SPC00587

INCOME TAX – Referral under section 28ZA TMA 1970 – Roll-over relief – definition of “personal company” in para. 1(2) Sch. 6 TCGA 1992 for the purposes of s.157 TCGA 1992 – whether “voting rights … are exercisable … by [an] individual” includes a situation where they are as a matter of fact so exercisable, although the rights in question are held by another person – held it does not – determination accordingly 

THE SPECIAL COMMISSIONERS

                                          R S BOPARAN
	                                                                                                 	
									Taxpayer

                                                             - and -

	THE COMMISSIONERS OF 
                              HER MAJESTY’S REVENUE AND CUSTOMS	
		                                        Respondents

			Special Commissioner :	JOHN WALTERS QC 

Sitting in public in London on 2 November 2006

Julian Ghosh QC and Sadiya Choudry, instructed by Grant Thornton, for the Taxpayer
David Ewart QC, instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1. This decision results from a referral to the Special Commissioners of a question arising in connection with the subject-matter of an enquiry into a return made by Mr. Boparan (“the Taxpayer”).  
2. The referral is made under section 28ZA Taxes Management Act 1970 (“TMA”).
3. The question for determination is whether 2 Sisters Premier Division Limited (“the Company”) was the Taxpayer’s personal company for the tax years 2000/01, 2001/02 and 2002/03 for the purposes of a roll-over relief claim under section 152 of the Taxation of Chargeable Gains Act 1992 (“TCGA”).
The facts – introductory 
4. I find the following facts (most of which were agreed between the parties) from the Statement of Agreed Facts and Issues and the documents before me, as well as the oral evidence and witness statements of the Taxpayer and his wife, Mrs. B.K. Boparan.
5. The issued share capital of the Company is 60,000 ordinary shares of 1 p each.  At all material times 99.87 per cent. of these shares (59,932) were held beneficially by another company, Boparan Holdings Ltd. (“the Holding Company”). Of the remaining 68 shares, 53 were held by the Taxpayer and his wife jointly and 15 were held by third parties.
6. The issued share capital of the Holding Company was at all material times 5,008 shares and was held by two shareholders, the Taxpayer and his wife.  The Taxpayer held a little more than 50% of the shares in the Holding Company (2,505): his wife held a little less than 50% (2,503).  The Taxpayer and his wife were the sole directors of the Holding Company.
7. The Taxpayer and his wife jointly owned farms on which chickens were raised, and feed mills, which supplied chicken feed.  The farms and feed mills were let by the Taxpayer and his wife to the Company on normal commercial terms and the Company conducted its trade from the farms and feed mills so let to it.
8. Between 31 March 2001 and 24 October 2002 the Taxpayer and his wife sold certain farms and feed mills and acquired replacement properties between 3 April 2001 and 2 December 2002, which they also let to the Company on normal commercial terms.
9. The Taxpayer claimed roll-over relief for capital gains tax purposes in respect of these transactions.
The roll-over relief claim 
10. The statutory background against which the dispute is set is contained in section 152(1), section 157, and paragraph 1(2), Schedule 6, TCGA in the form in which those provisions had effect at the tax years relevant to the enquiry, which (so far as relevant) was as follows:
“152 Roll-over relief
(1) If the consideration which a person carrying on a trade obtains for the disposal of, or of his interest in, assets (“the old assets”) used, and used only, for the purposes of the trade throughout the period of ownership is applied by him in acquiring other assets, or an interest in other assets (“the new assets”) which on the acquisition are taken into use, and used only, for the purposes of the trade … then the person carrying on the trade shall, on making a claim as respects the consideration which has been so applied, be treated for the purposes of this Act–
(a) as if the consideration for the disposal of, or of the interest in, the old assets were (if otherwise of a greater amount or value) of such amount as would secure that on the disposal neither a gain nor a loss accrues to him, and
(b) as if the amount or value of the consideration for the acquisition of, or of the interest in, the new assets were reduced by the excess of the amount or value of the actual consideration for the disposal of, or of the interest in, the old assets over the amount of the consideration which he is treated as receiving under paragraph (a) above, …
157 Trade carried on by personal company: business assets dealt with by individual
In relation to a case where–
(a) the person disposing of, or of his interest in, the old assets and acquiring the new assets, or an interest in them, is an individual, and
(b) the trade or trades in question are carried on not by that individual but by a company which, both at the time of the disposal and at the time of the acquisition referred to in paragraph (a) above, is his personal company, within the meaning of Schedule 6,
any reference in section … 152 … to the person carrying on the trade (or the 2 or more trades) includes a reference to that individual.
SCHEDULE 6
1 (2)
…
“personal company”, in relation to an individual, means any company the voting rights in which are exercisable, as to not less than 5 per cent. by that individual:”

11. The Taxpayer’s claim for roll-over relief in respect of the disposals of the farms and feed mills and the acquisition of the replacement properties is thus competent under these provisions only if the Company is the Taxpayer’s “personal company” within the definition in paragraph 1(2), Schedule 6, TCGA.  If the Company is the Taxpayer’s “personal company” within that definition, then, by virtue of section 157, the trade, which is actually carried on by the Company, is treated for the purposes of section 152 TCGA as if it were carried on by the Taxpayer.
The facts – the Taxpayer’s connection with the Company 
12. As stated above, the issued share capital of the Company was 60,000 ordinary shares of which 59,932 were held by the Holding Company, and 53 were held by the Taxpayer and his wife jointly. The issued share capital of the Holding Company was 5,008 shares and was held by the Taxpayer and his wife in the ratio 2,505:2,503. The Taxpayer and his wife were the sole directors of the Holding Company.
13. Both the Company and the Holding Company have adopted Articles of Association incorporating Table A in the Schedule to the Companies (Tables A-F) Regulations 1985 as modified by their respective Articles of Association.  Neither Counsel suggested that any special feature of the Articles of either company was significant or relevant for the purposes of this determination and I therefore approach the case on the basis that the shares in the Company and the Holding Company respectively rank pari passu with regard to the exercise of voting rights.
14. The evidence of the Taxpayer and his wife, which was not challenged by Mr. Ewart QC for H.M. Commissioners of Revenue and Customs (“the Revenue”) was that the Taxpayer runs the Holding Company because he possesses the necessary business expertise with little input from his wife.  There is a non-family director of the Holding Company, a Mr. Noble until he resigned on 20 September 2002 and a Mr. Silk from his appointment on 16 December 2003.  The Holding Company does not hold general meetings.  The Taxpayer’s wife has not attended directors’ meetings during recent years.  It is at directors’ meetings that the voting of dividends and the sale and purchase of assets by the Holding Company are decided upon.  The Taxpayer and his wife sometimes discuss the business informally at home.  The Taxpayer shows his wife the accounts (presumably of the Holding Company) which he signs before she does.  She does not ask about the details of the accounts or query the Taxpayer’s decisions in relation to either of the two companies, because she  trusts the Taxpayer’s business expertise.  At all times which were material to this decision, the Holding Company exercised all its votes in respect of its shares in the Company in the way the Taxpayer wanted them to be exercised.  The Taxpayer’s wife agreed to exercise her votes in the Holding Company in the way the Taxpayer asked her to, because any decision she made concerning them was dependent on the Taxpayer’s business expertise.  The Taxpayer asserted that he thus controlled the affairs of the Company, and all the votes in the Company, which were held by the Holding Company, were exercisable by him. 
The Submissions
15. Mr. Ghosh QC’s starting point on the construction of the crucial word “exercisable” in paragraph 1(2) of Schedule 6, TCGA is that it has its dictionary meaning: “able to be exercised, employed, enforced”, or “put to practical effect”.  He says that the question, whether or not the voting rights in the Company are exercisable by the Taxpayer, is a question of fact.  He submits (in his Skeleton Argument) that if the Taxpayer is “able” to secure that the votes in the Company are exercised by him, through his voting rights in the Holding Company, then the votes in the Company are indeed exercisable by the Taxpayer.  
16. He cited Vinelott J’s judgment in Hepworth v William Smith Group [1981] STC 354 for the proposition that the question, whether voting rights exercisable at a general meeting are or are not exercisable by an individual claiming relief, is a factual question (see: ibid. at 359c).  In particular, and in support of his general proposition that the question is to be “looked at in the real world”, the mechanism by which an individual in fact exercises or is able to exercise voting rights is irrelevant.  The question in this referral is one of looking at the voting rights in the Company and seeing if, as a matter of fact, they are exercisable by the Taxpayer.  And he says that, on the evidence, the votes in the Company attaching to the shares in the Company which are held by the Holding Company are in fact exercised – and exercisable – by the Taxpayer.
17. Mr. Ghosh submits that in deciding this question of fact it is irrelevant, if an individual has it within his control to exercise voting rights, whether this situation – the individual’s ability to exercise the rights – is a one stage or a two stage process, that is, as I understand the submission, whether he is able to exercise the voting rights directly or indirectly.  He cites Weston v Garnett [2005] STC 1134 and Re Penrose [1933] Ch. 793 in support.  His case is that the Taxpayer had, by virtue of a combination of the voting rights attaching to his own shares in the Holding Company and de facto control over the voting rights attaching to his wife’s shares in the Holding Company, the ability to secure that the Holding Company exercised the voting rights attaching to its shares in the Company in accordance with his, the Taxpayer’s, wishes. This resulted in 99.87% of the voting rights in the Company being “exercisable” by the Taxpayer.
18. Mr. Ghosh had three further arguments, all alternative, leading to the same result.  
19. First, he submitted that the shares in the Holding Company held by the Taxpayer’s wife were held by her on a bare trust for the Taxpayer. 
20. Secondly, he submitted that the Taxpayer’s wife was the Taxpayer’s nominee in general law – that is, a person authorised to hold shares (in the Holding Company) on his behalf.  
21. Thirdly, he submitted that, as a matter of fact, the Taxpayer was appointed and authorised by the Holding Company to act as that company’s representative at any meeting of the Company, within section 375(1)(a) Companies Act 1985. 
22. Section 375, Companies Act 1985, so far as relevant to this submission, provides as follows:
“(1) A corporation, whether or not a company within the meaning of        this Act, may–
if it is a member of another corporation, being such a company, by resolution of its directors or other governing body authorise such person as it thinks fit to act as its representative at any meeting of the company or at any meeting of any class of members of the company;
…
(2) A person so authorised is entitled to exercise the same powers on behalf of the corporation which he represents as that corporation would exercise if it were an individual shareholder … of the other company.”
23.  Mr. Ghosh submits, in this connection, that the resolution referred to in section 375(1)(a) need not be in writing.  He submits that the directors of the Holding Company (namely the Taxpayer and his wife) can act informally, provided they do so unanimously and that this is not precluded by the Holding Company’s Articles of Association. The Holding Company’s Articles do not, he submits, preclude this and the evidence shows that in fact the Taxpayer and his wife agreed that the Taxpayer would act as the Holding Company’s duly authorised representative in respect of its votes in the Company.  He adds that the Articles of the Company do not prohibit a duly authorised representative of a corporation (the Holding Company) acting on that corporation’s behalf at the Company’s general meetings. On this basis, also, the voting rights attaching to the Holding Company’s shares in the Company were exercisable by the Taxpayer.  
24. Mr. Ghosh makes a general, overarching, submission that his approach is wholly consistent with the language of the relevant TCGA legislation and its policy.  He makes the point that there is no intelligible reason to confer relief in respect of shares in a company which is directly held as to 5% but to deny relief where the company is not directly held as to 5% but is indirectly held as to a much larger percentage.  He submits that because, in such a case, a taxpayer must demonstrate that, as a matter of fact, the voting rights attaching to shares held by another shareholder were in fact exercisable by him, there is no scope for manipulation or avoidance.  
25. Mr. Ghosh drew my attention to other provisions in tax legislation which in terms concentrate on the possession of shares or rights, as opposed to the exercise of voting rights.  They were section 416(2) Income and Corporation Taxes Act 1988 (“ICTA”) and section 29(2) TCGA.
26. Section 416(2) ICTA gives the meaning of control of a company for, primarily, close company purposes.  It provides as follows:
“(2) For the purposes of this Part, a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, direct or indirect control over the company’s affairs, and in particular, but without prejudice to the generality of the preceding words, of he possesses or is entitled to acquire–
(a) the greater part of the share capital or issued share capital of the company or of the voting power in the company; or
(b) such part of the issued share capital of the company as would, if the whole of the income of the company were in fact distributed among the participators (without regard to any rights which he or any other person has as a loan creditor), entitle him to receive the greater part of the amount so distributed; or
(c) such rights as would, in the event of the winding –up of the company or in any other circumstances, entitle him to received the greater part of the assets of the company which would then be available for distribution among the participators.”
27. Section 29(2) TCGA deals with the description of the taxable event where there is value-shifting from shares in or rights over a company owned by one person to shares in or rights over the company owned by others.  It provides as follows:
“(2) If a person having control of a company exercises his control so that value passes out of shares in the company owned by him or a person with whom he is connected, or out of rights over the company exercisable by him or by a person with whom he is connected, and passes into other shares in or rights over the company, that shall be a disposal of the shares or rights out of which the value passes by the person by whom they were owned or exercisable.”
28. Mr. Ghosh submits that both of these provisions demonstrate clearly a dichotomy in the draftsman’s mind between rights which are exercisable and shares which are owned.  He submits that the fallacy in the Revenue’s argument is that it confuses the ownership of rights (voting rights) with the ability to exercise them.  He submits that of course rights owned by A can be exercised, and exercisable, by B, and, to establish that such is the position, it is necessary to lead evidence that that is what has actually happened or is in reality the position.
29. He submits that the word “exercisable” in paragraph 1(2) of Schedule 6, TCGA sets not a formal test, but a test of substance.  Unlike the words “owned” or “possessed” in relation to shares or rights, the word “exercisable” does not admit of a formal test.  He accepts that it is capable of a narrow construction, but, he submits, a narrow construction would require a gloss to restrict the identification of a person by whom voting rights are exercisable to the person who holds or possesses those rights.  Absent such a gloss, he submits that the correct construction of the expression is the natural one answering to the factual question, by whom are the voting rights exercisable in general meeting, which he urges me to adopt.
30. Mr. Ewart, for the Revenue, points out that the Taxpayer owned (jointly with his wife) at the relevant time 68 out of 60,000 issued shares in the Company.  The voting rights attaching to the shares in the Company, which were held by the Holding Company, were exercisable by the Holding Company and not by any individual.  In construing the definition of “personal company” in paragraph 1(2) of Schedule 6 to the TCGA, I should recognise that the defined term is “personal” company, and that this indicates that the draftsman intended to draw a connection by the definition between the company and a particular individual.  In the context of the definition, Mr. Ewart urges me to recognise that voting rights are exercisable by voting in general meeting, and therefore the person who is entitled so to vote will be the person by whom the relevant voting rights are exercisable.  He comments that all that Mr. Ghosh’s case shows is that the Taxpayer could have taken steps to influence the Holding Company in such a way that it exercised its voting rights in the Company in line with the taxpayer’s wishes.
31. Mr. Ewart submits that in a case where a nominee or a bare trustee exercises voting rights, he or she does so on behalf of the beneficial owner of the shares concerned, and the votes are accordingly exercisable by the beneficial owner.  This is expressly recognised by section 60(1) TCGA, and in any case is the position in the general law of agency.  But in any event, he submitted, there is no evidential foundation for the assertion that the Taxpayer’s wife was a bare trustee or nominee for the Taxpayer.  He said that there is no evidence that the Taxpayer’s wife did not own her shares beneficially.
32. Mr. Ewart submitted that the extreme nature of Mr. Ghosh’s submissions was indicated by the fact that his (Mr. Ghosh’s) argument would be the same if the person in the Taxpayer’s position had had no share in the Holding Company at all, but had influence over the person who held all the shares.
Conclusion
33. I accept Mr. Ewart’s submissions and will determine the referral accordingly. In my judgment the Company was not the Taxpayer’s personal company for the tax years 2000/01, 2001/02 and 2002/03 for the purposes of section 152 TCGA.  My reasons are as follows.
34. Whether or not the voting rights in the Company are exercisable by the Taxpayer for the purposes of the definition of “personal company” in paragraph 1(2) of Schedule 6, TCGA is not, I consider, a question of fact, but a mixed question of law and fact.  It is necessary to ascertain what, as a matter of construction, the expression “voting rights which are exercisable in a company” connotes for the purposes of the legislation in question.
35.  In my view Vinelott J was not saying anything inconsistent with that conclusion in the passage in Hepworth v William Smith Group, to which I was referred by Mr. Ghosh.  He, in the passage beginning at [1981] STC page 358h, had rejected a construction of the (for relevant purposes) identical definition of “family company” in section 34(6) Finance Act 1965, which took account of how in fact votes were exercisable (or not) in order to construe what proportion of the voting rights in a company were exercisable by a particular individual.  He said that “quite plainly” voting rights were capable of being exercised by the holders of the relevant shares, and said nothing to indicate that this was not a complete answer to any question of how the statutory expression should be construed.  Mr. Ghosh has not persuaded me that there is any relevant distinction in principle, for the purposes of this case, between the voting rights exercisable in a company and possession of shares in or rights over a company. 
36. It is, I consider, far too wide a construction of the expression “voting rights which are exercisable in a company” to hold that it can attribute such rights to any person who is able, as a matter of fact, to exercise voting rights on behalf of another person, whether by a one stage or a two stage process.
37. Such a construction would sever the ties of ownership between the “personal company” and the individual whose “personal company” it is, which, it seems to me, is essential in the scheme of roll-over relief.  It would also lead to (inherently unlikely) multiplied entitlements – that is to situations where particular voting rights could give entitlement to two, or more, individuals.  It is a necessary requirement of qualification for roll-over relief that the assets on the disposal of which the gain to be relieved has accrued should be assets used in a trade carried on by (and therefore owned by), in principle, the individual disposing of the assets (see: section 152(1) TCGA).  This is expanded (by section 157) to cater for the case where the trade is carried on, not by that individual, but by his “personal company”. It would be extraordinary, and, I consider, wrong, if the definition of “personal company” were to be construed so as to allow relief in the case of gains accruing on the disposal of assets owned by an individual and used for the purposes of a trade carried on by a company in which that individual had no (or no sufficient) degree of ownership, but over which he as a matter of fact exercises influence short of ownership.
38. It is, I accept, difficult to understand the rationale of a scheme which allows relief for assets used in a trade by a company in which the individual concerned has a 5 per cent. voting interest, but does not allow relief where the individual’s interest is indirect through a holding company, which is this case.  Mr. Ewart submitted that the legislation respects the individuality of companies as separate legal entities. I doubt if that answer supplies a satisfactory and complete rationale, but the conclusion for which Mr. Ewart contends is, in my view, inescapable on the statutory wording.
39. Mr. Ghosh’s alternative arguments do not succeed, either.  I accept Mr. Ewart’s submission that there is no evidence that the shares in the Holding Company held by the Taxpayer’s wife were held by her on a bare trust or as nominee for the Taxpayer.  Her statement in evidence (which, of course, I accept) that she leaves decisions on how to exercise votes in the Holding Company to her husband, because of her trust in the Taxpayer’s expertise, does not amount to evidence that she had no beneficial interest in the shares.  In fact, in so far as it was indicative at all, I consider that it showed the contrary.  She trusted, it seemed to me, that the Taxpayer would do the best both for her and for him.  
40. Nor does section 375 Companies Act 1985 help Mr. Ghosh.  At least for the sake of argument, I accept that the Holding Company could have acted informally to appoint the Taxpayer as its representative at any meeting of the Company.  But there is no evidence that it did so.  The evidence is that the Taxpayer’s wife trusted the taxpayer to make the right decisions.  That does not amount to an appointment of him as the Holding Company’s representative.  But even if it did, and the Taxpayer had been properly authorised to act as the Holding Company’s representative, anything he did in that capacity (viz: the exercise of voting rights in the Company) would have been done on behalf of the Holding Company, and that would not (for the reasons given above) have shown a situation where for the purposes of paragraph 1(2) of Schedule 6, TCGA the voting rights in the Company were exercisable by the Taxpayer.
41. For these reasons, I determine the referral as stated in paragraph 33 above. 

JOHN WALTERS QC
SPECIAL COMMISSIONER
RELEASE DATE: 30 January 2007

SC 3043/06