The Gazette 1984

GAZETTE

APRIL. 1984

company A Ltd., the acquisition cost of which to him for capital gains tax purposes was £y. Being advised that on selling his shareholding in A Ltd. to a purchasr C for £x he would incur capital gains tax on a chargeable gain of £(x- y) A sold his shareholding in A Ltd. to B Ltd. for £x, in exchange for the issue to him, credited as fully paid up, of x ordinary shares of £1 in the capital of B Ltd. A Ltd., thus, became a wholly owned subsidiary of B Ltd. B Ltd. then sold its shareholding in A Ltd. to C for £x. The sale by A to C of A's shareholding in A Ltd. thus took place in two steps instead of one, but had the following important consequences under the then capital gains tax legislation. The first step, the exchange by A of his shareholding in A Ltd. for shares in B Ltd., would have been treated under the then capital gains tax. legislation (construed in accordance with the Westminster approach) as a "re- organisation" of the share capital of A Ltd. and B Ltd. within the meaning of the U.K. equivalent to paras 2 and 4 in Schedule 2 of the Capital Gains Tax Act 1975, involving no disposal by A of his shareholding in A Ltd. B Ltd., on the other hand, would have been treated under the U.K. equivalent to s.9(2) (a) Capital Gains Tax Act 1975 as having acquired its shareholding in B Ltd. at the "market value" thereof. Since B Ltd. would shortly afterwards have disposed of its shareholding in A Ltd. to an arm's length third party C for £x, £x would have been an accurate indication of the "market value" of A's share- holding in A Ltd. at the date of its acquisition by B Ltd. In the result, B Ltd. would have been treated as having acquired its shareholding in A Ltd. for £x and as having disposed of it to C at the same price, thus realising a chargeable gain of £ nil. A would therefore be treated under the capital gains tax legislation, construed according to the Westminster approach, as having made no disposal, B Ltd. being treated as having made a disposal the chargeable gain accruing in respect of which would have been £ nil. A chargeable gain would, of course, have accrued to A on disposing of his share- holding in B Ltd. but this was not in issue. The House of Lords unanimously decided that the intermediate disposal of A to B Ltd. was to be ignored for capital gains tax purposes, capital gains tax being levied on the assumption that A had disposed of his share- holding in A Ltd. directly to C, without the intervention of B Ltd. The practical consequence of this approach was to fix A with liability for the capital gains tax payable in respect of a sale by B Ltd. to C, the proceeds of sale of which had factually accrued to B Ltd. Whatever may be the position in the U.K. the constitutionality in Ireland of levying a tax on A in respect of a gain accruing to B is open to question. Apart altogether from the constitutional issue the decision of Furniss -v- Dawson has little to recommend it from any other standpoint. The Westminster approach, reaffirmed in that decision and adopted in Ireland in O'Sullivan -v- P. Ltd. 3 ITC 355 is at least just in that it requires the Revenue to levy tax in accordance with the legal relations which the taxpayer has created on the person to whom the profit or gain chargeable actually accrues. The Furniss -v- Dawson approach on the other hand does neither. To borrow an example put forward by the late A. P. Herbert, while the State can undoubtedly levy an annual tax on the taxpayer's motor car it is equally open to the taxpayer to say 'I do not wish to pay this tax. Therefore, I will sell my car' and to do so. The Westminster approach,

purposes, which would not have been the case had he (the Duke) paid his gardener wages in the ordinary way. The Revenue, not unnaturally, contended that the annual payments were in substance wages and sought to disallow them as deductions when assessing the Duke to surtax. This approach drew a stinging rebuke from the House of Lords of the day. "Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. This so- called doctrine of 'the substance'-seems to me to be nothing more than an attempt to make a man pay not- withstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable": 520 per Lord Tomlin. In O'Sullivan -v- P. Ltd. 3 ITC 355 the doctrine of'the substance' was considered and decisively rejected by Kenny J. who based his decision squarely on the principle laid down (or rather reaffirmed) by Lord Tomlin in CIR - -v- Westminster 19 TC 490. "Prior to the decision in IRC -v- Duke of Westminster [1936] AC 1 there was some judicial support for the view that in determining liability to tax, the substance of the transaction was to be looked at: this was assumed to mean the financial results and not the legal effects of a transaction determining liability for tax purposes. This view was rejected in the Duke of Westminster's case": 360 per Kenny J. So far as the High Court (and also the Appeal Commissioners and Circuit Court) is concerned, at any rate, the principle reaffirmed in CIR -v- Westminster 19 TC 490 and adopted by Kenny J. in O'Sullivan -v- P. Ltd. 3 ITC 355 represents the law of Ireland at the time of writing. 3. Will the Supreme Court follow Furniss -v- Dawson? While what may, for the sake of brevity, be referred to as the Westminster approach represents the law of Ireland at the time of writing so far as the High Court and inferior tribunals are concerned the matter is res integra so far as the Supreme Court is concerned. The Supreme Court could, if it saw fit to do so, overrule existing authority and adopt the Furniss -v- Dawson approach in construing tax legislation. Whether it would be acting in accordance with the Constitution in so doing is another matter. Lord Scarman admitted frankly in Furniss -v- Dawson that the approach therein formulated was "judge-made law". While there is no way under the British Constitu- tion (short of express statutory prohibition) of preventing the highest tribunal in the land from crossing "the line where interpretation ceases and legislation begins" referred to by Lord Donovan in Mangin -v- CIR [1971] 1 All ER 179, 185 and thereby assuming legislative powers which it does not possess, the same is not necessarily so in Ireland, where the supreme authority is a written consti- tution to which the legislature and the judiciary alike are subject. Whether the Constitution would permit the judiciary to follow the example of their British colleagues and to arrogate to themselves extra statutory powers of levying tax otherwise than in accordance with the legal relations created by the taxpayer is debateable. To what extend the Furniss -v- Dawson approach is open to question may be gauged by considering the facts of the decision itself. The taxpayer A was the beneficial owner of the entire issued share capital of a private limited 110