Land Management Ltd v Fox
| Jurisdiction | England & Wales |
| Judgment Date | 28 February 2002 |
| Date | 28 February 2002 |
| Court | Special Commissioners (UK) |
special commissioners decision
Dr Nuala Brice.
1 Land Management Ltd ("the appellant") appeals against a decision of the respondent dated 14 March 2000 refusing a claim for a reduction in the rate of corporation tax for each of the accounting periods ending on 30 September 1992, 1993, 1994 and 1995. The reason for the refusal was that the respondent was of the view that the appellant's associated company had carried on business in each of those accounting periods.
2 Section 13(1) of the Income and Corporation Taxes Act 1988 ("the 1988 Act") provides that where, in any accounting period, the profits of a company do not exceed lower relevant maximum amount the company may claim a lower rate of corporation tax known as the small companies' rate. Section 13(2) provides that, if the profits exceed the lower relevant maximum amount but do not exceed an upper relevant maximum amount, the company may claim a fractional reduction in its corporation tax. After 1994 subs. 13(3) and (4) provide:
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(3) The lower and upper relevant maximum amounts mentioned above shall be determined as follows-
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(a) where the company has no associated company in the accounting period, those amounts are £300,000 and £1,500,000 respectively;
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(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.
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(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 … 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.
3 Before 1994 the amounts in s. 13(3)(a) and (b) were £250,000 (instead of £300,000) and £1,250,000 (instead of £1,500,000).
4 It was not disputed that the appellant had an associated company which was under the control of the same persons who controlled the appellant. The respondent did not argue that the associated company was carrying on any trade but did argue that it was carrying on business within the meaning of s. 13(4) during all four accounting periods of the appellant and for that reason should not be disregarded when applying s. 13(3)(b). The appellant argued that the associated company was not carrying on business at anytime within the meaning of s. 13(4) and so it should be disregarded for the purposes of s. 13(3)(b).
5 Thus the issue for determination in the appeal was whether the associated company was carrying on business at any time in any of the four accounting periods of the appellant.
6 A preliminary hearing was held on 27 September 2001. The appellant had indicated in advance of that hearing that it would not be represented. Accordingly, the preliminary hearing proceeded in the absence of the appellant under the provisions of reg. 16 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 (SI 1994/1811). Directions were given at the preliminary hearing which had the aim of giving the appellant an opportunity of presenting its case. The appellant was notified on 16 November 2001 of the hearing on 31 January 2002 but informed the clerk to the special commissioners that it did not intend to be represented.
7 Regulation 16 provides:
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16(1) If a party fails to attend or to be represented at a hearing of which he has been duly notified, the Tribunal may:
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(a) unless it is satisfied that there is good and sufficient reason for such absence, hear and determine the proceedings in the absence of the party or his representative, or
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(b) postpone or adjourn the hearing.
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(2) Before deciding to hear and determine any proceedings in the absence of a party or his representative, the Tribunal shall consider any representations in writing or otherwise submitted by or on behalf of that party in response to the notice of hearing and shall, give any party present at the hearing an opportunity to be heard in regard to those representations.
8 In response to the directions given at the preliminary hearing on 27 September 2002, the appellant had written on 12 October 2001 to say that its letter of 19 September 2001 could be treated as comprising its outline arguments.
9 A bundle of documents was produced by the respondent. There was also a statement of facts not in dispute.
10 From the evidence before me I find the following facts.
11 Shares in the appellant are owned by Mr J H G Sunnucks, Mrs R A Sunnucks and the Share and Debenture Trust Ltd ("the associated company"). Through their controlling interest in the associated company, and their personal holdings of shares in the appellant, Mr and Mrs Sunnucks control the appellant for the purposes of s. 13 of the 1988 Act. It follows that, for the accounting periods under appeal, the associated company was treated as an associated company of the appellant within the meaning of s. 13(4) because both the appellant and the associated company were under the control of Mr and Mrs Sunnucks.
12 The appellant was carrying on a trade during the four years under appeal and its profits chargeable to corporation tax were:
| 1992 | £241,372 |
| 1993 | £297,668 |
| 1994 | £202,191 |
| 1995 | £201,691 |
13 The associated company is a private limited company and was incorporated in 1914 under the provisions of the Companies Act1908. It is controlled for the purposes of s. 13 of the 1988 Act by Mr and Mrs Sunnucks. It was agreed that it did not carry on any trade at any time during the four years under appeal and also that it was an investment company within the meaning of s. 130 of the 1988 Act.
14 The memorandum of association of the associated company sets out the objects for which the company was established and these are in very wide terms. The first object is:
To carry on [or] undertake any business undertaking or operation commonly carried on or undertaken by bankers, capitalists, promoters, financiers, concessionaires, contractors for public and other works, merchants and any other business.
15 The accounts of the associated company for its 78th year at 31 December 1992 indicate that its principal activity was as an investment company with estate income derived from a tenanted residential freehold property. Its fixed assets were shares in the appellant and also a freehold property. It was noted that in 1992 the associated company had made a loan of £15,000 to the appellant. The trading statement for the year gave four sources of income as:
| £ | |
| Dividends received gross | 48,436 |
| Loan interest | 1,798 |
| Rents receivable | 1,020 |
| Bank interest | 411 |
| Total | 51,665 |
16 The "dividends received gross" were received from the appellant. There was a schedule of net operating expenses totalling £3,326 made up as:
| 'ADMINISTRATION EXPENSES | £ |
| Salaries | 300 |
| Printing postage and stationery | 12 |
| General expenses | 42 |
| Audit and accountancy | 441 |
| Bank charges | 77 |
| Directors' remuneration | 900 |
| 1,772 | |
| PROPERTY EXPENSES | £ |
| Insurance | 158 |
| Repairs and renewals | 1,396 |
| 1,554' |
17 The profit and loss account indicated that there was an operating profit before taxation of £48,339. Out of that, net dividends of £34,500, and tax of £12,281, were paid.
18 The accounts for the three following years were in similar form. The accounts for the year ending on 31 December 1993 showed that some listed shares had been acquired to the value of £9,946 and that the loan to the appellant had been repaid on 10 March 1993. Accordingly, the accounts for the years ending in 1994 and 1995 showed only three sources of income namely dividends, rents and bank interest. In 1994 the property expenses comprised insurance, professional fees and repairs and renewals. In 1995 the property expenses comprised professional fees and insurance.
19 Thus for the four relevant years the activities of the associated company may be summarised as:
| 1992 | Holds investments (shares in apellant) and receives dividends; |
| makes loan to appellant and receives interest; | |
| receives rents from residential property; and | |
| receives bank interest. | |
| 1993 | Makes investments (of shares in listed company; |
| holds investments (shares in apellant); | |
| receives dividends; | |
| receives repaymnent of loan to appellant and interest; | |
| receives rents from residential property; and | |
| receives bank interest. | |
| 1994 | Receives dividends; |
| receives rents from residential property; and | |
| receives bank interest. | |
| 1995 | Receives dividends; |
| receives rents from residential property; and | |
| receives bank interest. |
20 The arguments for the appellant were set out in its letter of 19 September 2001. In that letter the appellant argued that the word "business" had been described as a chameleon and had to be construed in the light of the facts and legislation in question and it cited Town Investments Ltd v Department of the Environment ELR[1978] AC 359. It argued that the purpose of s. 13 was to prevent the abuse of the small companies' rate by a proliferation of associated companies carrying on separate businesses and that the purposive approach to the construction of tax statutes had been acknowledged in WT Ramsay Ltd...
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