Case: Aberdeen Construction Group Ltd v Commissioners of Inland Revenue (1978) 52 TC 281
Outcome: considered
In the United Kingdom, the distinction between the 'value' of an asset and its 'state' or 'nature' was drawn in Aberdeen Construction Group Ltd v Commissioners of Inland Revenue (1978) 52 TC 281 which was concerned, in part, with para 4(1)(b) of Sch 6 to the Finance Act 1965 (UK). 57 Section 160ZH(3)(c), which was introduced into the Act later in time is in similar, but not identical, terms to this UK provision. The taxpayer did point out that the first limb of the UK provision requires that expenditure be incurred on the asset, but I do not regard that a difference determinative of the issue before me and the way I consider the s 160ZH(3)(c) should be interpreted. 58 Under paragraph 4(1)(b) of Sch 6 of the UK provision, one of the sums allowable as a deduction in the computation of the gain accruing to a person on the disposal of an asset was: (b) the amount of any expenditure wholly and exclusively incurred on the asset by him or on his behalf for the purpose of enhancing the value of the asset, being expenditure reflected in the state or nature of the asset at the time of the disposal ... 59 In construing paragraph 4(1)(b), UK courts have indicated that the state or nature of a share does not include its value. In Aberdeen Construction 52 TC 281, Lord President Emslie found that expenditure by the taxpayer in the form of loans to a company that were later waived was not the kind of expenditure to which paragraph 4(1)(b) was directed and the paragraph was therefore not applicable. However, the Lord President went on to state (at 290): In any event, by no reasonable stretch of the imagination is it possible to classify the making of the loans or their waiver as expenditure wholly and exclusively incurred "on" the shares and I find it impossible to say that either were reflected in the state or nature of the shares which were sold. The waiver of the loans may well have enhanced their value but what para 4(1)(b) is looking for is, as the result of relevant expenditure, an identifiable change for the better in the state or nature of the asset, and this must be a change distinct from the enhancement of value. 60 Lord Avonside said that the loan 'may have enhanced [the share's] value in so far as it might give [the company] working capital helpful to its trading. When the loan was waived the shares remained in their state and nature unchanged' (at 294). 61 This issue was not considered by the House of Lords when the matter went on appeal, although the appeal was successful. 63 The Commissioner before me relied upon above passages in the UK authorities, and particularly the last sentence in Fenston's case. On the other hand, the taxpayer submitted that the UK authorities have no precedential value, either because in the case of Aberdeen the actual decision relied on was overturned by the House of Lords, and in the case of Fenston , the comments relied upon were clearly dicta. The taxpayer also contended that the dicta relied upon by the Commissioner before me in the above passages was wrong. 66 The comments therein relied upon by the Commissioner do support the approach to the concepts of 'value', and 'state or nature' included within similar legislation which accord with my own view of the operation of s 160ZH(3)(c). It may not have been strictly correct to refer (as was done by the Lord President in Aberdeen ) to 'an identifiable change', or a 'change distinct from the enhancement of value'. The UK provision, like s 160ZH(3)(c) does not specifically talk in terms of 'change', only the need for the expenditure being reflected in the state or nature of the asset. However, the clear approach taken by the UK authorities is to treat 'value' as a concept falling outside the concept of 'state or nature' in similarly worded legislation dealing with the same subject matter. 67 Finally, in the taxpayer's submission, excluding the capital contribution from the cost base of the NMUK shares would give rise to an anomalous result. Payments into shareholders' funds may take a variety of forms, including the purchase of shares, the payment of calls on shares, and as here, by the making of capital contributions. It was contended that to allow some of these payments to be taken into account in determining cost base, but not others (being the capital contribution), is not capable of rational explanation. 68 The Commissioner responded to this submission by contending that the exclusion of the capital expenditure of &#8356;42.912 million from the reduced cost base of the shares does not give rise to an anomalous result. It may be that the amount would have been part of the cost base if it had taken some other form. However, the way in which a company raises capital can take many forms, each with different taxing consequences. Moreover, it was submitted that the provision is not specific to cost base in respect of shares, but to assets generally. The way in which the taxpayer here determined to contribute capital to NMSLAL should not dictate the proper construction of the section because the taxpayer may have been able to secure the expenditure as part of the cost base if it had been done differently.