New Angel Court Ltd v Adam (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Lawrence Collins |
| Judgment Date | 25 July 2003 |
| Neutral Citation | [2003] EWHC 1876 (Ch) |
| Docket Number | CH/2003/APP/0053 |
| Court | Chancery Division |
| Date | 25 July 2003 |
[2003] EWHC 1876 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE SPECIAL COMMISSIONERS OF INCOME TAX
Royal Courts of Justice
Strand
London WC2A 2LL
Mr Justice Lawrence Collins
CH/2003/APP/0053
Mr Jonathan Peacock QC (instructed by Levy Watters) for the Appellant
Mr Philip Jones (instructed by the Solicitor of Inland Revenue) for the Respondent
(subject to editorial correction)
I Introduction
New Angel Court Ltd ("the Appellant") is a wholly owned subsidiary in the Hilton Group of companies. The parent company, Hilton Group plc, was formerly known as Ladbroke Group plc ("Ladbroke"). On 13 November 1996 the Appellant acquired nine properties from its fellow subsidiaries. The properties had previously been held as investment properties and the question on this appeal is whether the Appellant acquired them as "trading stock."
This is an appeal against the decision of the Special Commissioners of 13 January 2003 ("the Decision"), dismissing the Appellant's appeal against a notice of determination of loss (for corporation tax purposes) for the period to 31 December 1996 in the sum of £448,332. That determination did not take account of the loss of approximately £68m on the sale of the nine properties.
The appeal raises the important question of the relevance of fiscal motive on the tax consequences of transactions which are carried out to save tax.
II Legislation
By the Taxation of Chargeable Gains Act 1992 (" TCGA 1992"), section 161(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."
That brings into charge or relieves any existing gain at the time of appropriation of an asset to trading stock. That is subject to subsection (3) which allows the taxpayer to elect that the existing gain or loss should be taken into account in computing its trading profits:
"..subsection (1) above 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 I 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 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."
Where there is an intra-group transfer with the transferor company holding the asset as a capital asset and the transferee company acquiring the asset as trading stock, section 173(1) applies those sections by providing that the existing capital gain or loss arises accrues to the transferee company, which may elect under section 161(3) to treat the gain or loss as part of its trading profits. At the relevant time (it having been amended in immaterial respects in 2000), it took the following form:
"Where a member of a group of companies acquires an asset as trading stock from another 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."
It is common ground that the Appellant made an election under section 161(3) and the effect of the legislation is that if the Appellant acquired the Properties as trading stock the loss will be available for group relief.
By section 288(1) "trading stock" has the meaning given by section 100(2) of the Income and Corporation Taxes Act 1988, and includes in relation to any trade, property such as is sold in the ordinary course of the trade.
III The facts
The Appellant, the Properties and the vendors
The Appellant has carried on business as a property dealing company since 1986. It was formed to develop and dispose of a site at the Angel, Islington. In 1987 it became a joint venture company in which the Ladbroke group (through Gable House Estates Ltd) had a 50% interest, and in 1993 it became a wholly owned subsidiary of Gable House Estates Ltd. From November 1996 its shares were owned directly by Hilton Group plc.
The directors of the vendor companies and the Appellant at the material time (13 November 1996) consisted of Mr Taljaard (the chief executive of the Ladbroke Group property division), Mr Neil Earp (Commercial Director of the UK property division), Mr Geoff Leonard (chartered accountant and property negotiator), and also Mr Peter Gosling (new project manager), who was not a director of three of the vendor companies. Ms Pam Barker (chartered accountant and financial controller of the UK property division) became a director of all of them on 20 November 1996. They were all employed by a group company.
At the start of 1996 Ladbroke (through its subsidiary companies) owned the following properties ("the Properties"):
(1) Old Texas Store, St James Mill Road, Northampton ("Northampton") owned by Ladbroke (Rentals) Ltd.
(2) 14/15 Langham Place and 2 Cavendish Place, London ("Langham Place") owned by Ladbroke (Rentals) Ltd.
(3) The Brooks, Winchester ("Winchester") owned by LCC (Winchester) Ltd
(4) Queens Terrace, Finchley Road, London ("Queens Terrace") owned by Ladbroke Group Homes Ltd.
(5) St James's Terrace, St James's Terrace Mews and Primrose Court, Marylebone, London ("Park St James") owned by Park St James Ltd and Gable House Properties (Regents Park) Ltd.
(6) Lincoln Place, Farringdon, London ("Lincoln Place") owned by Gable House Estates (City of London) Ltd.
(7) Oliver Road, West Thurrock, Essex ("West Thurrock") owned by Ladbroke (Rentals) Ltd.
(8) 8/12 Hyde Park Square, London ("Hyde Park Square") owned by Ladbroke Group Homes Ltd.
(9) Jarman Fields, Hemel Hempstead, Hertfordshire ("Jarman Fields") owned by Techno Ltd.
Among the agreed facts were that (1) had the Properties been sold on 13 November a loss, for capital gains tax purposes, of about £68m would have arisen; and (2) the Properties did not form a part of the trading stock of any trade carried on by the subsidiary companies which owned the Properties.
Background
The background was that in 1994, following a strategic review, the Ladbroke group decided not to make any further commercial property investments and to sell the whole of its portfolio in an orderly manner. Ladbroke's 1994 accounts stated that the "group will continue to dispose of its property portfolio at acceptable prices." Sales of £189.2m were made in that year. Sales continued in 1995, and in the second half of 1996 the Group board decided to accelerate the disposal programme. By the material time the best properties had been sold and only complicated or difficult properties remained.
The idea of transferring the Properties to the Appellant started with a memorandum from Mr Phil Turner of the group tax department to Mr Brian Wallace (Group Finance director) on 28 October 1996 which said that "the dealing expertise of [the Appellant's] officers would then be used to market the properties and optimise the timing and value of disposal." Mr Turner said:
"I imagine that the discussion you would have at the Board Meeting could be summarised as follows … [T]he intentions of the Group towards property have changed. We no longer consider ourselves property investors and instead wish to use our property dealing expertise to optimise the value/timing of disposal of our existing portfolio…".
The tax department originally proposed a sale of the Properties at a price which gave a guaranteed minimum margin of 10 per cent. Mr Taljaard and Ms Barker (financial controller of the UK property division) substituted a fixed price. A memorandum by Ms Barker of 12 November stated:
"It has been decided that [the Appellant] should expand its dealing activity by purchasing a portfolio of properties from other Group companies which it will then market using its dealing expertise. In the majority of cases the consideration is less than the current book value but this will enable [the Appellant] to have the opportunity to trade the properties profitably, and optimise the sales proceeds from a Group perspective."
Mr Taljaard also said in evidence that the price at which the Appellant purchased was designed to enable it to make a profit.
Sale and disposal
The Properties (plus a further property not relevant to this appeal) were contracted to be sold from the various group investment companies to the Appellant on 13 November 1996 for a total of £18,705,000. Mr Taljaard signed the contract on behalf of the Appellant and Mr Earp signed on behalf of the vendor companies.
In the absence of any evidence to the contrary the Special Commissioners accepted that the prices at which the Appellant acquired the Properties were within the range of arm's length prices but at the end of the range designed to show the maximum profit to the Appellant.
The minutes of the directors of the vendor companies attended by Mr Taljaard and Mr Earp approving the contract reported that agreement had been reached following an approach from the Appellant and stated that the sale would...
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