Falmer Jeans Ltd v Rodin (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 26 January 1990 |
| Date | 26 January 1990 |
| Court | Chancery Division |
Chancery Division.
Millett J.
Mr Graham Aaronson QC (instructed by Constant & Constant) for the taxpayer.
Mr Alan Moses (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Bell v National Provincial Bank of England Ltd TAX(1903) 5 TC 1
Briton Ferry Steel Co Ltd v Barry (HMIT) TAX(1939) 23 TC 414
Laycock (HMIT) v Freeman, Hardy & Willis Ltd TAX(1938) 22 TC 288
Corporation tax - Carry forward of losses - Company reconstructions without change of ownership - Taxpayer's trade was selling clothing manufactured by another member of the group - Taxpayer took over activities of manufacturer which had ceased trading - Manufacturing activities absorbed into single trade of manufacturing and selling clothing - Whether taxpayer could claim unrelieved losses of manufacturing company - Whether taxpayer was successor to manufacturer's trade - Income and Corporation Taxes Act 1970 section 252Income and Corporation Taxes Act 1970, sec. 252 (nowIncome and Corporation Taxes Act 1988 section 343Income and Corporation Taxes Act 1988, sec. 343).
This was an appeal by the taxpayer company against the decision of a special commissioner that in taking over the manufacturing activities of its main supplier, another member of the same group which had previously made up garments for a fee, the taxpayer did not succeed to the trade of the manufacturing company and was therefore not entitled to claim carry forward relief in respect of accrued losses sustained by the manufacturing company by virtue of the Income and Corporation Taxes Act 1970 section 252Income and Corporation Taxes Act 1970, sec. 252.
The taxpayer ("FJ") was at all material times a directly held subsidiary of Falmer International Ltd. It sold clothing and, until 1984, did nothing else. Its principal supplier was another subsidiary of Falmer International Ltd ("FMS") which manufactured garments exclusively for FJ from cloth supplied by FJ. FMS's services were charged to FJ on the basis of cost plus a margin representing a proper commercial return.
FMS had made losses over a number of years and on 31 December 1983 ceased trading. On the following day FJ took over FMS's assets and carried on the manufacturing activities in its own name. Thereafter FJ carried on a single trade of manufacturing and selling clothing but the costs attributable to the manufacturing trade previously carried on by FMS were separately identified in FJ's accounts.
FJ appealed to a special commissioner against the refusal by the inspector of its claim to be entitled under the Income and Corporation Taxes Act 1970 section 252 subsec-or-para (3)Income and Corporation Taxes Act 1970, sec. 252(3) to carry forward each year so much of FMS's accrued losses as would cover the notional profits on the manufacturing side of FJ's business.
The question was whether, on taking over FMS's manufacturing activities, FJ succeeded to the trade of FMS within Income and Corporation Taxes Act 1970 section 252 subsec-or-para (1)sec. 252(1).
The special commissioner held that the activities of FMS which were subsequently carried on by FJ were "bare activities" not amounting to a trade because the means by which profits were earned, i.e. the fee paid for making up the garments, had disappeared. The trade of FMS, which was entirely with FJ, was not taken over by FJ but ceased to exist since FJ could not trade with itself. FJ did not carry on the trade previously carried on by FMS and was not entitled to carry forward FMS's losses.
Held, allowing FJ's appeal:
1. Under Income and Corporation Taxes Act 1970 section 252 subsec-or-para (1)sec. 252(1) the successor was required to carry on the very same trade as the predecessor. Income and Corporation Taxes Act 1970 section 252 subsec-or-para (7)Subsection (7) extended Income and Corporation Taxes Act 1970 section 252 subsec-or-para (1)subsec. (1) to allow carry forward relief where the trading activities formerly carried on by the predecessor were carried on by the successor and where the profits from those activities were realised in the form of global receipts which did not distinguish between the different activities by which they were earned.
2. Income and Corporation Taxes Act 1970 section 252 subsec-or-para (7)Subsection (7) concentrated on the trading activities and not on the trade by treating the trading activities which the successor began to carry on as if they were a separate trade. Income and Corporation Taxes Act 1970 section 252 subsec-or-para (8)Subsection (8) then apportioned part of the successor's expenses and receipts to that separate trade. The requirements of Income and Corporation Taxes Act 1970 section 252 subsec-or-para (7)subsec. (1) were satisfied when the deeming provisions of Income and Corporation Taxes Act 1970 section 252 subsec-or-para (7)subsec. (7) were brought into play.
3. There were two changes when FJ took over FMS's trade: FMS no longer made up FJ's cloth to specification and no separate charge was made for manufacturing services. However, the manufacturing activities were still conducted for reward and profit was earned by selling the finished articles. It was impossible to identify any physical activity of the trade formerly carried on by FMS which was not undertaken by FJ, except the charging of a fee by FMS to FJ. But that could not be an essential activity of the relevant trade if the deeming provision and the apportionment of receipts provided for by Income and Corporation Taxes Act 1970 section 252 subsec-or-para (8)subsec. (8) were to have effect.
1. On 16 and 17 November 1988 I, one of the special commissioners, heard appeals by Falmer Jeans Ltd ("FJ") against assessments to corporation tax in respect of its profits for the three years ending on 31 December 1984, 1985 and 1986.
2. Shortly stated, the question for my decision was whether, in computing the amount of the chargeable profits for the said years, FJ was entitled to deductions in respect of losses which had previously accrued to another company, Falmer Manufacturing Co (Scotland) Ltd ("FMS"). That depended on whether FJ had on 1 January 1984 succeeded to the trade of FM and had thereafter carried on the activities of that trade as part of its (FJ's) trade, within the meaning of Income and Corporation Taxes Act 1970 section 252sec. 252 of theIncome and Corporation Taxes Act 1970.
The same question arose in relation to unused stock relief of FMS. It is common ground that the availability to FJ of such stock relief stands or falls with the availability to it of FMS's losses: both questions hang on the true construction of the said Income and Corporation Taxes Act 1970 section 252sec. 252.
3. [Paragraph 3 listed the documents before the commissioner.]
4. The facts and the submissions of the parties are set out in my reserved decision which was issued on 2 December 1988…For the reasons set out therein I held that on the true construction of the saidIncome and Corporation Taxes Act 1970 section 252sec. 252, FJ was not entitled, on the facts of the case, to make deductions in respect of FMS's losses.
5. The parties subsequently reached agreement on the figures of chargeable profits for the years under appeal, in accordance with my decision, as follows:
and on 25 January 1989 I formally determined the appeals accordingly.
6. Immediately after the said determinations FJ declared its dissatisfaction therewith as being erroneous in point of law and on 6 February 1989 required [the commissioner] to state a case for the opinion of the High Court pursuant to the Taxes Management Act 1970 section 56Taxes Management Act 1970, sec. 56.
7. The question of law for the opinion of the court is whether I erred in holding that on the true construction of Income and Corporation Taxes Act 1970 section 252sec. 252 of theIncome and Corporation Taxes Act 1970, the relief claimed was not available.
This case raises a short point on Income and Corporation Taxes Act 1970 section 252sec. 252 of the Income and Corporation Taxes Act 1970 (now Income and Corporation Taxes Act 1988 section 343sec. 343 of the Income and Corporation Taxes Act 1988), which is concerned with, inter alia, the carry-forward of losses in the context of "company reconstructions without a change of ownership" - the words of the sidenote. Falmer Jeans Ltd ("FJ") has appealed against assessments to corporation tax for its accounting periods ending 31 December 1984, 1985 and 1986 because the inspector has declined to give it the relief which it claims under that section, in computing its total profits.
FJ was incorporated in 1955 and it has at all material times been a directly held subsidiary of Falmer International Ltd. It sells clothing - jeans, and other casual wear - and until 1984 it did nothing else. The selling is partly wholesale (to mail-order businesses and others both in the UK and abroad) and partly retail, through a number of concession outlets spread throughout the country. The turnover is considerable: in the year to 31 December 1984, sales amounted to £25.4m and they have subsequently exceeded £30m.
Before 1984 all the clothing sold by FJ was manufactured by others. Between 1955 and 1966 most of its supplies were acquired from manufacturers not associated with the Falmer group.
In 1966 a new subsidiary of Falmer International Ltd was incorporated - Falmer Manufacturing Co (Scotland) Ltd ("FMS"). Its sole function was the manufacture of garments for FJ, and it immediately became FJ's principal supplier. It bought the sewing cotton, buttons and lining materials which it required, but the cloth was supplied to FMS by FJ. Since FMS did not own the garments which it made it did not dispose of them to FJ by way of sale: instead, FMS's services were charged out to FJ on the basis of cost plus a margin considered appropriate by both managements...
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