Strand Futures and Options Ltd. v HM Inspector of Taxes

For corporation tax purposes, a company’s purchase of its own shares is an actual disposal by the shareholder where it occurs under a contract of sale, even though the shares are treated as cancelled on completion. However, section 208 of the Income and Corporation Taxes Act 1988 exempts distributions by a United Kingdom resident company from corporation tax, whether the distribution is treated as income or forms part of a chargeable gain, unless the Tax Acts expressly provide otherwise. The exemption preserves corporation tax neutrality for inter-company distributions and avoids potentially overlapping income and capital gains charges.

Strand Futures and Options Ltd appealed against the Special Commissioners’ decision of 13 February 2002, which had dismissed its appeal against a corporation tax assessment for the accounting period ending 31 December 1995. The dispute concerned £871,630 received when City of London Options Ltd purchased half of SFOL’s shareholding in itself.

The central questions were whether the transaction constituted a disposal of shares for capital gains purposes and whether the payment was a distribution exempt from corporation tax under section 208 of the Income and Corporation Taxes Act 1988.

1. Appeal allowed. The payment received by SFOL on CLO’s purchase of its own shares did not give rise to corporation tax on a chargeable gain.

2. The sale of the shares was an actual disposal for capital gains purposes. “Disposal” bears its ordinary meaning: the parties contracted for a sale, and the shares were sold pursuant to that contract. The fact that the shares were treated as cancelled after completion under sections 160(4) and 162(2) of the Companies Act 1985 did not alter the character of the transaction.

3. Powlson v Welbeck Securities Ltd [1986] 60 TC 269 was distinguishable. It concerned release of an option without a corresponding acquisition, whereas the present transaction involved sale and purchase followed by deemed cancellation.

4. The first limb of section 208 of the Income and Corporation Taxes Act 1988 uses broad language. Properly construed, and subject to express exceptions elsewhere in the Tax Acts, it exempts all distributions of a United Kingdom resident company from corporation tax, whether treated as income or as an ingredient in calculating a chargeable gain.

5. The construction was supported by the anomaly produced under section 13 by the Revenue’s interpretation, the identical wording of the predecessor provision in section 47(1) of the Finance Act 1965, the former deduction-at-source regime, and the policy against a potential double charge reflected in paragraph 2 of Schedule 6 to that Act.

6. The alternative arguments on sections 37 and 122 of the Taxation of Chargeable Gains Act 1992 did not require determination.

High Court (Chancery Division): allowed SFOL’s appeal from the Special Commissioners’ decision dated 13 February 2002, which had dismissed the appeal and confirmed the assessment at £1,431,686.