CEDH · CASELAW;DECISIONS;DECCOMMISSION;ENG — 12 avril 1996

.sDD6737AE { font-size:11pt } .s211D6B00 { margin-top:0pt; margin-bottom:0pt; line-height:normal; widows:0; orphans:0; font-size:8.5pt } .sBB9EE52A { font-family:Arial }                          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)