Brian George Foulser & Anor v MacDougall (Officer of HM Revenue & Customs) [2007] EWCA Civ 8

“165(4) Where a claim for relief is made under this section in respect of a disposal- (a) the amount of any chargeable gain which, apart from this section, would accrue to the transferor on the disposal, and (b) the amount of the consideration for which, apart from this section, the transferee would be regarded for the purposes of capital gains tax as having acquired the asset or, as the case may be, the shares or securities, shall each be reduced by an amount equal to the held-over gain on the disposal.”

“167(2) A company is within this subsection if it is controlled by a person who, or by persons each of whom – (a) is neither resident nor ordinarily resident in the United Kingdom, and (b) is connected with the person making the disposal.” (a) is neither resident nor ordinarily resident in the United Kingdom, and (b) is connected with the person making the disposal.”

“286(1) Any question whether a person is connected with another shall for the purposes of this Act be determined in accordance with the following subsections of this section (any provision that one person is connected with another being taken to mean that they are connected with one another).”

“13 . . . The general policy conditions provide as follows: ‘3 Fund The policy will be linked to a fund ("the Fund") established when the Policy comes into force. No other Policies will be linked to that Fund. Each fund is a separate and identifiable fund forming part of the Life Assurance Fund of the Company [Irish Life]. Each fund is divided into units of equal value. The assets of the Fund which are owned directly and for the avoidance of doubt include assets owned by any investment vehicle or other legal entity within the Fund will be determined by the Proposer [defined as the person shown in the Schedule as Proposer or his executors, administrators or assigns, who are legally entitled to receive any benefits payable under the Policy] and his Investment Adviser [defined as the person appointed on the Investment Adviser Appointment Form], if any, subject to Condition 8 below and any other terms and conditions laid down by the Company from time to time. The amount of the benefits payable under the Policy will be calculated by reference to the aggregate value of the assets which are legally and beneficially owned by the Company and which are specified from time to time for the purposes of the Policy (‘the Fund’). For the avoidance of doubt the Proposer will have no right or interest of any kind in or over the assets in the Fund and the Company will have full control over any company shares which are comprised in the Fund, however, this shall not affect the policyholders [sic] right to surrender or statutory cancellation rights in respect of the Policy. … 6. Valuations The assets of the Fund will be valued on days (each called a 'Valuation Day') to be determined at the Company's discretion but no less than four times each year…. For the purpose of valuing private company shares, the value of such shares shall be calculated by reference to the latest available share valuation provided by the auditors of the private company. Such valuations shall be provided no less than annually. 7 Encashment 7.1 Full encashment The Policy may be fully encashed at any time. The 'Encashment Value' payable will be the Policy Value on the Valuation Day following the receipt by the Company of its required written notification less the Encashment Charge. The Policy Value for this purpose will reflect the cash amounts realised on selling all the investments of the Fund and after taking into account all the charges relating to the sale of those investments. … The Company is not obliged to find a buyer for the investments of the Fund and for the purposes of this section, if difficulties arise in selling the investments of the Fund, the Company may choose instead to transfer the investments to the Proposer after deducting the Encashment Charge, if any, together with any external expenses, taxes, duties and other charges incurred by the Company in connection with such a transfer and in so doing cancel the remaining number of Units attached to the Fund….. 7.2 Partial Encashment The Policy may at any time or times be partially encashed provided that the Policy Value remaining after the Partial Encashment is not less than Stg.£7,000/US$10,000 (or currency equivalent) However, the Partial Encashment will only be permitted if there is sufficient cash held within the Fund. If there is insufficient cash the Proposer or his Investment Adviser, if any, will be obliged to inform the Company which investments of the Fund are to be sold to meet the Partial Encashment…. 8 Asset Disposal For the avoidance of doubt, where private company shares or other illiquid assets are held within the Fund the Company reserves the right to dispose of such assets if its considers them to be valueless or contrary to the Company's normal investment philosophy or in relation to private company shares if it deems that the activities of the company are illegal, unethical or of a nature that may be of detriment to the reputation of Irish Life International. The Company's decision in such matters is final…. 14 Notice of Assignment All notices of assignment of the Policy must be given in writing at the Registered Office of the Company. The Proposer may only assign the Policy with the consent of the Company.’ 14. There are separate conditions relating to private company shares which contain the following: ‘1. A résumé of the private company must accompany the application…. 3. An inception valuation of the shares of each private company requested for inclusion must be supplied by the appointed and recognised auditors of the company (cost to be borne by client). This will normally represent the net asset value of the company as stated in the latest set of audited accounts. 4. Irish Life International will not provide directors or other officers to private companies. The shares in the private company are held solely as an investment of the fund to which the policy is to be linked. It is not the intention of Irish Life International to undertake any day to day management. The applicant agrees and understands that Irish Life International does not take any responsibility for the value of the private company shares….’” ‘3 Fund The policy will be linked to a fund ("the Fund") established when the Policy comes into force. No other Policies will be linked to that Fund. Each fund is a separate and identifiable fund forming part of the Life Assurance Fund of the Company [Irish Life]. Each fund is divided into units of equal value. The assets of the Fund which are owned directly and for the avoidance of doubt include assets owned by any investment vehicle or other legal entity within the Fund will be determined by the Proposer [defined as the person shown in the Schedule as Proposer or his executors, administrators or assigns, who are legally entitled to receive any benefits payable under the Policy] and his Investment Adviser [defined as the person appointed on the Investment Adviser Appointment Form], if any, subject to Condition 8 below and any other terms and conditions laid down by the Company from time to time. The amount of the benefits payable under the Policy will be calculated by reference to the aggregate value of the assets which are legally and beneficially owned by the Company and which are specified from time to time for the purposes of the Policy (‘the Fund’). For the avoidance of doubt the Proposer will have no right or interest of any kind in or over the assets in the Fund and the Company will have full control over any company shares which are comprised in the Fund, however, this shall not affect the policyholders [sic] right to surrender or statutory cancellation rights in respect of the Policy. … ‘1. A résumé of the private company must accompany the application…. 3. An inception valuation of the shares of each private company requested for inclusion must be supplied by the appointed and recognised auditors of the company (cost to be borne by client). This will normally represent the net asset value of the company as stated in the latest set of audited accounts. 4. Irish Life International will not provide directors or other officers to private companies. The shares in the private company are held solely as an investment of the fund to which the policy is to be linked. It is not the intention of Irish Life International to undertake any day to day management. The applicant agrees and understands that Irish Life International does not take any responsibility for the value of the private company shares….’”

“The directors of Morkend and Cannock wrote to Irish Life [on 24 November 1997] saying ‘Please accept this letter as our instruction to purchase [Lazerman Limited or Motion Limited], a company registered in England… on behalf of and owned by the bond.’ Note: Although the special commissioner referred, at paragraph 18 of his decision, to “the direction from the Underlying Company” as the immediate cause of the acquisition by Irish Life of Lazerman and Motion, it is clear that he intended to refer to the direction from the directors of the Bondholder (Morkend or Cannock). Irish Life wrote to [MTM] agreeing to acquire Lazerman and Motion for £200 each.”

“15. In summary, Irish Life were the passive legal and beneficial owners of the assets held within the Bonds to which the Bondholder had a contractual right; they acted on instructions of the Bondholder or investment adviser with regard to investment; did not take part in day to day management of BG Foods; and accepted valuations by the auditors.”

“11 The contentions of the parties show that they are applying a different definition of control at the start of s 167(2): [Counsel for the appellants] is applying the definition resulting from their being alleged to be connected persons, that Irish Life and the Foulsers are acting together to exercise control of the Underlying Company; and [counsel for the revenue] is applying the general definition of control in s 416(2), that as 100% shareholder Irish Life controls because it is able to exercise control over the Underlying Company's affairs. While it is strange at first sight that [counsel for the revenue] is contending in one part of s 167(2) that Irish Life controls the Underlying Company, and in another that Irish Life is acting together with the Foulsers in securing or exercising control of the Underlying Company, in my view there is no reason why he should not do so. There is no necessary connection between the applicable definition of control in the opening words of s 167 and the applicable definition of connection, which may involve acting together to secure or exercise control. One can approach the section by asking separately whether (a) Irish Life has control of the Underlying Company on any definition of control in s 416, to which the answer is obviously yes as it owned 100% of the shares; and (b) whether Irish Life is connected with the Appellant within any definition of connected persons in s 286, the applicable one being that they are acting together to secure or exercise control of the Underlying Company, which depends on the facts. . . . Accordingly I agree with [the revenue’s] interpretation and I need to examine the facts.”

“12 . . . [Counsel for the revenue] contends that, while agreeing that the matter is to be examined at the time of the disposal, one can determine whether parties are acting together to secure or exercise control only by looking at the whole circumstances, including what happened before and after the disposal, in so far as they help to determine the situation at the time of the disposal. Again I agree with [the revenue]. However, clearly events after the disposal which are independent of any arrangements set up at the time are irrelevant.”

“26 . . . Either on that basis [exercise of control], or on the basis that I have already found in paragraph 18 that they acted together to secure control of the Underlying Companies, the Appellants and Irish Life are therefore connected persons and s 167(2) prevents hold-over relief from applying on the gift of shares.”

“3 . . . I declined the application on the ground that following the preliminary hearing on 22 September 2003, at which the Appellants were represented, the Appellants were directed to prepare a Statement of Case by 30 January 2004 (about a year before the hearing) to which the Inspector was directed to reply by 27 February 2004 (being dates agreed by the representatives of the parties at the preliminary hearing). The purpose of a preliminary hearing is to obtain finality about the nature of each party's case so that the other party has full knowledge of the case to be answered. Obviously there may be situations where a case takes an unexpected turn and it may be necessary for arguments to be raised later. While I appreciate [counsel’s] difficulty having been brought in only recently, this application did not fall into that category.”

“Quite apart from that fundamental objection to the position now adopted by the Appellants, if they had wanted to ventilate this issue, they should have done so before the Special Commissioner, adducing evidence as to the true commercial position, actually raising the question whether Irish Life was exercising (or seeking to exercise) rights of establishment. Then the point could have been investigated and tested. . . .”

“The Court does not (and should not) rule on hypothetical questions concerning the rights of those who are not before it; in the absence of findings of fact and in the absence of a meaningful dispute on the issue.”

“[33] There is no appeal from the Special Commissioner’s findings of fact or law. The only question raised in the notice of appeal and in the arguments before me is the compatibility of TCGA 1992, section 167, with Article 43”

“[34] Mr and Mrs Foulser argue that the application of section 167 is unlawful because it restricts the right of establishment of Irish Life, an Irish company, contrary to Article 43. Section 167 is a general provision excluding the tax advantage whenever the transferee is foreign-controlled. This goes beyond any legitimate aim to prevent abuse or avoidance. The provision does not allow the national court to take account of the particular circumstances. It applies whatever the outcome on the notification of the taxpayer. The application of section 167 would in any case not pursue a legitimate aim. The case is indistinguishable from Case C-436/00 X, Y v Riksskatteverket [2002] ECR 1-10829, [2004] STC 1271. . . . [36] Such a general restriction on transfers to companies of one Member State by nationals of another Member State is a clear abuse of the right of freedom of establishment. Section 167 is a general provision excluding any case where the transferee is a company controlled by non-residents. . . . [37] The mere fact that Mr and Mrs Foulser gain a UK tax advantage by transferring the shares to an Irish company does not preclude the application of Article 43. It is not a wholly artificial situation - there is a real transaction consisting in the transfer of the shares to an Irish insurance company. It is true that the transaction offers certain UK tax advantages and entails a loss of Revenue to the UK but this is not enough to justify interference with the right of establishment of the Irish company. The fact that the shares are transferred to a company which is not subject to UK legislation but is subject to the legislation of another Member State does not of itself involve tax avoidance. The fact that the Irish company is subject to a favourable tax regime is irrelevant. It is established in Ireland and is entitled to trade with the UK taking advantage of the local cost structure, including the tax regime. [38] It is contrary to Article 43 for tax legislation to deny relief for a transfer to a company because it is foreign-owned. Although tax legislation may target purely artificial schemes, tax evasion or tax fraud cannot be inferred generally from the fact that the transferee company or its parent company is established in another Member State and cannot justify a fiscal measure which compromises the exercise of a fundamental freedom guaranteed by the Treaty. ”

“[78] The literature accompanying the Bonds makes it clear that Irish Life does not maintain a permanent place of business in the United Kingdom. It refers to another company in the group, City of Westminster Assurance Co Ltd, which is registered in England and to Irish Life Assurance plc, an Irish company with a branch in England, but there is no suggestion that these companies have any connection with the business involved in this case: some fund management activities are said to be carried out by Irish Life Assurance plc, but these Bonds involve no management by Irish Life. [79] Irish Life was simply participating in a contractual transaction for a fee. The fiscal disadvantage from disallowance of the relief is suffered only by Mr Foulser, and the only consequence for companies such as Irish Life is the loss of the fee. In Case C-294/97 Eurowings Luftverkehrs AG v Finanzamt Dortmund-Unna [1999] ECR I-7447 it was held that giving tax advantages to lessees of aircraft leased by lessors established in that Member State and not in respect of leases of aircraft from lessors established in other Member States was an unlawful restriction on the right of freedom to provide services under Article 49. But it has not been argued in this case that section 167 could be a restriction under Article 49 on Irish Life's right to provide the Bonds for a fee. [80] The only relevant consequence of section 167 is that companies in the position of Irish Life will no longer have the opportunity to earn a (modest) fee on schemes of this kind. Taxation provisions may have any number of incidental effects on the ability of financial institutions and professionals established in other Member States to charge fees, but that cannot of itself engage the right of freedom of establishment. In this case Irish Life's right to freedom of establishment is not engaged.”

“58 In summary it is submitted that the Special Commissioner erred in law in deciding that Irish Life was connected with Mr Foulser for Section 167 purposes, for the following reasons: (a) even if Section 286(7) applied to treat Irish Life and Mr Foulser in relation to Lazerman as connected, that is not a sufficient connection for Section 167 purposes; (b) in any event Irish Life and Mr Foulser cannot have been acting together to secure or exercise control of Lazerman, at the time of the gift or at all, because, (i) in relation to the acquisition of the Lazerman shares they cannot have been acting together to ‘secure’ control; and (ii) in relation to the Lazerman shares they cannot have been acting together to ‘exercise’ control; and (iii) in any event, they cannot have been ‘acting together to’ secure or exercise control of Lazerman when Irish Life owned all the shares and voting power.” (i) in relation to the acquisition of the Lazerman shares they cannot have been acting together to ‘secure’ control; and (ii) in relation to the Lazerman shares they cannot have been acting together to ‘exercise’ control; and (iii) in any event, they cannot have been ‘acting together to’ secure or exercise control of Lazerman when Irish Life owned all the shares and voting power.”

“The EC point had not originally been taken before the special commissioners but during the course of the hearing an attempt was made to bring it into the argument. The special commissioners refused to allow that to happen, however on appeal to the judge, on the basis that no findings of special commissioners remained in issue, the Revenue consented to the point being made and on appeal to the judge that was the new, essential and only point. . . .”

“If the Appellants had wanted to ventilate the [article 43] issue, they should have done so before the Special Commissioner, adducing evidence as to the true commercial position, actually raising the question whether Irish Life was exercising (or seeking to exercise) rights of establishment. Then the point could have been investigated and tested. . . .”

“[Counsel for the revenue] submitted before me that ‘to secure’ meant ‘to acquire’ or ‘to obtain’ and that it was sufficient for the purpose of the subsection to establish that the parties had originally acted together to obtain control: thereafter they were to be treated as ‘acting together’ and connected persons so long as they retained control. The original concerted action in obtaining control coloured that control and brought it within the subsection so long as that control was retained. I reject this construction for two reasons. First, the subsection requires the person to be acting together at the relevant times and not merely to have acted together in the past. Secondly, I think that the subsection is concerned with the position after, and not before, control has been obtained, and the word ‘secure’, therefore, cannot have the meaning for which [counsel] contends. The verb ‘to secure’ has a number of possible meanings, the appropriate choice depending on the context. It can mean ‘to acquire’, or ‘to obtain, or ‘to bring about’ (e.g. ss 791(a), 841(3), 749(5)(c) of the Act). But it can likewise mean ‘to safeguard’, ‘to protect’, or ‘to make safe against loss’. It may be noted that s 416 uses the word ‘acquire’, and yet s 839 (which is to be construed by reference to s 416) deliberately uses a different word: ‘secure’. It would be odd if the Parliamentary draftsman used the different words but did not thereby intend to convey a different meaning. In the context of s 839(7), I think that ‘safeguard’ is the proper and natural meaning of the word ‘secure’. The subsection is concerned with the situation where there is an agreement or arrangement between persons having control (including for this purpose persons having an entitlement in the future to acquire control: see s 416(4)) designed to ensure that such control is retained. I am not deterred from reaching this conclusion by reason of the warning from counsel for both sides, who are experienced in this area of the law and have patiently and helpfully initiated me in its mysteries, that this construction has never previously been considered, let alone advanced. There is no authority to the contrary and (as it seems to me) there is no other tenable construction . . .”

“The judge construed ‘secure’ in the sense of ‘safeguard’. EVC contends that this is wrong and that it should be construed in the sense of ‘obtain’. I do not see why it should necessarily be confined to either sense to the exclusion of the other. The point is of some importance for the definition of connected persons applies in 40 different contexts in the 1988 Act alone. In those circumstances, I prefer to leave it on the basis that I express no view on the construction of the word ‘secure’ in section 839(7) or on the correctness or otherwise of the decision of Lightman J on this point.”

“Any 2 or more persons acting together to secure or exercise control of a company shall be treated in relation to that company as connected with one another”

“Anyquestion whether a person is connected with another shall for the purposes of this Act be determined in accordance with the following subsections”

“s 839(7) does not operate to make ‘. . . persons acting together to secure or exercise control of a company’ connected with one another simpliciter, but merely ‘. . . connected with one another in relation to that company’; there is nowhere to be found in the relevant legislation any independent or free-standing concept of persons being connected ‘in relation to a company’; and the only purpose and scope of the application of s 839(7) appears to be to extend the ambit of s 839(5) and (6).”

“In my view the insuperable obstacle to this submission is the width of the words in Article 10(3)(d), namely ‘for any purpose’. These words, in my view, clearly embrace the connection under s 839(7). Though this connection is ‘in relation to that company’ only and the subsection appears to be directed only to extending the scope of the connection under subss (5) and (6), nonetheless subs (7) creates a genuine connection, albeit for a limited purpose, namely the application of subss (5) and (6). Accordingly the shareholders in EVC Holdings are treated as connected under the laws of the United Kingdom relating to the taxes covered by the Convention, albeit for this limited purpose. . . .”

“For the purposes of, and subject to, the provisions of the Tax Acts which apply this section”

“736(4) . . . (a) . . . (b) . . . and section 839 shall have effect in relation to paragraph (b) above as if, in subsection (7) of that section, after the words ‘or exercise control of’ in each place where they occur there were inserted the words ‘or to acquire a holding in’.”

“839(7) Any two or more persons acting together to secure or exercise control of or to acquire a holding in a company shall be treated in relation to that company as connected with one another . . .”

“5. . . . The special Commissioner was wrong to prevent the European Law point being argued. This is because Article 43 is part of the fundamentals of European law incorporated into United Kingdom law.”

“As the point is one of pure law and not dependent on the evidence there is no reason for the Court to exercise its inherent discretion to exclude it especially as it was raised at the hearing (see eg Pittalis v Grant [1989] 1 QB 605 at 611E-F). To decide otherwise might raise points under Article 6 of the European Convention on Human Rights.”

“In this case Irish Life’s right to freedom of establishment is not engaged”

“60 Mr Foulser submits that Section 167 TCGA is an unlawful restriction on the freedom of establishment of Irish Life, contrary to Article 43. That is, first, Section 167 makes a foreign element the basis for a difference in UK tax treatment, that element being the fact that a company established in another Member State (here, Irish Life) has a controlling holding in the transferee company. Secondly, the exclusion of tax relief constitutes a restriction (admittedly a minor one) on the freedom of establishment of Irish Life, that is its ability to acquire a (direct) controlling holding in Lazerman and an (indirect) controlling holding in BG Foods. Thirdly, Section 167, insofar as it excludes categorically and generally the advantage of hold-over relief whenever the transferee is foreign controlled, does not allow the national courts to make a case-by-case analysis taking account of the particular facts of each case. Fourthly, the criterion on the basis of which hold-over relief is excluded, namely the fact that the transferee is controlled by a company established in another Member State relates to the exercise of the freedom of establishment guaranteed by the Treaty and cannot, therefore, in itself, constitute an abuse of the right of establishment. Fifthly, the loss of tax which would be likely to result from the granting of hold-over relief cannot be relied upon in order to justify unequal treatment that is, in principle, incompatible with Article 43.”

“Is the answer to this question affected by the facts that – (i) immediately before, and for the purposes of the disposal by A to B, C acquired the shares in B, an off-the-shelf company with no assets, and C entered into an insurance contract with A under which C promised to pay A, on surrender, a sum equal to the value of the shares in B and A promised to pay C an annual fee calculated by reference to the same value; (ii) C does not intend to undertake the day-to-day management of B or D and is content for A to undertake such management; (iii) C is equally willing to enter into the above transactions whether or not section 167 applies?”