Dunlop International AG v Pardoe (HM Inspector of Taxes)

Where a United Kingdom-resident company transfers an asset within a group and subsequently migrates, it ceases to be a member of the group when its United Kingdom residence ends. The statutory charge on deferred gains may therefore arise under Income and Corporation Taxes Act 1970, section 278.

The company’s status is assessed when it ceases to be a group member, by reference to the circumstances immediately beforehand. The associated-company exception in section 278(2) is different. It applies only where the companies remain associated immediately after leaving the old group, so that the latent gain remains within a continuing subgroup. The exception does not protect the simple disposal of a subsidiary to a third party.

Dunlop International AG appealed against the decision of Mr Justice Lightman, reported at [1998] STC 459, dismissing its appeal from the Special Commissioners.

DIAG had acquired shares from a group subsidiary at a no-gain, no-loss value under section 273(1) of the Income and Corporation Taxes Act 1970. It later transferred its residence from the United Kingdom to Switzerland. The central questions were whether migration caused DIAG to cease to be a group member, whether it remained a chargeable company for section 278, and whether the associated-company exception in section 278(2) applied because the transferor also left the group at the same time.

1. Appeal dismissed. The Court of Appeal, in a judgment delivered by Lord Justice Chadwick, with Lord Justice Pill and Lord Justice Peter Gibson agreeing, upheld the judge’s decision. The case was remitted to the Special Commissioners unless the figures were agreed.
2. Under section 272(1) of the Income and Corporation Taxes Act 1970, a company must be resident in the United Kingdom to be a company for group purposes. DIAG was therefore a principal company while resident in the United Kingdom. When it became non-resident, it ceased to be a principal company and the International Group ceased to exist. DIAG consequently ceased to be a member of that group.
3. Section 278(1) and (3) applied to DIAG notwithstanding that migration simultaneously caused it to cease to qualify as a company for the statutory scheme. The statutory language refers to the time when the company ceases to be a group member, not to the position afterwards. The relevant status is therefore assessed immediately before the cesser. The express exclusion for dissolution in section 278(1) supported that construction, since dissolution is another instance in which loss of group membership coincides with loss of corporate status.
4. The need for Treasury or exchange-control consent did not assist construction of the tax provisions. The issue had to be resolved from the wording and purpose of Chapter II of Part XI of the Act.
5. Section 278(2) did not apply. The associated-company condition had to be satisfied immediately after the companies ceased to belong to the old group. DIAG and Moorgate were not then members of a continuing group and were not associated companies. This construction preserved the purpose of section 278(3), namely to prevent indefinite postponement of the gain produced by an intra-group transfer, while allowing deferral to continue where a subgroup leaves a larger group and remains intact.
6. The court adopted the explanation of the envelope scheme given in NAP Holdings UK Ltd v Whittles [1992] STC 59 as illuminating the statutory mischief.

• Court of Appeal (Civil Division): Appeal dismissed. The order of Mr Justice Lightman was upheld; the case was remitted to the Special Commissioners unless the figures were agreed.
• High Court: Mr Justice Lightman dismissed DIAG’s appeal from the Special Commissioners: [1998] STC 459.
• Special Commissioners: Decision dated 7 January 1997, determining that section 278 applied to the transaction.