Chappell v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 12 November 2008 |
| Date | 12 November 2008 |
| Court | Special Commissioners (UK) |
special commissioners decision
Dr John F Avery Jones CBE
The Appellant in person
Lee Paddon and Nicola Parslow, HMRC Appeals Unit London & Anglia for the Respondents
Income or capital gain - payment for sale of partnership share - capital gain but no taper relief because the trade had not commenced - appeal dismissed
A special commissioner decided that the sale by a taxpayer of part of his share in a consortium partnership did not qualify for business taper relief. Since the partnership had not yet acquired any assets and had not begun trading, the interest sold was not an asset that was being used for the purposes of a trade carried on at the time of the disposal by a partnership of which the taxpayer was a member.
The taxpayer entered into an oral agreement with D in respect of property ventures under which each had a 50 per cent interest ("the consortium"). The taxpayer, on behalf of the consortium, was interested in acquiring the head lease of a substantial property and in order to increase the chances of success of the venture, he entered into an agreement with another company ("Swan") under which for £500,000 the taxpayer sold to Swan 10 per cent of his 50 per cent interest (i.e. 5 per cent of the whole) in the consortium.
The taxpayer regarded what he was selling as the opportunity to take part in the consortium. His tax return described it as a sale of his interest in the goodwill of the consortium. The consortium failed to persuade the leaseholders to sell and the property was eventually sold to another purchaser in September 2005.
The taxpayer contended that the sale made by the agreement was of a capital asset that qualified for business taper relief which he claimed in his self-assessment return. The Revenue rejected that claim and made an amendment to his self-assessment for the year 2002-03 giving effect to the conclusions contained in a closure notice to the effect that taper relief of 75 per cent was not available and that the income was taxable under Sch. D, Case I.
The taxpayer appealed.
Whether a receipt by the taxpayer of £500,000 pursuant to an agreement of 1 May 2002 should be subject to capital gains tax as a business asset with taper relief of 75 per cent or income tax either under Sch. D, Case I or Case VI.
The special commissioner (Dr John Avery Jones) (dismissing the appeal) said that it could be inferred from the facts that the consortium was a partnership and the sale pursuant to the agreement was of a partnership share or interest, i.e. of a share in the underlying assets.
There was no rule of law that the parties to a joint venture did not become partners until actual trading commenced. The rule was that persons who agreed to carry on a business activity as a joint venture did not become partners until they actually embarked on the activity in question. It was necessary to identify the venture in order to decide whether the parties had actually embarked upon it, but it was not necessary to attach any particular name to it. Any commercial activity which was capable of being carried on by an individual was capable of being carried on in partnership. However, in relation to trade it was impossible to commence a trade without acquiring trading assets and the consortium had never started to trade.
There was no suggestion that the taxpayer had entered into the consortium intending to sell an interest in the consortium and so it was difficult to see how he could be taxable on the sale under Sch. D, Case I. In this case, under the agreement the taxpayer agreed to use his best endeavours to seek acceptances of the offers to purchase and to take all reasonable steps relating to its onward disposal. While the taxpayer had agreed to perform services, the payment was really for 10 per cent of his 50 per cent partnership share and not realistically for services which it was in the taxpayer's interest to carry out anyway because they benefited his remaining 40 per cent partnership interest. Accordingly Case VI was applicable.
The Revenue did not suggest that Income and Corporation Taxes Act 1988 section 776s. 776 might apply, presumably because no property was ever acquired, so that did not need to be considered. That left capital gains. A partnership interest, which was essentially a share in the partnership assets, which were in this case intangible, could be a capital asset liable to capital gains tax and that was the right head of charge here.
However the partnership share was not an asset that was being used for the purposes of a trade carried on at the time of the disposal by a partnership of which the taxpayer was a member pursuant to Taxation of Chargeable Gains Act 1992 schedule 1A subsec-or-para 5TCGA 1992, Sch. 1A, para. 5. The partnership would have been a trader if it had acquired the property. But since it never started to trade, the assets representing the partnership interest were not being used for the purposes of a trade carried on by the partnership.
Accordingly the amendment to the self-assessment would be upheld but as a capital gain without any taper relief, on which the same income tax was due but not National Insurance contributions of £1,806, making the amendment income tax of £181,455.20.
1. Mr Christopher Martyn Chappell appeals against an amendment to his self-assessment for the year 2002-03 giving effect to the conclusions contained in a closure notice dated 21 June 2007 to the effect that taper relief of 75 per cent is not available and that the income was taxable under Case I of Schedule D. The Appellant appeared in person; the Respondents ("the Revenue") were represented by Mr Lee Paddon and Mrs Nicola Parslow.
2. The issue in this appeal is how a receipt by the Appellant of £500,000 pursuant to an agreement of 1 May 2002 should be taxed, the Appellant contending for capital gains tax as a business asset with taper relief of 75 per cent, and the Revenue for income tax either under Case I or Case VI of Schedule D.
3. The Appellant provided a witness statement and gave evidence and was cross-examined on one point. I also had a bundle of documents. I find the following facts:
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(2) The Appellant entered into an oral agreement with Mr Jack Dellal, who is a well known figure in the property world, for property ventures under which each had a 50 per cent interest. This is described as a consortium called the Allied Commercial Consortium ("the Consortium"). I deal with its nature below.
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(3) The Appellant, on behalf of the Consortium, was interested in acquiring the head lease of Dolphin Square from Westminster City Council together with the sublease owned by Dolphin Square Trust Limited. He considered that by merging the two and actively managing the property, including granting long leases to tenants wanting to acquire them the value would be enhanced. Since the purchase was never finalised I shall not set out any details of what was proposed. Negotiations for the purchase began when an offer of £120m was made in November 2000, but no doubt there were earlier actions taken by the Appellant although I did not see anything as early as October 1999 mentioned in the Appellant's income tax return (see below). The offer was later increased to £145m although I am not sure when, but the offers were eventually unsuccessful.
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(4) Mr Justin Cadbury contacted the Appellant in connection with the property venture and the Appellant considered that the chances of success for the purchase would be increased if Mr Cadbury were involved. The Appellant entered into an agreement of 1 May 2002 ("the Agreement") with Swan House Investments Holdings Limited ("Swan"), Mr Cadbury's holding company under which for £500,000 the Appellant sold to Swan 10 per cent of his 50 per cent interest (i.e. 5 per cent of the whole) in the Consortium.
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(5) The Agreement recited that the Appellant on behalf of the Consortium had been engaged in research into the Dolphin Square project for 2 years and that they had received an offer dated 21 February 2002 from Crown Dilmun plc for the sale of the two leasehold interests for £175m. The offer...
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