Kellogg Brown & Root Holdings (UK) Ltd v Revenue & Customs

For a conditional contract, Taxation of Chargeable Gains Act 1992, section 28 determines when the disposal and acquisition occur. That time also determines whether the parties are connected for section 18 purposes, unless the legislation indicates otherwise. A group of shareholders may constitute a group, and may act together, without any common purpose or agreement to exercise their votes. Where shareholders together control a parent company, control may extend indirectly to wholly owned subsidiaries. Section 416(6) may attribute the parent’s rights and powers to those shareholders collectively. These principles can make companies connected under section 286(5)(b), preventing the claimed loss from being set off.

The appellant appealed under section 56A of the Taxes Management Act 1970 against the Special Commissioner’s dismissal of its appeal on 18 June 2008. The dispute concerned a loss claimed on the sale of shares under a conditional agreement. The sale was conditional on a corporate distribution occurring first. The central issues were when the disposal occurred for the purposes of sections 18 and 28 of the Taxation of Chargeable Gains Act 1992, and whether the appellant and purchaser were connected companies under section 286(5)(b), applying the control provisions in section 416 of the Income and Corporation Taxes Act 1988.

1. Appeal dismissed. The Special Commissioner correctly dismissed the appellant’s appeal and HMRC were entitled to refuse the claimed loss set-off.
2. Section 28(2) of the Taxation of Chargeable Gains Act 1992 applied because the Sale Agreement was conditional. The disposal and acquisition occurred, or at least were not completed until, the Distribution condition was satisfied. The present tense in section 18 required the connection to exist at that time. The court did not need to decide whether connection must also exist when the contract is made.
3. The agreements expressly required the distribution to precede the share sale. The Closing Memorandum confirmed that the distribution was Phase I and completion of the sale was Phase II. The transactions therefore were not simultaneous.
4. The shareholder collections were “groups” for section 286(5)(b). A common relation, namely membership of the relevant company, was sufficient. No common purpose or commonality of wish was required.
5. “Together” in section 416(3) required the aggregation of the shareholders’ rights but imposed no additional requirement that they agree to exercise control. The concept of indirect control in section 416(2) was wide enough to include control of wholly owned subsidiaries through a controlled parent.
6. Section 416(6) applied to persons who together controlled a parent company. The parent’s rights and powers could be attributed to them collectively. The provisions of section 416(3) and (6) were capable of operating as alternatives, and were not limited by the use of the singular pronoun “he”.
7. The principles in Steele v EVC International NV [1996] STC 785 concerning control of a company’s affairs at general-meeting level were accepted. Gascoines Group Ltd v HMIT [2004] EWHC 640 (Ch) correctly treated indirect control and attribution under section 416 as alternative routes to control.
8. At the relevant time, the same shareholder groups controlled the appellant’s parent chain and the purchaser’s parent chain under sections 416(3) and (6). The companies were therefore connected under section 286(5)(b), so section 18 applied and the loss could not be set off against gains from transactions with other persons.

• Special Commissioner: On 18 June 2008, Dr Avery Jones CBE dismissed the appellant’s appeal against HMRC’s amendment notice.
• High Court (Chancery Division): The Chancellor dismissed the appeal and upheld the Special Commissioner’s conclusions.