts were that shareholders entered into negotiations for the sale of the share capital of P.G.I. to C. Ltd. In order to postpone Capital Gains Tax on a direct sale, an Isle of Man company was set up to exchange its shares for those of P.G.I., and to sell the P.G.I. shares on to C Ltd. The proceeds of sale could then be lent interest free with no tax laibility to the shareholders i n P.G.I. Negotiations ended i n February, 1974. The exchange went ahead i n March, 1974. The shares were eventually sold in 1976 to a third party. 33. [1985] S.T.C.584.

the same en d result. The position o f taxpayers defending themselves against the application of the new approach b y th e Revenue i s also strengthened. Secondly, where a tax avoidance arrangement is entered into in the expectation that it will be followed through without the certainty that it will, and the arrangement is not followed through until later, perhaps with a different party, because negotiations break down or a sale does not go through, then the new approach does not apply. Whether these decisions will be upheld on appeal remains to be seen. • 2. See i n particular "Tax Avoidance i n Ireland — A Approach" by David Kennedy and Paul McElhinney. (1985) 7 D.U.L.J. (N.S.) and the materials cited in that article. 3. Notes o f a meeting between the C.C.A.B. and the Board of Inland Revenue. [1982] S.T.I. 167. 4. A 'Swiss roundabout' is an arrangement to allow a U.K. resident company to borrow funds from a lender resident in a country with which the U.K. does not have a double taxation treaty in such a way as to avoid U.K. withholding tax on the interest while obtaining a U.K. corporation tax deduction for the interest. 5. CCAB Memorandum TR 487, [1982] S.T. 1. 556. 6. Tolley's Practical Tax, 21 March, 1984. The statement was made a t a n Institute o f Fiscal Studies Conference held to discuss Furniss -v- Dawson. 7. Official Report, April 10, 1984, Cols. 254-5. 8. Standing Committee A, June 7, 1984. 9. Parliamentary written answer dated 8 March, 1984. 10. A clause proposed by a Conservative back bencher of this kind was not selected for debate. 11. CCAB Guidance Note TR 588, [1985] S.T. 1. 568. 12. The ones discussed were as follows: Those marked * are of little Irish significance because of differences in legislation or Revenue practice. Capital losses; Hive Downs; payments of dividends before sale of a company, leasing*, Charities*, bed and breakfast transac- tions*, transfer between husband and wife, year end stock adjustments, and the creation of a U.K. holding company. [1982] S.T.C.344. [1982] S.T.C. 103. See also Tesco Stores -v- Irving, [1982] S.T.C. 881. Berry -v- Warnett [1982] S.T.C. 396. I.R.C. -v- The Trustees of Sir John Aird's Settlement, [1982] S.T.C. 245, [1983] S.T.C. 700. I.R.C. -v- Brandenburg, [1982] S.T.C. 555. Chilcott -v- I.R.C., [1982] S.T.C. 1. 13. 14. 15. 16. 17. New Footnotes 1. [1984] S.T.C. 153. In this case, to render a bónus payment of £5,000 tax free, the employer gave the employee a loan, the yearly interest on which was £5,000. The taxpayer employee then immediately paid one year's interest in advance. Four days later, his liability to repay the principal was transferred t o a connected third party o n payment t o the third party o f a sum equal t o the principal (£50,000) less the interest paid in advance (£5,000). The taxpayer claimed that the payment of £5,000 was "annual interest" and would be offset against other income. 23. [1984] S.T.C. 520. This case contains a useful discussion of the method of applying the new approach. 26. [1985] S.T.C. 531. In this case, the taxpayers wished to sell or merge the shares in Q. Ltd. in 1973. In 1976, they commenced negotiations with C . Ltd. fo r a merger and explored th e possibilities of establishing a company in the Isle of Man to act as a holding company for the merger. In June 1976, M. Ltd. was incorporated and in July it had acquired the issued share capital 24. [1985] S.T.C. 260. 25. [1985] S.T.C. 664. 18. 19. 20. 21. 22. Page -v- Lowther, [1983] S.T.C. 61; [1983] S.T.C. 799. Minden Trust (dayman) Ltd. -v- I.R.C., [1984] S.T.C. 434. [1984] S.T.C. 637. Ibid at p.642. [1985]S.T.C.124. [1983] S.T.C.178.

34. Ibid at p.646-7.

•

(Part 2 of this article will appear in the next issue.)

Is your business on the move?

Your telephone system is vital to the efficiency and success of your business. Trillium Telephone Systems, from the Mitel family of companies, can offer you Intercom, Speed Dial, Call Restriction, Music and much more in a stylish, state-of-the-art i telephone system for thirty employees or less. Cost effective? Yes! Compare it to your current system and smile, or have it make your day. For more Information, call us today. TRILLIUM phon e system s MITEk7/4)ELTA y COMMUNICATIONS LTD C.K. Business Electronics Ltd., 14, Merchants Road, GALWAY. Telephone: 091-63795/64172.

216