First-tier Tribunal (Tax)

[2010] UKFTT 261 (TC)

 

 

 

 

 

 

TC00555

 

Appeal number TC/2009/14044

 

 

 

 

Capital Gains Tax – Share for share exchange – Computation of gain – Whether consideration shares had already been acquired by taxpayer – No  – Whether relief available under TCGA 1992 s.135 – No

 

 

FIRST-TIER TRIBUNAL

 

                           TAX

 

 

                                              PETER HADFIELD                             Appellant

 

 

                                                                      - and -

 

 

                                 THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (Capital Gains Tax)                                                                Respondents

 

 

 

                                                TRIBUNAL:  SIR STEPHEN OLIVER QC

                                                                         

                                                                       

 

Sitting in public in London on 1 June 2010

 

The Appellant in person

 

Phillip Jones QC, instructed by the general counsel to HMRC, for the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

 

1.         Mr P D S Hadfield (“Mr Hadfield”) appeals against an amendment to his return for the year ended 5 April 2006.  The amendment results in a £3,270.40 increase in tax due. 

 

Background

 

2.         In response to an “exchange offer” by Royal Dutch Shell (“RDS”) of two “A” shares in RDS for every share in Royal Dutch (“RD”) Mr Hadfield obtained 2,640 “A” shares.  When Mr Hadfield submitted his 2005/6 tax return he reported his exchange of RD shares and stated by way of explanation that he had completed the return on the basis that Taxation of Capital Gains Act 1992 (“TCGA”) section 135 applied to treat the exchange as a reorganisation.

 

3.         HMRC opened an enquiry.  In January 2009 HMRC informed Mr Hadfield that the enquiry was complete and that they had concluded that relief under section 135 was not due; they included taxable capital gains of £8,178.

 

4.         The transactions resulting in this dispute were those involved in the merger of the Royal Dutch Petroleum Company (“Royal Dutch”) and Shell Trading & Transport Company Plc (“Shell T&T”).  This was achieved by way of an exchange offer by RDS for the shares in RD and, in the case of ST&T, by way of a scheme of arrangement.  For the scheme, so far as it related to the acquisition of RD, to be practically possible it was necessary that shares which the former public shareholders in RD received were not issued or transferred into a clearance system when they carried with them the full value of the underlying group ownership interest.  This is because that state of affairs would have resulted in a 1½% stamp duty reserve tax charge on the market capitalisation of RD.

 

Summary of the relevant transactions

 

5.         The preliminary step leading to the exchange offer for RD shares was the setting up of a special purpose vehicle called Shell BV in March 2004:  Shell BV was owned as to 50% by RD and as to 50% by Shell T&T.  Then on 21 October 2004 RDS (i.e. the company designed to make the offer) issued 4,148,800,000 Euro Deferred Shares to Shell BV for cash at par (€0.7, giving an aggregate subscription price of approximately €290m).  Shell BV became the legal and beneficial owner of those shares.  At the time of the issue of those Euro Deferred Shares, they were redeemable at par.

 

6.         The purpose of issuing those Euro Deferred Shares was to put RDS in a position where it could satisfy an offer for RD (with an exchange of 2:1) if that were the option chosen.  At the time of issue, no such decision had been taken and there was no certainty that the offer would proceed.

 

7.         On 25 October 2004 the Euro Deferred Shares were deposited with “Euroclear” (a central depository and clearing service for securities).  The applicable stamp duty reserve tax was paid.  Euroclear became legal owner of those shares while beneficial ownership was retained by Shell BV.

 

8.         On 28 October 2004 the proposed unification of RD and Shell T&T was publicly announced.  So far as RD was concerned this was said to involve RDS making an offer for RD.  Shareholder approval was still needed for the relevant transactions to go ahead and various conditions had to be fulfilled.  On 22 November 2004 the rights attaching to the Euro Deferred Shares were amended such that they could be redeemed for €0.01 in respect of all shares redeemed at any one time. 

 

9.         A Declaration of Trust was effected by Shell BV on 30 November 2004.  Shell BV ceased to be beneficial owner of the Euro Deferred Shares and declared itself trustee for the RD shareholders.  Bearing in mind that Mr Hadfield argues that he had been given beneficial ownership of 2,640 Euro Deferred Shares by Shell BV on 30 November 2004 and that in consequence he had had “the sole and unfettered right to use, enjoy or dispose of” those shares from that date, it is necessary to set out the relevant provisions of the Declaration of Trust. 

 

“2.   THE TRUST

 

2.1       The Settlor [Shell BV] hereby declares that, with effect from the date of this Deed, it holds and, subject to Clause 3 and Clause 4, shall hold, all of its right, title and interest present and future in respect of the euro deferred shares (the “Trust Property”) upon trust for the RD Shareholders on the terms of this Deed.

 

2.2    Subject to Clause 3 and Clause 4, the beneficial interest of each RD Shareholder at any time under the trust declared pursuant to Clause 2.1 (the “Trust”) shall be in such proportion of the Trust Property as corresponds, at that time, to the proportion of the issued ordinary share capital of RD held by that RD Shareholder.

 

3.    BENEFICIAL INTERESTS

 

3.1       With effect from the Unconditional Date [meaning the date on which the Proposed Offer is declared unconditional in all respects: see Clause 1.1], the beneficial interest of each RD Shareholder at any time (the “Relevant Time”) under the Trust shall be:

 

(a)   to the extent that such RD Shareholder (and “Assenting Shareholding”) has assented its ordinary shares in RD to the Proposed Offer at or before the Relevant Time (and not withdrawn them), in a proportion of that part of the Trust Property represented by euro deferred shares the rights attaching to which have, at the Relevant Time, been varied such that they have become Class A Shares (the “Assenting Part”): and

(b)       to the extent that such RD Shareholder (a “Non-Assenting Shareholder”) has not assented its ordinary shares in RD to the Proposed Offer at or before the Relevant Time (or has assented and withdrawn them), in a proportion of that part of the Trust Property represented by the euro deferred shares the rights attaching to which have not, at the Relevant Time, been so varied (the “Non-Assenting Part”).

 

3.2       The beneficial interest under the Trust of each Assenting Shareholder at the Relevant Time shall be such proportion of the Assenting Part as corresponds to the proportion of the issued share capital of RD which has been assented to the Proposed Offer at or before the Relevant Time (and not withdrawn) which is represented by the ordinary shares in RD so assented (and not withdrawn) by or on behalf of that Assenting Shareholder.

 

3.3       …

 

3.4       …

 

3.5       For the avoidance of doubt, an RD Shareholder can, at the same time, be both an Assenting shareholding and a Non-Assenting Shareholder. 

 

3.6       Unless the Settlor determines otherwise, the entire beneficial interest under the Trust shall revert to the Settlor unless the Proposed Offer is declared unconditional in all respects within five business days of the Closing Date. 

 

4.    TRANSFER OF BENEFICIAL INTERESTS AND ENTITLEMENT ON   

        REDEMPTION

 

4.1       If any RD Shareholder calls for the transfer to it or any other person of its beneficial interest (if any) in the Trust Property prior to:

 

(A)      the time at which such RD Shareholder is entitled to settlement under the Proposed Offer, or, if later

 

(B)       the expiry of any “grace period” for acceptance of the Proposed Offer)

 

the existing beneficial interest of such RD Shareholder under the Trust shall immediately be determined and the relevant proportion of the Trust Property shall thereafter be held by the Settlor on behalf of such of the RD Shareholders as it may in its absolute discretion decide (who may include, for the avoidance of doubt, the RD Shareholder which has called for the transfer of its beneficial interest in the Trust Property).

 

4.2       If any of the euro deferred shares comprised in the Trust Property are redeemed by RDS, the Settlor shall only be required to pay an RD Shareholder with a beneficial interest in the Trust Property at the relevant time its proportionate share of the redemption moneys if such share exceeds €1.00.  The Settlor shall be entitled to retain any lesser entitlements.”

 

 

9.         On 13 May 2005 a conditional resolution of RDS was passed reclassifying the Euro Deferred Shares as “A” shares to the extent that the offer was accepted by RD Shareholders.  This resolution was conditional on the offer becoming unconditional in all respects.  The reclassification was to take place by stages to cover RD Shares tendered during the RD Acceptance Period (as defined), any subsequent Acceptance Period and thereafter.  The resolution was passed by Shell BV in its capacity as the holder of the (then) outstanding ordinary shares of RDS. 

 

10.       The RDS “A” shares were, in July and August 2004, used to satisfy the offer (consistent with the Declaration of Trust), which (as already noted) provided that Euro Deferred Shares which had been reclassified as “A” shares should be held, pro rata, on behalf of RD Shareholders who had accepted the offer.  Settlement was effected pursuant to instructions given by Shell BV.

 

11.       RDS did not have any ability to control how the Euro Deferred Shares/”A” shares were dealt with by Shell BV (although both entities were jointly controlled by RD and ST&T and RDS was aware of the Declaration of Trust).  There was no other relevant specific contractual provision although an “Implementation Agreement” between RDS, RD and Shell T&T did impose a reasonable endeavours obligation on each party to implement the unification in the manner described in the relevant public documents.

 

12.       RDS has been a resident of The Netherlands for tax purposes since its incorporation. 

 

13.       Following completion of the offer, the outstanding Euro Deferred Shares (i.e. those that had not been reclassified as “A” Shares in order to satisfy the offer) were redeemed in accordance with their terms. 

 

14.       On 8 July 2005 Mr Hadfield tendered 1,320 RD Shares to RDS with a signed application form and a document of transfer.  On 20 July 2005 the RDS nominee service advised him that 2,640 RDS “A” shares were held on his behalf and that the mid-market price of “A” shares on that date was £17.6625. 

 

The dispute

 

15.       As noted, Mr Hadfield duly completed his 2005/6 tax return stating that section 135 of TCGA applied.  On 5 January 2009 HMRC notified Mr Hadfield of the ending of the enquiry and their conclusion that relief of the section 135 was not available.  The result was that £3,270.40 of additional tax was said to be due from Mr Hadfield.  Several letters were then exchanged between Mr Hadfield and HMRC and on 7 September 2009 Mr Hadfield appealed to the Tribunal against HMRC’s decision and against the capital gains tax assessment which he contended to be “unsound”.

 

16.       Essentially, the basis for HMRC’s decision that relief was not available under section 135 is that there had been no “issue” by RDS of shares to Mr Hadfield in exchange for shares in RD in the circumstances specified in subsection (2).  The Tribunal’s expectation was that Mr Hadfield would address an argument to the effect that, properly analysed, the transaction by which RDS came to acquire the share capital of RD should be seen as involving the “issue” of two “A” shares in RDS to Mr Hadfield in return for every one RD share tendered by him.  When the day came, Mr Hadfield took a different tack. 

 

17.       To provide a reliable account of Mr Hadfield’s argument and to avoid mistaking his reasoning, I need to quote from his written submissions to the Tribunal.

 

“I was given the beneficial ownership of 2,640 Euro Deferred Shares by Shell BV on 30 November 2004 and thus acquired and received those shares, which gave me ‘the sole and unfettered right to use enjoy or dispose of” them (INTN 332010) on that day, which was some five months before the RD Offer was made; for CGT purposes I would be regarded as the owner of those shares from that date, as “it is the beneficial ownership (not the legal ownership) which the tax principally follows” (CG 11730).  When the rights of the EDS which I beneficially owned were verified and they were thus reclassified as “A” shares on 20 July 2005 as per HMRC’s case, I would automatically be the beneficial owner of the resultant “A” shares, as I was the beneficial owner of the Euro Deferred Shares which had had rights varied.  I did not dispose of my Euro Deferred Shares or acquire or “receive” any shares in their place; my Euro Deferred Shares would simply have become my “A” shares.  For CGT purposes, the subsequent transfer to me of the legal title to my “A” shares by Euroclear on 20 July 2005 would be ignored in line with CG 11730.  I therefore could not and would not have “received” any “A” shares under the RD Offer under HMRC’s case.”

 

18.       I do not agree with Mr Hadfield’s interpretation of the relevant transactions.  As I see it Mr Hadfield did not become beneficial owner of any particular shareholding interests in RDS until he accepted the exchange offer in July 2005 and the RDS “A” shares, being the considerations shares, were transferred to him.  The Declaration of Trust was executed on 30 November 2004 in preparation for the exchange offer.  But it did not make the individual shareholders in RD absolutely entitled as against Shell BV to the Euro Deferred Shares or any of them until the offer was made and until the particular individual shareholder had assented in respect of the particular RD Shares tendered.

 

19.       All beneficial interests of the RD shareholders in the Trust Property (the Euro Deferred Shares) are held in suspense until the exchange offer has been declared unconditional.  That is the effect of Clauses 2 and 3 of the Declaration of Trust.  Clause 2.1 directs that the Euro Deferred Shares be held, with effect from 30 November 2004, “upon and for the RD Shareholders on the terms of this Deed”.  The interests of these shareholders are not however defined until the “Unconditional Date” (Clause 3.1) which is when the offer goes unconditional; and that happened in July 2005.  The individual shareholder, such as Mr Hadfield, is then qualified to assent (in whole or in part) by tendering his RD shares.  Until then Mr Hadfield had been one of a class of potential beneficial owners none of whom can be said to have been absolutely entitled to shares as against the Settlor (Shell BV).  At that stage, however, the considerations shares will, pursuant to the resolution of 13 May 2005, have comprised shares that are to be reclassified as “A” shares in RDS. 

 

20.       The reclassification of the Euro Deferred Shares into RDS “A” consideration shares took place by operation of the terms of the special resolution of RDS passed in May 2005 at a time when Mr Hadfield was not a shareholder in RDS, either individually or collectively with the other RD shareholders.  It follows that Mr Hadfield received his interest in the RDS “A” consideration shares as the result of his tender of his RD shares on 8 July and of RDS’ response by allocating 2,640 RDS “A” shares to him.  HMRC are, in my view, correct in treating Mr Hadfield as having disposed of his RD shares at that time in return for a consideration represented by the RDS “A” shares.

 

21.       HMRC are also correct in refusing to allow section 135 relief for capital gains tax in respect of that disposal.  There was no “issue” of the RDS “A” consideration shares to Mr Hadfield.  For completeness I need to add that Mr Hadfield specifically disclaimed arguing that there had been an “issue”.  If there should be any dispute about the position taken by Mr Hadfield I will set out in the Appendix a verbatim account of Mr Hadfield’s written summary of “My Position”. 

 

22.       For those reasons I dismiss the appeal. This Decision Notice contains full written findings of fact and reasons for the decision.

 

 

 

 

 

SIR STEPHEN OLIVER QC

             CHAMBER PRESIDENT

               RELEASE DATE: 10 June 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

APPENDIX

(Extract from Mr Hadfield’s Written Submissions)

 

 

My Position

 

3.2       My position was and remains that I received 2,640 “A” shares from RDS in exchange for my tendered RD shares.  There is a lot of documentary evidence to indicate I would indeed receive “A” shares under the RD offer, which I maintain could only have happened if RDS had delivered me those shares; there is also evidence that “A” shares were delivered to me by RDS.  HMRC and I exchanged correspondence on this matter for about two years without our respect positions budging.  For my appeal to the Tribunal, rather than regurgitating all the points I have made in my letters to HMRC and in my Notice of Appeal, I am just going to focus on one of them, which is that HMRC’s Amendment is “wrong” and “unsound”.  Happily this will not involve:  whether or not there was an “A” share issue, the intricacies of section 135 TCGA; the evidence that shows that I would have received and did receive and was delivered “A” shares under the RD offer; the meaning of the word “issue”; the reasons for the increase in “other reserves”, the applicability of the Mergers Directive or Counsel’s Opinion; these will not therefore form part of my case to the Tribunal, which should save us all some time. 

 

Why HMRC’s Amendment is wrong and unsound and should be cancelled

 

(a)       HMRC’s Case is based on: the premise that the RD shareholders did not receive “A” shares, which is inconsistent with its computation; RDS having varied the rights of the Euro Deferred Shares, which would not have happened and did not happen, and a contract which could not have been carried out.  Its case is therefore unsound, which means that its decision, amendment, review and statement of case, which are all based on it, are also unsound and should be cancelled. 

 

(b)       HMRC’s computation has computed a CGT charge on the basis that I disposed of 1,320 RD shares and “received” 2,640 “A” shares worth £17.6625 each in July 2005. Given the indicated value of the shares I “received”, the computation is referring to the receipt by me of the beneficial ownership of those “A” shares and not just to the legal title to them, as that would have had no value.  The computation is thus based on a different and contradictory transaction to that on which HMRC’s case is based, which is why and under which I would not have “received” the beneficial ownership of 2,640 “A” shares in July 2005, as I had become the beneficial owner of those shares on 30 November 2004 and you cannot “receive” things which you already own.  HMRC’s amendment, which is based on its computation and case, is based on two conflicting transactions and therefore has no proper basis. 

 

(c)       The “disposal proceeds” per HMRC’s computation, which I am being taxed on as having “received” from the disposal of my RD shares to RDS on 20 July 2005, consist of shares which I acquired on 30 November 2004, when they were Euro Deferred Shares, multiplied by the mid-market price of “A” shares on 20 July 2005.  Thus they consist of shares I already owned.  Besides being nonsense, this would mean that I would have received no value for the disposal of my RD shares and would have thus made a capital loss … which would be nonsense.

 

(d)       HMRC’s computation is internally inconsistent, as if I had “received” 2,640 “A” shares on 20 July 2005, which were worth £17.6625 each, no CGT would be due, as roll over relief would apply, and yet it has calculated a CGT charge.  HMRC’s computation is thus unsound and therefore HMRC’s amendment, review and SOC, which are based on it, are also “unsound” and should be cancelled.