AS TO THE ADMISSIBILITY OF
Application No. 27721/95
by NAP Holdings UK Ltd
against the United Kingdom
The European Commission of Human Rights (First Chamber) sitting
in private on 12 April 1996, the following members being present:
Mr. C.L. ROZAKIS, President
Mrs. J. LIDDY
MM. E. BUSUTTIL
A.S. GÖZÜBÜYÜK
A. WEITZEL
M.P. PELLONPÄÄ
B. MARXER
B. CONFORTI
N. BRATZA
I. BÉKÉS
E. KONSTANTINOV
G. RESS
A. PERENIC
C. BÎRSAN
K. HERNDL
Mrs. M.F. BUQUICCHIO, Secretary to the Chamber
Having regard to Article 25 of the Convention for the Protection
of Human Rights and Fundamental Freedoms;
Having regard to the application introduced on 15 May 1995 by NAP
Holdings UK Ltd against the United Kingdom and registered on 26 June
1995 under file No. 27721/95;
Having regard to the report provided for in Rule 47 of the Rules
of Procedure of the Commission;
Having deliberated;
Decides as follows:
THE FACTS
The applicant ("NAPUK") is a limited company with its head office
in London. It is represented before the Commission by Mr. E. Sparrow,
of Messrs. Ashurst Morris Crisp, solicitors, with Mr. D. Pannick, QC,
and Messrs. P. Duffy and K. Prosser, counsel. The facts of the case,
as submitted by NAPUK's representatives, may be summarised as follows.
Prior to 23 April 1983 NAPUK and Astbro Inc. ("Astbro") were
wholly-owned subsidiaries of Exco Overseas Ltd. ("Overseas"). They
were therefore members of the same group of companies for the purposes
of corporation tax on chargeable gains. On 23 April 1983, NAPUK
acquired the Astbro shares from Overseas in exchange for an issue to
Overseas of a further 20 million ordinary shares in NAPUK. Clearances
for the proposed transactions had been sought and obtained from the
Inland Revenue, which thereby accepted that the acquisition was for
bona fide commercial reasons.
Overseas had acquired the Astbro shares in 1981 and 1982 for some
$7.5m. NAPUK acquired them in April 1983, when they were worth some
$400m. In August 1985, NAPUK sold the Astbro shares outside the group
for $431m.
On 25 February 1986 Hoffmann J. gave judgment on an appeal from
a decision of the General Commissioners of Income Tax in the case of
Westcott (Inspector of Taxes) v. Woolcombers Ltd. ([1986] STC 182).
The judgment confirmed the General Commissioners' findings in 1981
that, where a company (A) transferred the entire issued share capital
in a subsidiary company (B) to another subsidiary company (C) in
exchange for a new allotment of shares in company C, the transfer of
shares in company B amounted to a "disposal" for the purposes of
Schedule 13, para. 2(1) to the Finance Act 1965 (replaced by Section
273 (1) of the Income and Corporation Taxes Act 1970, as amended). The
effect of the decision was that, for the purposes of computing company
C's chargeable gains or allowable losses arising on the sale of the
shares in company B outside the group, the acquisition cost of those
shares was to be treated as the consideration originally paid by
company A. The judgment surprised the financial community because it
had thitherto been assumed by both taxpayers and the Revenue that such
a transfer did not give rise to a "disposal" and that the acquisition
cost of the shares on a sale outside the group was to be treated as the
value of the shares at the time of the exchange.
On 6 January 1989 NAPUK was assessed to tax on the capital gain
on the sale of the Astbro shares, represented by the difference between
the original purchase price paid by Overseas ($7.5m) and the sale price
of the shares ($431m). NAPUK was accordingly assessed to tax in the
sum of £230m.
NAPUK appealed, contending that the tax should be assessed on the
difference in value between the date when it, NAPUK, acquired the
shares (value $400 m) and when it sold them (for $431 m).
On 31 July 1987 the Court of Appeal dismissed the Crown's appeal
against Hoffmann J's judgment in the Woolcombers case ([1987] STC 600).
On 15 March 1988 the Inland Revenue announced proposed
legislation to reverse the Woolcombers decision. In a press release,
it was stated, inter alia, that the proposed amendment would correct
the position by providing for the general rule (in Section 273 of the
1970 Act) to be ignored when the special rules (in Sections 78 and 85
of the Capital Gains Tax Act 1979) applied.
Section 115 of the Finance Act 1988 enacted the change announced
in the press release with effect from 15 March 1988.
A Special Commissioner of Income Tax dismissed NAPUK's appeal in
23 March 1990. He held that the rationale of the decision in
Woolcombers had not been affected by later statutory provisions, so
that the base value for tax was the value of the shares when Overseas
acquired the Astbro shares. The High Court dismissed NAPUK's appeal
by way of case stated on 6 December 1991 ([1992] STC 59).
The Court of Appeal allowed NAPUK's appeal on 9 July 1993 ([1993]
STC 592).
On 17 November 1994 the House of Lords by a majority of 4 to 1
allowed the Revenue's appeal, holding that the Woolcombers case had
been correctly decided and that the construction placed in that case
on the statutory predecessors of Section 273 of the 1979 Act and
Sections 78 and 85 of the 1979 Act had not been displaced by any
subsequent statutory provisions.
COMPLAINTS
NAPUK alleges a violation of Article 1 of Protocol No. 1 to the
Convention, taken alone and in conjunction with Article 14 of the
Convention.
Under Article 1 of Protocol No. 1, NAPUK considers that there was
no "reasonable relationship of proportionality" between the means
employed in the present case, and the aim pursued. In particular, it
points out that:
- the transaction had been cleared with the Inland Revenue before
it was implemented, and was accepted as a bona fide commercial
transaction;
- according to all the information available to the NAPUK and its
advisers at the time, the disputed liability would not arise;
- the Revenue knew of the contrary private ruling of the General
Commissioners in the Woolcombers case, but did nothing to
publicise that ruling or the Revenue's High Court appeal;
- no warning was given to NAPUK when clearing the transaction;
- under the law as interpreted in by the Inland Revenue in the past
and as now amended for the future, the disputed liability would
not be imposed on NAPUK, and that
- an extra-statutory concession and/or amendment of the law were
refused by the Revenue although granted in other analogous cases.
In connection with the information available to NAPUK at the time
of the transaction, an affidavit has been submitted from the NAPUK's
accountant that the Woolcombers decision came as a complete surprise
to him and to the vast majority of practitioners, and that the whole
case was unprecedented in his experience: in particular, if the Revenue
had not kept totally silent until 1986 about the issues in the pending
Woolcombers case, the transaction would never have been completed in
the way it was.
Copy correspondence with the then Financial Secretary to the
Treasury, Mr. J. Major, has also been submitted. In it, NAPUK's
accountant by letter of 25 April 1988 (that is, after the Revenue had
announced the proposed change in legislation and before the change was
enacted) the accountant wrote that "since the purpose of [the clause]
is to restore the position to that which was generally thought to be
correct prior to [Woolcombers], there is a strong case for saying that
the effective date of this clause should be retrospective subject only
to the proviso that those persons who are prejudiced by such
retrospection should be given the right of election to adopt the
[Westcombers] treatment". In his reply, the Financial Secretary
replied:
"The general principle is that, other than in very exceptional
circumstances, tax legislation should not be retrospective,
particularly where - as here - such retrospection would prejudice
some people who acted on the basis of the law as it then was.
As a result of Woolcombers some people may have organised their
affairs to obtain relief for losses which, but for Woolcombers,
would not have been available. Such people would argue, with
some justification, that retrospection would be unfair.
You suggest that in these cases taxpayers should be able to elect
for the legislation not to be retrospective. However, to breach
the basic rule against retrospection and then - additionally -
only to apply the law retrospectively where it was beneficial to
do so would, I think you will agree, not only be an extraordinary
departure from fundamental principles but would also set a very
awkward precedent."
NAPUK has submitted a list of occasions over recent years on
which retroactive legislation has been passed. One instance is the
enactment of Section 53 of the Finance Act 1991, which was enacted to
reverse the decision of the court in R. v. IRC ex parte Woolwich
Equitable Building Society (see, in the Convention context,
Nos. 21319/93, 21449/93 and 21675/93, Dec. 13.1.95). A further note
has been submitted of cases in which extra-statutory concessions have
been granted to remove unintended consequences of tax decisions.
THE LAW
NAPUK alleges a violation of Article 1 of Protocol No. 1
(P1-1) to the Convention, taken alone and in conjunction with Article
14 (P1-1+14) of the Convention.
Article 1 of Protocol No. 1 (P1-1) provides as follows:
"Every natural or legal person is entitled to the peaceful
enjoyment of his possessions. No one shall be deprived of his
possessions except in the public interest and subject to the
conditions provided for by law and by the general principles of
international law.
The preceding provisions shall not, however, in any way impair
the right of a State to enforce such laws as it deems necessary
to control the use of property in accordance with the general
interest or to secure the payment of taxes or other contributions
or penalties."
Article 14 (Art. 14) of the Convention provides as follows:
"The enjoyment of the rights and freedoms set forth in this
Convention shall be secured without discrimination on any ground
such as sex, race, colour, language, religion, political or other
opinion, national or social origin, association with a national
minority, property, birth or other status."
The Commission recalls that Article 1 (Art. 1) guarantees in
substance the right of property. It comprises three distinct rules.
The first, which is expressed in the first sentence of the first
paragraph and is of a general nature, lays down the principle of
peaceful enjoyment of property. The second, in the second sentence of
the same paragraph, covers deprivation of possessions and makes it
subject to certain conditions. The third, contained in the second
paragraph recognises that the Contracting States are entitled to
control the use of property in accordance with the general interest or
to secure the payment of taxes or other contributions or penalties.
However, the three rules are not "distinct" in the sense of being
unconnected: the second and third rules are concerned with particular
instances of interference with the right to peaceful enjoyment of
property and should therefore be construed in the light of the general
principle enunciated in the first rule (see, with further references,
Gasus Dosier- und Fördertechnik GmbH judgment of 23 February 1995,
Series A no. 306, p. 46, para. 55).
In the context of tax legislation, the European Court of Human
Rights has recently re-iterated that the legislature must be allowed
a wide margin of appreciation. The legislature's assessment will be
respected unless it is devoid of reasonable foundation (above-mentioned
Gasus judgment, p. 49, para. 60).
In the present case, NAPUK entered into a transaction on the
basis that it would have a particular tax effect. The Commission
accepts that that tax effect was based on the understanding of both the
Inland Revenue and the bulk of professional advice at the time. It
transpired, however, that the understanding was wrong: the Court of
Appeal in the Woolcombers case found (as the Inland Revenue expressed
it in the press release of 15 March 1988) that both the special rules
and the general rules on transfers of assets between members of the
same group applied. The result was that the base value for the
taxation of NAPUK's acquisition was the value of the shares in 1981 and
1982, and not the value when NAPUK acquired them, in April 1983.
The Commission will first consider NAPUK's claim that the Inland
Revenue could, and should, have informed it about the decision of the
General Commissioners in the case of Woolcombers: that decision had
been taken in July 1980, and if NAPUK had been informed of the
possibility that the general understanding of the law was not to be
accepted by the courts, it would have arranged its affairs in a
different - equally legitimate - way so as not to incur the greater
liability to tax.
As to the proceedings before the General Commissioners, NAPUK has
submitted that although proceedings before the General Commissioners
are private, and although the Commissioners' decisions are not
published, nothing would have prevented the Commissioners from
informing NAPUK of the General Commissioners' decision in the
Woolcombers case in a way which would not have revealed the identity
or the circumstances of the taxpayer in question. NAPUK has submitted
a press release in another case where decisions of the General
Commissioners were referred to.
On the basis that the decision of the General Commissioners in
the Woolcombers case could not have been anticipated, the Commission
sees no reason why the Revenue should have informed NAPUK in particular
or taxpayers generally about what it must have regarded as a maverick
decision. If the General Commissioners' decision was as unexpected as
the applicant company suggests, the Revenue must have been reasonably
confident of a successful appeal. Accordingly, the Commission does not
accept that the Revenue was acting in bad faith in not revealing the
Commissioners' 1981 decision in the Woolcombers case.
The remainder of NAPUK's claim under Article 1 of Protocol No. 1
(P1-1) and Article 14 (Art. 14) of the Convention is, in substance,
that the amendment to Section 273 of the Taxes Act 1970 which was
brought about by the Finance Act 1988 should have had retroactive
effect, so that NAPUK, too, could have benefitted from it. In this
connection the Commission again recalls that the legislature's
assessment in tax matters will be respected unless it is devoid of
reasonable foundation.
In reply to NAPUK's accountant's letter, the Financial Secretary
to the Treasury - a parliamentary assistant to the Chancellor of the
Exchequer - gave reasons for the decision not to give retroactive
effect to the amending legislation. Those reasons were, in summary,
that it would not be fair to individuals who had arranged their affairs
subsequent to the Woolcombers decision if the effects of that decision
were nullified retroactively. The Commission can see some force in
this argument, which cannot be considered to be "devoid of reasonable
foundation". The Commission can also accept that it would be difficult
to set up a system of retroactivity which depended on the will of the
taxpayer.
Finally, the Commission notes although the charge to tax which
eventually arose was not expressly foreseen by NAPUK or its advisers
(or probably by the Revenue), the possibility of the unexpected
happening cannot have been completely excluded: the clearance letter
to NAPUK's accountants confirmed that the transaction was a bona fide
commercial transaction, but did not state that the transaction would
have the desired effect for the purposes of corporation tax on
chargeable gains.
Given the limited nature of the Commission's consideration of the
complaints under Article 1 of Protocol No. 1 (P1-1) to the Convention,
and the reasons put forward for the decision not to give retroactive
effect to the legislation which "corrected" the Woolcombers decision,
the Commission finds the present case does not disclose a violation of
NAPUK's right of property, and that NAPUK was able to enjoy that right
without discrimination within the meaning of Article 14 (Art. 14) of
the Convention.
It follows that the application is manifestly ill-founded within
the meaning of Article 27 para. 2 (Art. 27-2) of the Convention.
For these reasons, the Commission, unanimously,
DECLARES THE APPLICATION INADMISSIBLE.
Secretary to the First Chamber President of the First Chamber
(M.F. BUQUICCHIO) (C.L. ROZAKIS)
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