New Angel Court Ltd v Adam (Inspector of Taxes) Also known as: Property Dealing Co v Inspector of Taxes

Court of Appeal (Civil Division) 16 March 2004

Case Analysis

Where Reported
[2004] EWCA Civ 242; [2004] 1 W.L.R. 1988; [2004] S.T.C. 779; 76 T.C. 9; [2004] B.T.C. 374; [2004] S.T.I. 892; (2004) 101(15) L.S.G. 28; (2004) 148 S.J.L.B. 357; [2004] N.P.C. 45; Times, April 12, 2004; Independent, March 24, 2004; Official Transcript

Case Digest
Subject: Tax Keywords: Computation; Corporation tax; Losses; Motive; Trading; Trading stock Summary: In deciding whether properties were acquired as trading stock, the Taxation of Chargeable Gains Act 1992 s.173(1) did not require the absence of fiscal considerations as elements in the acquisition of the asset in question but it did require the presence of a trading purpose. Abstract: The taxpayer (N) appealed against a decision upholding the dismissal of its appeal against a notice of determination of loss. N was a property developer within the Hilton Group. In 1994 the group owned a number of commercial properties, some held as investments and some as trading stock. The group decided to sell them off in an orderly fashion and by 1996 only "difficult" properties remained which did not form part of the trading stock of the subsidiaries which owned them. In 1996 the group decided that the properties should be transferred to N. Had the properties been sold on the open market they would have realised some GBP 68 million less than they had cost. N sold most of the properties in 1997. N's corporation tax return for 1996 was prepared on the basis that it had acquired the properties as trading stock for the purposes of the Taxation of Chargeable Gains Act 1992 s.173(1) so that for corporation tax purposes it had sustained a trading loss of some GBP 68 million which it could surrender to other companies in the group. The Revenue issued a notice of determination of loss excluding that loss from the corporation tax computation. N was unsuccessful in its appeal to the special commissioners. They ruled that they would have held that N had acquired the properties as trading stock if they had looked at N's position in isolation but they had to look at the position and purposes of the group and on

that basis the properties were not acquired by N as trading stock. The judge below dismissed N's appeal, holding that although fiscal motives would not "denature" what would otherwise be a commercial transaction, the commissioners had not erred in considering the position of the group as a whole and concluding that N did not have any independent purpose in disposing of the properties which was fiscally motivated. N submitted that authority indicated that a commercial purpose was sufficient to lead to a conclusion that the properties were acquired as trading stock and that the commissioners were wrong in so far as they relied on a fiscal motive as tending to show that N did not acquire the properties as trading stock. Held, allowing the appeal, that the Revenue could not object when a taxpayer had obtained a tax advantage by availing itself of the opportunity which the legislation itself offered to convert a capital loss of one company into a trading loss available for group relief. Fiscal considerations were to be ignored in determining whether an asset had been acquired as trading stock for the purposes of s.173(1) of the Act, Coates (Inspector of Taxes) v Arndale Properties [1984] 1 W.L.R. 1328 and Reed (Inspector of Taxes) v Nova Securities Ltd [1985] 1 W.L.R. 193 applied. However, an investigation into the purpose of the acquisition was still required since s.173(1) required the presence of a trading purpose as an element in the acquisition of the asset in question. A trading purpose was not negated by the presence of fiscal considerations. The commissioners had erred in principle in so far as they found that the group's purpose of disposing of the properties somehow negated the trading purpose which they had found existed when looking at N in isolation. Having reached that conclusion the commissioners need have gone no further and they erred in making their further findings by reference to "group purpose". N had acquired the properties as trading stock within the meaning of s.173(1). The acquisition satisfied the test in Reed because the properties were assets of a kind which were sold in the ordinary course of N's trade and they were acquired by N for the purposes of that trade with a view to resale at a profit. Judge: Lord Phillips of Worth Matravers, M.R.; May, L.J.; Jonathan Parker, L.J. Counsel: For the appellant: Jonathan Peacock QC. For the respondent: Philip Jones. Solicitor: For the appellant: Levy Watters. For the respondent: Inland Revenue Solicitor.

Appellate History & Status

Special Commissioners New Angel Court Ltd v Adam (Inspector of Taxes) [2003] S.T.C. (S.C.D.) 233; [2003] S.T.I. 944; (2003) 147 S.J.L.B. 694; Official Transcript Affirmed Chancery Division New Angel Court Ltd v Adam (Inspector of Taxes) [2003] EWHC 1876 (Ch); [2003] S.T.C. 1172; [2003] B.T.C. 451; [2003] S.T.I. 1385; (2003) 100(38) L.S.G. 35; Times, August 8, 2003; Official Transcript Reversed Court of Appeal (Civil Division) New Angel Court Ltd v Adam (Inspector of Taxes)

[2004] EWCA Civ 242; [2004] 1 W.L.R. 1988; [2004] S.T.C. 779; 76 T.C. 9; [2004] B.T.C. 374; [2004] S.T.I. 892; (2004) 101(15) L.S.G. 28; (2004) 148 S.J.L.B. 357; [2004] N.P.C. 45; Times, April 12, 2004; Independent, March 24, 2004; Official Transcript

Significant Cases Cited

Wandsworth LBC v Michalak [2002] EWCA Civ 271; [2003] 1 W.L.R. 617; [2002] 4 All E.R. 1136; [2003] 1 F.C.R. 713; [2002] H.L.R. 39; [2002] N.P.C. 34; Official Transcript; CA (Civ Div) Reed (Inspector of Taxes) v Nova Securities Ltd [1985] 1 W.L.R. 193; [1985] 1 All E.R. 686; [1985] S.T.C. 124; [1985] P.C.C. 209; 59 T.C. 516; (1985) 82 L.S.G. 1174; (1985) 129 S.J. 116; HL

FROM- THE JUDJMENT-- Conclusions

87. By enacting section 173(1), Parliament has placed groups of companies on the same footing as an individual trader in relation to appropriations of assets as trading stock. It has thereby provided groups of companies with an opportunity to secure an advantage for corporation tax purposes by appropriating an asset as trading stock and thereby converting a capital loss of one company in the group into a trading loss available for group relief. It has, in other words, made express provision for the kind of fiscal alchemy to which Vinelott J referred in the passage in his judgment in Overseas Containers v. Stoker quoted by Lord Templeman in Ensign Tankers (see paragraph 47 above). Accordingly, as Lord Templeman observed in Reed v. Nova Securities at 202B (in the passage quoted in paragraph 24 above), the Revenue cannot complain that a taxpayer has obtained a tax advantage by availing itself of the opportunity which the legislation itself offers. 88. It is in that context and against that background that the significance of the Special Commissioners' findings as to the purposes or purposes behind the transfer of the Properties to NAC, and in particular their finding (in paragraph 26 of the Decision) that there was no purpose other than tax for the transfer, fall to be considered. 89. However, before turning to the Special Commissioners' findings I would make the following general points. First, in the light of Lord Templeman's speech in Ensign Tankers (and in particular the passage quoted in paragraph 46 above), the observations of Sir Nicolas Browne-Wilkinson V-C in that case relating to the relevance of fiscal purpose, and in particular the distinction which he sought to draw between sole purpose and paramount purpose, are no longer good law. The same must also apply, in my judgment, to the ViceChancellor's explanation of Coates v. Arndale in the passage in his judgment in Overseas Containers (Finance) Ltd v. Stoker quoted in paragraph 38 above. 90. Second, it is in my judgment clear from both Coates v. Arndale and Reed v. Nova Securities, and confirmed by Lord Templeman in Ensign Tankers, that in determining whether an asset has been acquired as trading stock for the purposes of section 173(1) fiscal considerations are to be ignored. As Lord Templeman said in Coates v. Arndale at p.1330D:

There were therefore sound commercial reasons for converting the potential capital loss of SPI into a trading loss suffered by Arndale and there is express statutory provision which enables this to be done for corporation tax purposes. 91. Similarly, in Reed v. Nova Securities (at p.197AB) Lord Templeman was content to assume that the group's object was to obtain a tax advantage. As he put it in Ensign Tankers, when referring to Reed v. Nova Securities (in the passage from his speech quoted in paragraph 37 above): There was a tax avoidance motive in both transactions. This did not prevent the taxpayer from claiming and proving that the book debts had been acquired and disposed of as trading stock. 92. It is also to be noted that in Ensign Tankers Lord Templeman was able to conclude (at p.680A, in the passage quoted in paragraph 47 above) that the composite transaction in that case was (at least in part) a trading transaction, whatever its design. 93. In my judgment, therefore, the mere fact that a group of companies sets out to avail itself of the opportunity of obtaining a fiscal advantage which Parliament has itself provided says nothing as to whether the requirement which Parliament has imposed as the condition of obtaining that fiscal advantage that is to say that the asset in question must be acquired as trading stock has been fulfilled. It would, as it seems to me, be strange if it were otherwise. Indeed, I find it hard to conceive of a situation in which an asset is acquired under an intra-group transfer as trading stock, and an election made to convert the capital loss into a trading loss, where fiscal considerations have not played some part in the thinking of those concerned in planning or executing the transaction. 94. So in my judgment fiscal considerations (whether they be described in terms of motive, purpose, or object) must be put entirely on one side in considering whether an asset was acquired as trading stock for the purposes of section 173(1). 95. That is not to say, however, that an investigation into the purpose of the acquisition is not required. It is plain from Coates v. Arndale and Reed v. Nova Securities that such an investigation is required. As Lord Templeman made clear in Reed v. Nova Securities (in the passage from his speech quoted in paragraph 32 above), not only must the asset which has been transferred be of a kind which is sold in the ordinary course of the company's trade but it must have been acquired by the taxpayer for the purposes of that sale with a view to resale at a profit. It is therefore necessary to consider the purpose of the transfer. Was it for the purposes of the taxpayer's trade? Or, to put it another way, did acquisition of the asset have a trading purpose? 96. In Coates v. Arndale the acquisition of the lease by Arndale had no trading purpose, since (for the reasons given by Lord Templeman in the passage from his speech quoted in paragraph 28 above) the transaction had no commercial justification. Its object, as Lord Templeman concluded, was not to enable Arndale to trade with the lease but to achieve a tax advantage whilst at the same time retaining the lease within the group as a capital asset. It was not the object of obtaining a tax advantage which was fatal to the taxpayer's case in Coates v. Arndale; rather, it was the fact that Arndale did not acquire the lease for a trading purpose. It did not acquire the lease for a trading purpose because it was always intended that the lease should be immediately assigned on to APTL, which would retain it as a capital asset

(see Lord Templeman's reference to a contemporaneous and pre-arranged sale in the passage in his speech in Reed v. Nova Securities quoted in paragraph 32 above). Lord Templeman described the so-called 10,000 profit to Arndale as a timid veil designed to conceal the fact that the lease was not being traded. If it was timid, it was certainly transparent. 97. Similarly, in Reed v. Nova Securities, the House of Lords had to consider the question whether it could be said that no reasonable tribunal properly directed could have concluded that the transactions in question were trading transactions. In the result, the House of Lords concluded that whereas that could be said in relation to the shares, which were worthless, it could not be said in relation to the book debts, for the acquisition of which there could have been some commercial justification. As Fox LJ said in the Court of Appeal, in a passage quoted by Lord Templeman (see paragraph 35 above), the taxpayer in that case bought property of a kind in which it was authorised to deal, and before deciding to buy it the board of the taxpayer considered what, in ordinary commercial terms, was the profit which [the taxpayer] was likely to make on the transaction. Hence, the acquisition of the shares by the taxpayer had no trading purpose. 98. In my judgment, therefore, section 173(1) does not require the absence of fiscal considerations as elements in the acquisition of the asset in question: rather, it requires the presence of a trading purpose. As Coates v. Arndale and Reed v. Nova Securities demonstrate, a trading purpose is not negatived by the presence of fiscal considerations: to use Megarry J's word (in Lupton) the existence of fiscal considerations will not denature a trading purpose, just as the existence of fiscal considerations will not prevent what would otherwise be a trading transaction from being regarded as such for the purposes of section 173(1). 99. At the heart of the matter, as it seems to me, is the need to recognise that in the context and for the purposes of section 173(1) a trading transaction may be dictated entirely by fiscal considerations, without losing its character as a trading transaction (see, in particular, Lord Templeman's reference to sound commercial reasons in the passage from his speech in Coates v. Arndale quoted in paragraph 90 above). 100. I turn now to the Decision. It follows from what I have said above that in my judgment the Special Commissioners directed themselves entirely correctly when, in paragraph 21 of the Decision (quoted in paragraph 52 above), they identified the issue for decision as being simply whether [NAC] acquired the Properties as trading stock, not whether its purpose was to save tax (emphasis supplied), and when, later in the same paragraph, they said: The question whether [NAC] acquired the Properties as trading stock is not to be decided by whether it acquired the Properties for tax reasons. 101. However, having directed themselves correctly, the Special Commissioners in my judgment failed to follow their own directions. In paragraph 23 of the Decision they posed a different question, viz. What was the purpose of the change on 13 November 1996 and what really changed on that date? They then went on to find that, in substance, nothing had changed. They made that finding, as I understand it, by reference to the group's purpose to dispose of the Properties whichever company owned them (see paragraph 27 of the Decision, quoted in paragraph 55 above), and notwithstanding that, looking at NAC in

isolation, they would have had no hesitation in concluding that it had acquired the Properties as trading stock (see paragraph 28 of the Decision, quoted in paragraph 55 above). 102. In my judgment the Special Commissioners erred in principle in so far as they found that the Group's purpose of disposing of the Properties, whichever company owned them, somehow negatived the existence of the trading purpose which (implicitly) they would have found to exist looking at [NAC] in isolation. In the case of an intra-group transfer there will almost invariably be an element of group purpose, but this cannot negative the trading purpose which (as the Special Commissioners found) would have existed but for such group purpose. As pointed out earlier, by section 173(1) Parliament has given groups of companies the opportunity to secure a tax advantage. The fact that a group, as a group, has decided to avail itself of that opportunity is not to any degree inconsistent with the fulfilment of the condition which Parliament has imposed, viz. that the asset must be acquired as trading stock. A fortiori, as it seems to me, the fact that the Group in the instant case had adopted a policy of selling off its commercial properties says nothing as to whether NAC acquired the Properties as trading stock. 103. In my judgment Mr Peacock was right when he submitted that having reached the conclusion that, looked at in isolation, NAC acquired the Properties as trading stock the Special Commissioners need have gone no further, and that they erred in making their further findings by reference to group purpose. 104. Nor, with respect to the Special Commissioners, can I discern any evidential basis for their findings (in paragraph 29 of the Decision, quoted in paragraph 57 above) that NAC continued to realise the Properties held by the vendor companies as capital assets in exactly the same way as the vendor companies had done, and that NAC was merely a vehicle through which the existing investment companies sold the Properties as investments. It seems to me that these findings merely beg the question which the Special Commissioners had to answer (viz. did NAC acquire the Properties as trading stock). 105. Finally, so far as the Decision is concerned, I respectfully disagree with the Special Commissioners' conclusion (in paragraph 31 of the Decision, quoted in paragraph 57 above) that a commercial person knowing all the facts would not conclude that NAC acquired the Properties as trading stock. For what it may be worth, on the assumption that the commercial person knew that NAC was a property dealer, and that following its acquisition of the Properties NAC in fact traded with them and succeeded in selling all but one of them, I would be surprised if he did not reach the opposite conclusion. 106. I turn now to the judge's judgment. With two qualifications, I would accept the judge's summary of the applicable legal principles in paragraph 97 of his judgment (quoted in paragraph 68 of his judgment). The first qualification is the general one that the summary should be read subject to my conclusions as expressed in paragraphs 87 to 99 above. 107. The second qualification is more specific. In the final sentence of subparagraph (8) the judge says this: But the fact that there is profit, or the fact that there may be some conceivable reason for the transaction does not necessarily mean that it was acquired as trading stock.

108. In my judgment, the true test is that adumbrated by Lord Templeman in Reed v. Nova Securities (see paragraph 95 above). If that test is met, the conclusion follows that the asset in question was acquired as trading stock within the meaning of section 173(1). 109. As to the judge's conclusions, as set out in Section VIII of his judgment (quoted in paragraph 69 above), in my judgment he erred in regarding the window-dressing which the Special Commissioners found to have occurred (albeit to a significantly more limited extent than the judge recognised) as pointing to the conclusion that the acquisition of the Properties was not an acquisition as trading stock. 110. For my part, I have no hesitation in concluding that NAC acquired the Properties as trading stock within the meaning of section 173(1). The Properties were assets of a kind which were sold in the ordinary course of NAC's trade; and they were acquired by NAC for the purposes of that trade, with a view to resale at a profit. As Lord Templeman said in Ensign Tankers (in the passage from his speech quoted in paragraph 46 above) actions speak louder than words, and in every case the law must be applied to the facts. The facts in the instant case were that (as the Special Commissioners found) the price at which NAC acquired the Properties was a proper market price; that following its acquisition of the Properties NAC set about selling them and succeeded in selling all but one of them; and that in so doing NAC made a real profit (contrast the timid veil in Coates v. Arndale). The conclusion follows that NAC's acquisition of the Properties was a trading transaction entered into for a trading purpose; and that NAC accordingly acquired the Properties as trading stock within the meaning of section 173(1). 111. The correctness of this conclusion is in my judgment confirmed by the Revenue's acceptance that NAC acquired the Additional Properties as trading stock. The transaction under which NAC acquired the Properties and the transaction under which it acquired the Additional Properties appear to have been in all material respects identical, and following those acquisitions NAC dealt with the Properties and the Additional Properties in exactly the same way. Indeed, the sale to Minerva plc included six of the Properties and seven Additional Properties (see paragraph 15 above). In the circumstances it seems to me impossible to draw any relevant distinction between NAC's acquisition of the Properties and its acquisition of the Additional Properties. To my mind, the Revenue's acceptance that the Additional Properties were acquired by NAC as trading stock demonstrates the absurdity of its contention that the Properties were not similarly acquired. 112. It follows that in my judgment the only true and reasonable conclusion contradicts that which the Special Commissioners and the judge reached.

Result
113. I would allow this appeal. Lord Justice May: 114. I agree. Master of the Rolls: 115. I also agree.

Order: Appeal allowed with costs of the appeal and in the court below to be subject to detailed assessment if not agreed. Leave to appeal to the House of Lords refused.

Clarke (Inspector of Taxes) v BT Pension Scheme Trustees Also known as: Clarke (Inspector of Taxes) v Trustees of BT Pension Scheme Trustees of BT Pension Scheme v Clark (Inspector of Taxes) British Telecom Pension Scheme Trustees v Clarke (Inspector of Taxes) Clark (Inspector of Taxes) v British Telecom Pension Scheme Trustees Clark (Inspector of Taxes) v Trustees of the British Telecom Pension Scheme
Court of Appeal (Civil Division) 24 February 2000

Case Analysis

Where Reported

[2000] S.T.C. 222; [2000] O.P.L.R. 53; [2000] Pens. L.R. 157; 72 T.C. 472; [2000] B.T.C. 64; [2000] S.T.I. 217; (2000) 97(10) L.S.G. 37; (2000) 144 S.J.L.B. 119; Times, March 7, 2000; Official Transcript

Case Digest

Subject: Tax

Keywords: Exemptions; Income tax; Pension schemes; Underwriting Summary: The trustees of a pension fund appealed against the judge's ruling that the profits of their subunderwriting activities were taxable as trading income. The trustees submitted that the judge had been wrong to conclude that the Commissioners had erred in giving a purposive construction to the Income and Corporation Taxes Act 1988 s.592(3). The court held that, whilst the Commissioners had shown a tendency to error on the construction of s.592(3), that tendency had not vitiated their decision, and they had rightly concluded that the trustees' subunderwriting activities formed an integral part of the investment process. Abstract: BTPST, who had wide powers of investment including underwriting, received commission in respect of their subunderwriting activities. The special commissioners considered whether the profits received from those activities were trading income, taxable under Sch.D, or whether they were an integral part of the investment process and thereby eligible for income tax exemption under the Income and Corporation Taxes Act 1988 s.592(3). The commissioners concluded that, although subunderwriting had features

indicative of trading, BTPST's motive in engaging in subunderwriting was to exercise their investment powers, and that the resulting income was exempt from tax. The Revenue succeeded on appeal, the judge having found ([1998] S.T.C. 1075) that the commissioners had made a critical mistake in applying a purposive construction to s.592(3), and that the income was taxable as trading income. BTPST appealed, contending that the judge had been wrong to interfere with the commissioners' decision. Held, allowing the appeal, that although the commissioners had shown some inclination towards error on their construction of s.592(3), that tendency had no causal connection with their conclusion and had not, therefore, vitiated their decision. They had carefully appraised the evidence to ascertain the commercial reality of the subunderwriting operations and were right to find that the common features of subunderwriting and trading were not determinative. There were substantial grounds for their conclusion that the subunderwriting activities formed an integral part of the investment process and the judge had been wrong to interfere with that conclusion, Cooper (Inspector of Taxes) v C&J Clark Ltd [1982] S.T.C. 335 followed. Judge: Dame Elizabeth Butler-Sloss (President); Robert Walker, L.J.; May, L.J. Counsel: For C: Ross Cranston Q.C. and Timothy Brennan. For the BTPST: Michael Flesch Q.C. and Felicity Cullen. Solicitor: For C: Inland Revenue Solicitor. For the BTPST: Maxwell Batley.

Appellate History & Status

Special Commissioners Clarke (Inspector of Taxes) v BT Pension Scheme Trustees [1997] O.P.L.R. 279 Reversed Chancery Division Clarke (Inspector of Taxes) v BT Pension Scheme Trustees [1998] S.T.C. 1075; [1998] O.P.L.R. 243; [1998] B.T.C. 362; (1998) 142 S.J.L.B. 268; Times, October 16, 1998; Independent, October 26, 1998; Official Transcript Reversed Court of Appeal (Civil Division) Clarke (Inspector of Taxes) v BT Pension Scheme Trustees [2000] S.T.C. 222; [2000] O.P.L.R. 53; [2000] Pens. L.R. 157; 72 T.C. 472; [2000] B.T.C. 64; [2000] S.T.I. 217; (2000) 97(10) L.S.G. 37; (2000) 144 S.J.L.B. 119; Times, March 7, 2000; Official Transcript

Significant Cases Cited

Cooper (Inspector of Taxes) v C&J Clark Ltd [1982] S.T.C. 335; 54 T.C. 670; [1982] B.T.C. 130; Ch d