Unilever (UK) Holdings Ltd v Inspector of Taxes

For the capital gains tax share-reorganisation provisions to apply, a new holding must result from arrangements which would, without the statutory treatment, involve a disposal or acquisition, or which alter rights attached to a class of shares. A reduction of capital does not automatically constitute a reorganisation merely because the statutory definition includes reductions of capital. An alteration in the commercial enjoyment or significance of share rights is insufficient; the rights themselves must be altered. Cancellation of one class of shares does not alter the rights attached to that class. Where no reorganisation or new holding exists, the special valuation rule in paragraph 19(2) of Schedule 2 to the Taxation of Chargeable Gains Act 1992 does not apply.

Unilever appealed against the dismissal by Burton J of its appeal from the Special Commissioners’ decision concerning corporation tax on chargeable gains for 1998. Unilever sought to establish an allowable loss on the 1992 disposal of its ordinary shares in BOCM by treating the 1965 cancellation of BOCM’s preference shares as a reorganisation producing a new holding under Chapter II of Part IV of the Taxation of Chargeable Gains Act 1992 and paragraph 19 of Schedule 2.

The cancellation increased Unilever’s voting power from 62 per cent to 100 per cent. The primary issue was whether that event constituted a reorganisation and produced a new holding. A secondary issue concerned whether a payment of approximately £6.9 million to preference shareholders was consideration for the alleged new holding.

The appeal was dismissed. Lord Justice Jonathan Parker gave the judgment, with Lord Justice Clarke and Lord Justice Auld agreeing.

1. The definition of “reorganisation” in section 126(1) applies for the purposes of sections 126 to 131. It therefore cannot create a species of reorganisation falling outside the statutory scheme governing a new holding.

2. Consistently with the analysis in Westcott v Woolcombers Ltd, a new holding can arise only where the arrangements would, apart from section 127, involve an element of disposal or acquisition, or where they alter rights attached to shares of a class under section 126(2)(b). The requirements that the new holding represent the original shares and that the assets be treated as the same asset support that conclusion.

3. The cancellation of BOCM’s preference shares involved no disposal or acquisition of Unilever’s ordinary shares. It also did not alter the rights attached to the preference shares, since cancellation could not properly be described as an alteration of rights.

4. The ordinary shareholders’ rights were not altered within section 126(2)(b). The section concerns the rights themselves, rather than their commercial significance or enjoyment. The possibility that the ordinary shares became more valuable or more effective because preference shares had disappeared was insufficient. The ordinary shareholders could also create a new class of preference shares in future.

5. White v Bristol Aeroplane Co Ltd was not in point because it concerned whether rights had been affected, whereas section 126(2)(b) required an alteration of the rights themselves. Re Mackenzie & Co Ltd and Greenhalgh v Arderne Cinemas Ltd supported the conclusion that the rights attached to the ordinary shares remained unchanged. Fitch Lovell Ltd v I.R.C. was distinguishable and its relevant observation was obiter.

6. There was consequently no reorganisation and no new holding. Paragraph 19(2) did not apply, and section 128(1) could not render the £6.9 million payment consideration for a new holding.

• Court of Appeal (Civil Division): The appeal from Burton J was dismissed. The court upheld the conclusion that the 1965 cancellation of the preference shares created neither a statutory reorganisation nor a new holding.
• High Court, Chancery Division: Burton J dismissed Unilever’s appeal from the Special Commissioners. The judgment is reported at [2002] STC 113.
• Special Commissioners: The appeal against the corporation tax assessment was dismissed.