N Ltd v HM Inspector of Taxes
| Jurisdiction | England & Wales |
| Judgment Date | 04 June 1996 |
| Date | 04 June 1996 |
| Court | Special Commissioners |
special commissioners decision
Mr M Cornwell-Kelly and Mr PMF Horsfield QC sitting in private.
Corporation tax - Chargeable gains - Set-off of losses - Scheme to mitigate tax on chargeable gain by appropriation of loss-bearing assets to stock-in-trade within the accounting period in which gain arose - Whether company trading - Meaning of trade - Duration of accounting period - Income and Corporation Taxes Act 1988 section 12 subsec-or-para (2)Income and Corporation Taxes Act 1988, s. 12(2),Income and Corporation Taxes Act 1988 section 12 subsec-or-para (3) section 345 subsec-or-para (1)(3), 345(1).
1. The nature of the appeal
1.1 The Appellant company was at the time of the events which are the subject of this appeal a recently incorporated subsidiary of the A group. For convenience we will refer to it as "the New Company". On 11 October 1991 the New Company acquired a substantial parcel of shares in another group subsidiary, B Ltd. These shares had a large in-built chargeable gain which would prima facie become taxable on an actual or deemed disposal of the shares. In fact the New Company sold its B shares on 16 October 1991 (five days after acquisition). Notwithstanding this sale, the New Company claims that no tax is payable on the chargeable gain attributable to the shares because, it is said, the New Company is entitled to set against this gain certain allowable losses attributable to four freehold properties subsequently acquired by it on 7 July 1992.
1.2 Counsel for the New Company puts its claim to set these losses against the chargeable gain on its B shares in a number of alternative ways. However, each of these alternative bases of claim requires the New Company to establish in whole or part some of the following facts (though no basis of claim requires the establishment of all these facts):-
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(2) That when the New Company acquired its B shares it appropriated them to trading stock and traded in the shares.
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(3) That the New Company at various dates on and after 14 October 1991 acquired a number of parcels of government securities as trading stock and traded in these securities.
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(4) That when the New Company acquired four freehold properties it appropriated them as trading stock and traded in these properties.
It is necessary for the New Company to establish (3) above, if it is to succeed on any of the bases put forward by Counsel for the appellant.
1.3 The legal and factual issues arising in this appeal are of considerable complexity and the brief summary we have just given is not intended to be more than the most general description of the main issues. The purpose of the summary is to indicate that the core of the dispute between the parties is the question whether certain assets were or were not acquired by the New Company as trading stock and whether or not the New Company actually traded in those assets.
1.4 The assessment under appeal is an estimated assessment and we heard no submissions on quantum. At this stage what is being sought is a decision in principle.
2. Dramatis personae
The principal parties involved in the relevant transactions and the abbreviated names by which we refer to them are as follows:-
A plc ("A plc") is the head company of the A group ("the Group").
N Ltd (the Appellant), which we have defined as the New Company is, as already mentioned, a subsidiary member of the Group.
B Ltd ("the B Company") was, until the sale of its shares, another subsidiary member of the Group.
V1 Ltd, V2 Ltd and V3 Ltd (collectively referred to as "the Vendor Companies") are further subsidiary members of the Group which acquired the shares in the B Company not acquired by the New Company and joined with the New Company to sell the entirety of the share capital of the B Company on 16 October 1991.
P Ltd ("the P Company") is another subsidiary member of the Group. It has itself a number of subsidiaries which in turn hold the Group's properties. Three of these subsidiaries are, or were at the material times, P1 Ltd, V3 Ltd, one of the Vendor Companies and V2 Ltd, another of the Vendor Companies. We refer to these subsidiaries collectively as "the property subsidiaries".
Mr C ("Mr C"), a chartered accountant, was between April 1991 and September 1994 the Group's finance director. He was also at all material times one of the directors of the New Company. He is now finance director of another group.
Mr D ("Mr D"), a chartered surveyor, was at the material times deputy managing director of the Property Holding Company and a director of all of the property subsidiaries. He was also as from 25 June 1992 a director of the New Company.
Mr E ("Mr E"), a member of the senior management of the Property Holding Company and a director of the New Company as from 25 June 1992.
Mr F ("Mr F"), a member of the main board of the Group with legal expertise and a director of the New Company.
Mr G ("Mr G"), the tax manager of the Group.
Miss H ("Miss H"), assistant to Mr G in the Group tax department.
Mr I ("Mr I"), the Group company secretary.
Mr J ("Mr J"), a member of the Group treasury department.
1. The documentary evidence to which some additions were made during the course of the hearing consists of four bundles.
Bundle A contains what may be broadly described as the formal documentation evidencing the relevant transactions. Counsel relied almost exclusively on this volume in opening the Appellant's case and putting documents to the Appellant's two witnesses (Mr C and Mr D) in their examination in chief.
Bundle B consists of a multifarious collection of background papers which were disclosed to the Revenue by the Appellant pursuant to a proposed notice or notices served under section 20 of the Taxes Management Act 1970. The bulk of these documents first entered the arena when a number of them were put to the Appellant's witnesses in cross-examination.
Bundle C consists of correspondence between A Plc and the Inland Revenue with supporting tax computations. Some of these documents were put to Mr C by Counsel for the Crown in cross-examination.
Bundle D is headed "alternative corporation tax submission 1992" under the name of the New Company. It was introduced at the hearing and put to Mr C in cross-examination by Counsel for the Crown.
2. None of the bundles is, we understand, strictly an agreed bundle. However, neither party disputes that the documents on which the other relies are, or are copies of, the documents which they purport to be on their face.
3. The only two witnesses called by the Appellant were Mr C and Mr D. The Crown called no witnesses. The reliability or otherwise of these two witnesses has proved an important factor in this appeal. We should say at once that we have felt obliged to reject the evidence of Mr C on a number of important points, in particular as regards the tax saving arrangements disclosed by the documents in bundle B. We have similar reservations about part of the evidence of Mr D to which we refer later.
In this section we shall refer to the documents in the various bundles by reference to the letter indicating the bundle followed by a number indicating the page in that bundle.
1. 18 July 1991 (incorporation of the New Company) to 11 October 1991 (acquisition of the shares in the B Company).
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18 July 1991. The New Company was incorporated (as an off-the-shelf company) under the name NOP Ltd (A6). Its name was changed to "NO Ltd" on 17 October 1991 (A7) and to "N Ltd" on 16 July 1992 (A8).
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12 August 1991. A manuscript note of this date from "C" to "I/G" is at B79. When the note was put to him in cross-examination, Mr C identified C as himself, G as Mr G, the Group tax manager, and I as Mr I the Group company secretary. Mr C stated that Mr G reported to him (Mr C). This note states that "B" is the "code for our B business" and that "we are preparing an information memorandum for the possible sale of B". The note had attached a "detailed list of information requirements" with a request that Mr I should respond on items 2.1.3, 3.1 and 7 and Mr G item 5. This list was identified by Mr C as B81-86. The note went on state that "I" (i.e. Mr C) had the task of co-ordinating a working party which included Merchant Bank 1 (see B 70-73), and requested responses for a meeting of this working party. The note stressed the need for the utmost confidentiality, listing the in-house team by initials which do not appear to include those of Mr D. Document B81-86 included at 84-85 a section on taxation including "5.3 details of any loss carry forward/capital allowances and their ability to be utilised" and "5.4 capital gains history".
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6 September 1991. Messrs LMN ("LMN") wrote to Mr G on this date (B62-65) under the heading Project B and referred to a meeting between Mr G and themselves on 3 September. Mr C stated in cross-examination that he was not sure whether he had seen this letter, but that he had received comments from Mr G on the tax liability dealt with in the letter. The letter describes a number of alternative schemes for reducing tax on capital gains. Immediately following this letter there is an undated manuscript file note (B66-68) identified by Mr C as being in Mr G's hand and headed "cc. C only", which refers to a meeting (presumably that of 3 September) between Mr G and LMN "to discuss Capital Gains Tax minimisation schemes". After referring to the various schemes Mr G says "can we discuss please".
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6 September 1991. Also on this date Mr G sent a manuscript note to Mr C (B.61) enclosing LMN's letter. The second paragraph of this note reads as follows:-
My opinion is that we are left in item 4 (generation of capital gains tax losses) but I would welcome your views.
13 September 1991. Mr G wrote to a Mr K (B60) acknowledging receipt of "the first draft" of the...
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