New Angel Court Ltd v Adam (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Jonathan Parker,Lord Justice May |
| Judgment Date | 16 March 2004 |
| Neutral Citation | [2004] EWCA Civ 242 |
| Docket Number | Case No: C3 2003 1809 CHRVF |
| Court | Court of Appeal (Civil Division) |
| Date | 16 March 2004 |
[2004] EWCA Civ 242
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT
CHANCERY DIVISION (Mr Justice Lawrence Collins)
Royal Courts of Justice
Strand,
London, WC2A 2LL
Lord Phillips of Worth Matravers Mr
Lord Justice May and
Lord Justice Jonathan Parker
Case No: C3 2003 1809 CHRVF
CH 2003 APP 0053
Mr Jonathan Peacock QC (instructed by Messrs Levy Watters) for the Appellant
Mr Philip Jones (instructed by the Solicitor of Inland Revenue) for the Respondent
INTRODUCTION
This is an appeal by the taxpayer, New Angel Court Ltd ("NAC"), against an order made by Lawrence Collins J on 25 July 2003 dismissing its appeal against a Decision of the Special Commissioners (Dr John F. Avery Jones CBE and Mr John Clark) dated 13 January 2003 ("the Decision") . By the Decision, the Special Commissioners dismissed NAC's appeal against a Notice of Determination of loss for the period ended 31 December 1996.
NAC is a member of the Hilton Group ("the Group") . It has at all material times carried on the business of developing and dealing in property. The single issue before the Special Commissioners was whether nine commercial properties ("the Properties") which NAC acquired on 13 November 1996 from other companies in the Group were acquired by NAC 'as trading stock' within the meaning of section 173(1) of the Taxation of Chargeable Gains Act 1992 ("the 1992 Act") .
As at 13 November 1996 the Properties were pregnant with loss. Had the vendor companies sold the Properties outside the Group on that date they would have sustained capital losses for corporation tax purposes totalling some £68M. However, if the Properties were acquired by NAC 'as trading stock' within the meaning of section 173(1), it is common ground that for corporation tax purposes on its acquisition of the Properties NAC sustained a trading loss of some £68M which it could surrender to other companies in the Group. That is the result for which NAC contends.
By the Decision, the Special Commissioners held that the Properties were not acquired by NAC 'as trading stock' within the meaning of section 173(1) . The judge agreed with the Special Commissioners, and dismissed NAC's appeal.
NAC now appeals to this court. Permission for a second appeal was granted by Peter Gibson LJ on the papers on 22 October 2003.
THE FACTUAL BACKGROUND
NAC has carried on the business of developing and dealing in property since 1986. As its name indicates, it was originally formed to develop and market a site at the Angel, in Islington. In 1987 it entered into a joint venture with Gable House Estates Ltd, a company in the Group (then called the Ladbroke Group) . In 1993 it became a wholly-owned subsidiary of Gable House Estates Ltd. Since 1996 it has been a direct subsidiary of Hilton Group plc, the parent company of the Group.
In 1994 the Group owned a number of commercial properties in London and elsewhere. Some were held as investments; others as trading stock. In the course of 1994, following a strategic review, it was decided that the Group should sell off its commercial properties in an orderly manner. The Group's 1994 accounts stated that the Group would "continue to dispose of its property portfolio at acceptable prices".
During 1994, 1995 and 1996 a number of sales were made. In about October 1996 it was decided to accelerate the disposal programme. By then, the best properties had been sold; only difficult or complicated properties remained (among them, the Properties) .
The Properties did not form part of the trading stock of any trade carried on by the subsidiaries which owned them.
In about October 1996 it was decided that the Properties should be transferred to NAC, with a view to NAC selling them on the open market. Had the Properties been sold on the open market at that time they would have realised some £68M less than they had cost.
On 13 November 1996 contracts were exchanged for the sale of the Properties to NAC for a total purchase price of some £18.7M. Two of the Properties (one in Northampton and the other at Langham Place in London) were sold to NAC as separate parcels; the remaining seven were sold to NAC together as a portfolio.
As at 13 November 1996 the Northampton property was almost sold (contracts were exchanged five days later), and negotiations for the sale of the property at Langham Place were already on foot (although no offer had as yet been received) . Some interest had been expressed in the portfolio of the remaining seven properties, although the ultimate purchaser had not as yet made an offer.
On 18 November 1996 a number of other properties owned by companies in the Group were sold to NAC (I will refer to them as "Additional Properties") . NAC paid the purchase price in cash, with funds provided by its parent company. In contrast to the Properties, the Additional Properties were trading stock in the hands of the vendor companies. The Revenue accepts that the Additional Properties were acquired by NAC 'as trading stock' within the meaning of section 173(1) .
On 10 December 1996 it was decided to discontinue the Group's property division and to dispose of all the remaining properties. This marked the last stage of the process which had begun in about October 1994.
On 3 March 1997 NAC sold thirteen properties to Minerva plc. The thirteen properties consisted of six of the Properties (at an apportioned purchase price of £15.1M) and seven Additional Properties. Following that sale, only one of the Properties remained unsold.
In January 1998 NAC submitted a corporation tax return for the period ended 31 December 1996. The return was prepared on the basis that NAC had acquired the Properties 'as trading stock' for the purposes of section 173(1) . Thus, in computing its profits for that period for corporation tax purposes, NAC brought into account a trading loss of some £68M which (it contended) it had sustained for corporation tax purposes on its acquisition of the Properties.
In due course, however, the Revenue issued a Notice of Determination of loss which excluded that loss from the computation of NAC's profits for the period for corporation tax purposes.
NAC appealed against the Notice. By the Decision, the Special Commissioners dismissed NAC's appeal. NAC's appeal against the Decision was dismissed by the judge.
THE RELEVANT STATUTORY PROVISIONS
The relevant provisions of the 1992 Act are as follows:
"161 Appropriations from stock
(1) Subject to subsection (3) below, where an asset acquired by a person otherwise than as trading stock of a trade carried on by him is appropriated by him for the purposes of the trade as trading stock (whether on the commencement of the trade or otherwise) and, if he had then sold the asset for its market value, a chargeable gain or allowable loss would have accrued to him, he shall be treated as having thereby disposed of the asset by selling it for its then market value.
(2) ….
(3) …. subsection (1) shall not apply in relation to a person's appropriation of an asset for the purposes of a trade if he is chargeable to income tax in respect of the profits of the trade under Case 1 of Schedule D, and elects that instead the market value of the asset at the time of the appropriation shall, in computing the profits of the trade for the purposes of tax, be treated as reduced by the amount of the chargeable gain or increased by the amount of the allowable loss referred to in subsection (1), and where that subsection does not apply by reason of such an election, the profits of the trade shall be computed accordingly.
….
173 Transfers within a group: trading stock
(1) Where a member of a group of companies acquires an asset as trading stock from any other member of the group, and the asset did not form part of the trading stock of any trade carried on by the other member, the member acquiring it shall be treated for the purposes of section 161 as having acquired the asset otherwise than as trading stock and immediately appropriated it for the purposes of the trade as trading stock.
(2) ….
288 Interpretation
(1) ….
'trading stock' has the meaning given by section 100(2) of the [Income and Corporation Taxes Act 1988]
Section 100(2) of the Income and Corporation Taxes Act 1988 ("the 1988 Act") provides as follows (so far as material):
"(2) …. 'trading stock', in relation to any trade –
(a) means property of any description, whether real or personal, being either –
(i) property such as is sold in the ordinary course of the trade …."
Finally, for present purposes, section 832 of the 1988 Act defines 'trade' as including 'every trade, manufacture, adventure or concern in the nature of trade'.
The effect of the above provisions, so far as they are material in the instant case, is broadly as follows. Section 161 of the 1992 Act is directed at the case where an individual trader appropriates as trading stock of a trade which he carries on an asset which was not originally acquired by him as trading stock. Section 161(1) deems the trader to have disposed of the asset at market value at the date of appropriation, thereby giving rise to a chargeable gain or allowable loss for capital gains tax (or, in the case of companies, corporation tax) purposes. Section 161(3) enables the trader to convert a deemed allowable loss arising under section 161(1) into a trading loss by bringing the asset in question into account at cost (i.e. adding back the deemed allowable loss) in computing the profits of his trade for...
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