HM Revenue and Customs v Salaried Persons Postal Loans Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Lawrence Collins |
| Judgment Date | 07 April 2006 |
| Neutral Citation | [2006] EWHC 763 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CH/2005/APP/0839 |
| Date | 07 April 2006 |
[2006] EWHC 763 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE SPECIAL COMMISSIONERS
(Dr John Avery Jones)
Royal Courts of Justice
Strand
London WC2A 2LL
Mr Justice Lawrence Collins
Case No: CH/2005/APP/0839
(SC 3097/2004)
Mr Michael Gibbon (instructed by the Solicitor for HM's Revenue and Customs) for the Appellant
Mrs Felicity Cullen (instructed by Auerbach Hope (Chartered Accountants)) for the Respondent
Hearing: March 14, 2006
I Introduction
This is an appeal by the Revenue from a decision of the Special Commissioner (Dr J Avery Jones), holding that for the purposes of "small companies' rate" and in particular for the purposes of section 13(4) of the Income and Corporation Taxes Act 1988 ("the 1988 Act"), Malcolm Muir Ltd ("MML"), did not carry on a trade or business in the years ended July 31, 1998 to July 31, 2001.
The point arises in this way:
(1) By section 13(1) of the 1988 Act:
"Where in any accounting period the profits of a company which?
(a) is a resident in the United Kingdom, and
(b) is not a close investment-holding company (as defined in section 13A) at the end of that period,
do not exceed the lower relevant maximum amount, the company may claim that the corporation tax charged on its basic profits for that period shall be calculated as if the rate of corporation tax (instead of being the rate fixed for companies generally) were such lower rate (to be known as the 'small companies' rate') as Parliament may from time to time determine."
(2) Section 13(2) provides for the reduction of corporation tax for companies whose profits exceed what is called the lower relevant maximum amount and do not exceed the upper relevant maximum amount; and section 13(3) provides that the lower and upper relevant amounts are £300,000 and £1.5 million where the taxpayer company has no associated company, and
"(b) where the company has one or more associated companies in the accounting period, the lower relevant maximum amount is £300,000 divided by one plus the number of those associated companies, and the upper relevant maximum amount is £1,500,000 divided by one plus the number of those associated companies."
(3) By section 13(4):
"In applying subsection (3) above to any accounting period of a company, an associated company which has not carried on any trade or business at any time in that accounting period (or, if an associated company during part only of that accounting period, at any time in that part of that accounting period) shall be disregarded and for the purposes of this section a company is to be treated as an 'associated company' of another at a given time if at that time one of the two has control of the other or both are under the control of the same person or persons.
In this subsection 'control' shall be construed in accordance with section 416."
The effect of the legislation in section 13(3) is to divide the available amount of small companies' relief between relevant companies where a company has associated companies. It is the Revenue's case that the purpose of the legislation is to prevent the avoidance of tax through the exploitation of small companies' rate which could arise if a company with a successful business fragmented its activities such that each activity was then carried on by other associated companies.
The Revenue has supplied a helpful memorandum to show how the section works. This is substantially agreed by the Respondent, except that the Respondent says that the worked examples are not likely to arise in practice and are at the extreme end of the theoretical spectrum.
The Revenue's example is of a company, A Ltd, which has profits of £1.6 million chargeable to corporation tax in an accounting period. The profits of £1.6 million are above the upper relevant maximum amount specified in section 13(3)(a) of £1.5 million ("URMA"). Therefore, the full amount of the profits are chargeable at the full corporation tax rate of 30%, and the corporation tax liability of A Ltd will be £480,000.
If A Ltd is able to fragment its business such that it retains one separate trade or business, and has 15 other associated companies (B Ltd —P Ltd) each of which carries on one other separate trade or business, then the profits of each company are £100,000 giving an aggregate profit for all 16 companies of £1.6 million. Each of the 16 companies, A Ltd —P Ltd, would have the same liability: applying section 13(3)(b), the value of URMA would be: URMA £1,500,000/(1 + 15) = £93,750 which is lower than the company's profit of £100,000. Corporation tax liability on profit of £100,000 @ 30% is £30,000. A Ltd and the 15 similar companies would have an aggregate corporation tax liability of £30,000 x 16 = £480,000.
If the provisions of section 13(3)(b) were absent or could be circumvented, the value of the URMA and the lower relevant maximum amount ("LRMA") would not be adjusted despite the fact that each company had 15 associated companies. URMA would remain at £1,500,000, and LRMA would remain at £300,000. Corporation tax profits of A Ltd are £100,000 and this level of profit is less than LRMA. Corporation tax liability is £100,000 @ 20% = £20,000. A Ltd and the 15 similar companies would have an aggregate corporation tax liability of £20,000 x 16 = £320,000. In the absence of the provisions of section 13(3), or if A Ltd were able to circumvent them, A Ltd would have reduced its corporation tax liability by £160,000 by having fragmented its business into several companies each under the control of the original shareholders of A Ltd.
There is not, in theory, a finite amount of tax reduction which fragmentation can achieve. Where Z Ltd makes £3,200,000 of profits chargeable to corporation tax in an accounting period, the corporation tax of Z Ltd will be computed as follows: profits of £3,200,000 are above URMA, and therefore, the full amount of the profits are chargeable at the full corporation tax rate of 30%, i.e. £960,000.
If Z Ltd is able to fragment its business such that it retains one separate trade or business and has 31 other associated companies each of which carries on one other separate trade or business, each with a profit of £100,000, then there is an aggregate profit of £3,200,000. If section 13(3)(b) applies, the aggregate corporation tax liability would be the same as if Z Ltd had not fragmented its business, namely £960,000. According to the Revenue, however, if the provisions of section 13(3)(b) were absent (which is not the case) or could be circumvented, the value of URMA and LRMA would remain at £1,500,000 and £300,000 respectively, despite the fact that each company had 31 associated companies. Corporation tax profits of Z Ltd are £100,000 and this level of profit is less than LRMA. Corporation tax liability is £100,000 @ 20% = £20,000. Z Ltd and the 31 similar companies would have an aggregate corporation tax liability of £20,000 x 32 = £640,000. In the absence of the provisions of section 13(3), or if Z Ltd was able to circumvent them, Z Ltd would have reduced its corporation tax liability by an amount totalling £320,000 by having fragmented its business into several companies each under the control of the original shareholders of Z Ltd.
II The facts
Salaried Persons Postal Loans Ltd, the Respondent ("SPPL"), Salaried Staff London Loan Co Ltd ("SSLL"), Managers Limited ("ML") and MML are four companies under the control of Mr R Selig within the meaning of section 416 of the 1988 Act.
SPPL, SSLL and ML are private limited companies registered in England and are resident, for tax purposes, in the United Kingdom. MML is a private limited company registered in Scotland and is resident, for tax purposes, in the United Kingdom.
The following facts were agreed. Until 1966 MML carried on the trade of making personal loans from its premises at West Regent Street, Glasgow. MML owned the Scottish equivalent of the freehold of these premises.
In 1966, MML vacated its West Regent Street premises and let them to a tenant, J B & G Forsyth. MML moved to new premises (which it leased) at 111 Union Street, Glasgow and continued to carry on its trade from these new premises. MML shared these premises with SPPL.
MML carried on its trade of making personal loans from the Union Street premises until November 30, 1995. It then ceased trading.
In the year ended July 31, 1996 MML surrendered its licence under the consumer credit legislation, and MML and SPPL vacated the premises at 111 Union Street, Glasgow.
MML continued to own the premises at West Regent Street, Glasgow from which it receives a net rental income twice a year. A cheque for the full rent payable less commission (i.e. for net rent) is sent directly to ML which acts as banker for SPPL, MML, and SSLL.
The income from the West Regent Street premises has been MML's sole source of income since it ceased trading on November 30, 1995, in its financial year ended July 31, 1996. MML's lease of the Union Street premises expired in April 1998.
MML has incurred modest agent's fees in respect of the letting of the West Regent Street premises.
Since MML ceased trading and disposed of all of its assets other than the premises at Union Street and West Regent Street, Glasgow:
(1) MML has not had its own bank account but has maintained an inter-company balance with ML, the group's banker;
(2) MML has had two directors but has had no employees;
(3) MML has not paid any directors' fees or salaries;
(4) MML has not paid any dividends nor made any distributions;
(5) MML has not purchased any assets or disposed of any assets;
(6) MML has neither received nor paid any interest on its inter-company balance with ML;...
To continue reading
Request your trial
-
GE FINANCIAL INVESTMENTS v THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS [2023] UKUT 00146 (TCC)
...much. The second High Court authority on the same section was Revenue and Customs Commissioners v Salaried Persons Postal Loans Ltd [2006] EWHC 763 (Ch), a decision of Lawrence Collins Lawrence Collins J considered the authorities at [23] to [33] of his decision, including the cases of Amer......
-
Allam v Revenue and Customs Commissioners
...Similarly, we do not derive any assistance from the judgment of Lawrence Collins J in R & C Commrs v Salaried Persons Postal Loans Ltd [2006] BTC 423, another case on which Mr Ridgway relied, which involved the availability of small companies relief for corporation tax. [101] In our view, t......
-
JS Torkington v HM Revenue and Customs
...to be applied; Town Investments Ltd v Dept of Environment[1978] AC 359 and R & C Commrs v Salaried Persons Postal Loans LtdUNK [2006] EWHC 763 (Ch); [2006] BTC 423. 10. In the case of Town Investments Ltd (ibid) Lord Diplock stated that "the word "business" is an etymological chameleon: it ......
-
G E Financial Investments
...out property in that case was not a business. [76] In an appeal against that decision (R & C Commrs v Salaried Persons Postal Loans Ltd [2006] BTC 423), which was essentially on Edwards (HMIT) v Bairstow (1955) 36 TC 207 grounds, Lawrence Collins J, observed: [54] Whether or not a business ......