Cook (Inspector of Taxes) v Medway Housing Society Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 19 December 1997 |
| Date | 19 December 1997 |
| Court | Chancery Division |
Chancery Division.
Lightman J.
Timothy Brennan (instructed by the solicitor of Inland Revenue) for the Crown.
Kevin Prosser QC (instructed by Trowers & Hamlins) for the taxpayer.
The following cases were referred to in the judgment:
Carpet Agencies Ltd v IR Commrs TAX(1958) 38 TC 223
Casey (HMIT) v Mounteagle Estate Co UNK[1962] Ir R 106
Fairburn Court Residents Association v IR Commrs SCD(1995) Sp C 12
Howth Estate Co v Davies (1934) 2 ITC 74
IR Commrs v 1933 Housing Society Ltd UNK[1946] ATC 355
IR Commrs v Buxton Palace Hotel Ltd TAX(1948) 29 TC 329
Marson (HMIT) v Morton TAX(1986) 59 TC 381
Power, Re, Public Trustee v Hastings ELR[1947] Ch 572
Wragg, Re, Wragg v Palmer ELR[1919] 2 Ch 58
Corporation tax - Carry forward of excess charges on income - Society acquired housing stock of council with funding from private sector - Society continued council's housing policy to provide affordable housing - Whether excess charges on income could be carried forward - Whether society was an investment company - Income and Corporation Taxes Act 1988 section 130Income and Corporation Taxes Act 1988, s. 130.
This was an appeal by the Revenue from the decision of a special commissioner that the society was an investment company withinIncome and Corporation Taxes Act 1988 section 130Income and Corporation Taxes Act 1988, s. 130 and was accordingly entitled to carry forward excess charges on income.
The society was formed in 1989 and was registered under theIndustrial and Provident Societies Act 1965. It was a body corporate and was formed to acquire the housing stock of Rochester Upon Medway City Council ("the council") with a view to providing housing for rent primarily for those living or working or otherwise connected with Rochester. It was not a registered housing association.
In order to obtain loans to fund the purchase of the housing a business plan was drawn up. The plan showed that the loans would be fully repaid in 21 years, subsequently reduced to 19 years because of interest rate reductions, and that thereafter there would be a revenue surplus which would increase in future years. After final repayment of the loans the rents would be used to improve the existing housing and to acquire or build additional housing. In 1990 the society purchased the council's housing stock. Rents charged to ex-council tenants were about 50 per cent below market rents and rents charged to new tenants were five per cent below market rent. Rents did not exceed the housing benefit level as most of the society's rental income was received by way of housing benefit payments. The society's rules stated that the distribution of profits was forbidden, on a winding up any surplus was to go to charity and that the society was not to trade for profit.
In the accounts for the year to 31 March 1994 there was a deficit of £1.3m for the year, and a deficit brought forward of £13.9m in line with the business plan. There had been a revenue surplus for the years ended 31 March 1995 and 1996. The society's claim to carry forward excess charges on income was refused.
The issue was whether the society was a "company whose business consists wholly or mainly in the making of investments and the principal part of whose income is derived therefrom …" and was therefore an "investment company" within Income and Corporation Taxes Act 1988 section 130s. 130 of the 1988 Act entitling the society to carry forward excess charges on income.
Held, dismissing the Revenue's appeal:
1. The term "investment" meant the laying out of moneys in anticipation of profitable capital or income return. The business plan made clear that the society was run with the intention of over time producing a profitable capital and income return.
2. Although it was one of the society's objects to provide affordable housing it was consistent with the object of purchasing property with the intention of making a profitable return. The fact that the profit was to be ploughed back in furthering objects of the society, and was not to be distributed to members, was irrelevant.
3. Although the society was not to trade for profit that was not inconsistent with the view that the society was an investment company because it did not prohibit the achievement of the object to make a profit with which to further the society's objects.
4. The holding of assets with a view to producing a profitable return was not merely incidental to the carrying on of some other business but was the very business carried on by the taxpayer. Accordingly the society was an investment company within Income and Corporation Taxes Act 1988 section 130s. 130 of the 1988 Act.
By originating motion pursuant to the Taxes Management Act 1970 section 56ATaxes Management Act 1970, s. 56A (as substituted by SI 1994/1813SI 1994/1813 with effect from 1 September 1994) the Revenue appealed to the High Court against the following decision of a special commissioner (Dr JF Avery-Jones) released on 3 September 1996.
1. The issue in this appeal by Medway Housing Society Ltd (the society) against a corporation tax assessment for the period ended 31 March 1994 and against a determination under Taxes Management Act 1970 section 41As. 41A of the Taxes Management Act 1970 for the same period is whether the society is an investment company, and accordingly whether it can carry forward excess charges on income. The society was represented by Mr Kevin Prosser QC and the inspector by Mr Alun Williams of the Solicitor's office of the Board of Inland Revenue.
2. There was a statement of agreed facts and I heard evidence from Mr T Pattison, the finance director of the society. I find the following facts.
3. The society was formed in 1989 as an industrial and provident society registered as such under the Industrial and Provident Societies Act 1965. It is a body corporate. It was formed to acquire the housing stock of Rochester Upon Medway City Council with a view to providing housing for rent primarily for those living or working or otherwise connected with Rochester. It is not a registered housing association.
4. The society's rules list a number of objects, the first of which is "providing constructing improving or managing houses for rent or licence or hostels". The other rules relate to similar functions, including providing amenities or services, and carrying out maintenance. The rules contain a borrowing power limited to £200m. Distribution of profits is forbidden and on a winding-up any surplus goes to charity.
5. In 1990 the society acquired the council's stock of housing of 8031 units which it purchased for £77m (a figure negotiated between the society, the council and the Department of the Environment) provided as to £20m from the council, which has since been repaid, and £61.5m by way of a seven-year loan from a syndicate of banks, which has since been refinanced with the private sector. The debts are not guaranteed by the council or anyone else. In order to obtain the loans, and at the time of the refinancing, a business plan was drawn up. This contains details of how the society intended to carry on its business and financial forecasts. These showed that a further £23.5m of borrowings would be required over the first seven years to finance refurbishment of pre-war dwellings and to cover interest. The plan showed that quickly the rents would exceed the outgoings for maintenance and interest, which is currently the case, and the loans would be fully repaid by year 21, now reduced to year 19 because of interest rate reductions which were not passed on to the tenants by way of reduction in rents. The original business plan showed that in year 21 when all the loans had been repaid there would be a revenue surplus of £30m which would increase in future years. Part of the loans was in the year to 31 March 1994 converted to a fixed rate of 6.2 per cent and an interest rate cap of eight per cent was purchased on another part, as well as making a repayment of £5m. After final repayment of the loans the rents would be used to improve the existing housing and to acquire or build additional housing.
6. The housing stock acquired from the council was well-maintained and repaired. This included high-rise blocks which had been surveyed in 1987 and the reports indicated that they were structurally in good condition and that there should be no structural problems for at least 50 years. There were about 450 prefabricated reinforced concrete properties which in some parts of the country have been found to be structurally unsound. However, 410 of these are structurally sound and the remaining 40 are being repaired by the society. There were also about 1300 pre-war dwellings for which the business plan allowed £12m to be spent on refurbishment over five years. Overall the society acquired housing stock with an indefinite useful life, well over 50 years. There is no question of the society having to apply its annual surpluses from year 19 onwards in replacing worn-out housing units.
7. Rents charged to ex-council tenants are about 50 per cent below market rents and rents charged to new tenants are five per cent below market rent. The council gave an undertaking to existing tenants that rents would not increase more than one per cent above the rate of inflation each year. The society agreed to abide by this undertaking and has exercised its right to increase rents by this amount. The undertaking given to new tenants was that rents would not increase by more than ten per cent above the rate of inflation. Originally the society...
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