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

For capital gains tax, the time of a disposal made under a conditional contract is the time when the condition is satisfied. The connection between the parties is assessed at that disposal time under section 18(1), not at the contract date. The word “group” in section 286(5)(b) has its ordinary meaning of a collection of persons; it does not require concerted action or a common purpose. The broad concept of direct or indirect control in section 416(2) is not narrowed by later deeming provisions. A common shareholder group capable of controlling two companies can therefore make them connected persons, even where the companies are publicly quoted and the shareholders are not identical.

The taxpayer appealed against the decision of the Chancellor of the High Court, who had upheld the Special Commissioner’s dismissal of its challenge to an amendment disallowing a claimed capital loss. The High Court decision was reported at [2009] EWHC 584 (Ch).

The loss arose from a disposal of shares under an agreement conditional on a prior distribution of shares in the ultimate holding company. The appeal concerned the time of the disposal, the time at which connection between the parties was to be assessed, the meaning of control and the meaning of a “group” under the connected-person provisions. HMRC’s respondent’s notice raised related arguments concerning section 28 of the 1992 Act.

The Court of Appeal unanimously dismissed the appeal. Lord Neuberger MR gave the leading judgment. Lord Justice Longmore and Lady Justice Smith agreed.

1. Time of disposal. The disposal agreement was genuinely conditional on the actual distribution of the shares in the ultimate holding company. Under section 28(2) of the Taxation of Chargeable Gains Act 1992, the disposal therefore took place when that condition was satisfied, immediately after the distribution. The general rule in section 28(1) could not be used to select the earlier contract date.
2. Time for assessing connection. Section 18(1) required the parties’ connection to be assessed at the time of disposal. The present-tense wording of the subsection, and the absence of any principled means of selecting another date, made a purpose-based alternative inappropriate in a taxing statute. The contractual documents did not make the disposal unconditional before the actual distribution.
3. Control. Section 416(3) of the Income and Corporation Taxes Act 1988 did not require an agreement or arrangement between the persons who together satisfied the statutory control conditions. Further, the opening words of section 416(2), including indirect control, were to be given their ordinary and broad meaning. The later subsections did not justify an artificially narrow construction. The approach was supported by Steele v EVC International NV [1996] STC 785 and R v IRC ex p Newfields Developments Ltd [2001] 1 WLR 1111.
4. Meaning of group. In section 286(5)(b) of the Taxation of Chargeable Gains Act 1992, “group” meant a collection of persons. It did not require a common purpose, concerted action or collaboration. The same shareholder collection could therefore have control of both companies for the purposes of the provision.
5. Result and practical burden. The common shareholder group was sufficient to connect the relevant companies. Section 18(3) accordingly restricted the capital loss to gains from disposals between the same connected persons. Although HMRC bore the practical burden of proving the connection where apparently independent companies were involved, that did not alter the outcome.

• Court of Appeal (Civil Division): dismissed the taxpayer’s appeal on 24 February 2010 in [2010] EWCA Civ 118.
• High Court of Justice, Chancery Division: the Chancellor upheld the Special Commissioner’s decision in [2009] EWHC 584 (Ch).
• Special Commissioner: dismissed the taxpayer’s appeal against HMRC’s amendment disallowing the claimed capital loss.