A Property Company v HMIT
| Jurisdiction | England & Wales |
| Judgment Date | 05 October 2004 |
| Date | 05 October 2004 |
| Court | Special Commissioners |
special commissioners decision
Strephen Oliver QC and Dr John F Avery Jones CBE
Kevin Prosser QC, Charles Harpum and Elizabeth Wilson, counsel, instructed by Downs for the Appellant
Launcelot Henderson QC (7 and 28 November 2003), Christopher Tidmarsh QC (10-12 May 2004) and Hugh McKay, counsel, instructed by the Solicitor of Inland Revenue for the Respondents
SCHEDULE A - income from land - whether agreements for lease gave rise to an immediate right to rent or whether the right was conditional on obtaining the landlord's consent to subletting - whether the Landlord and Tenant (Covenants) Act 1995 enables retention of a future rent payment on a sale of the reversion - no - whether the definition of the retained rent payment is void for uncertainty - no - whether contractual right to such rent is within Schedule A - no CASE VI OF SCHEDULE D - profits - as to the rent payable under agreements entered into before the 1995 Act, it is not taxable under Case VI because the only possible head of charge is Schedule A which does not apply because the source has ceased - as to the rent caught by the 1995 Act which passed automatically to the purchaser, the sum equal to the rent purported to be retained on sale that the purchaser was liable to pay to give business effect to the agreement is taxable under Case VI
1. A Property Company appeals against estimated assessments to corporation tax in the estimated sum of about £112m for two alternative periods, the first being 25 August 1996 to 18 September 1996, and the second being 19 September 1996 to 18 September 1997.
2. At the original hearing in June to August 2003 we heard argument about whether the Appellant was liable to tax under Schedule A, which was at the time the Inspector's only argument. The Appellant was represented by Mr Kevin Prosser QC, Mr Charles Harpum and Miss Elizabeth Wilson, and the Inspector by Mr Hugh McKay. At the end of the Inspector's case Mr McKay raised for the first time the possibility of Case VI of Schedule D being applicable. We issued an interim decision (being this decision up to the end of paragraph 70, to which we have added paragraph 38 to explain why we did not permit re-arguing the point at the resumed hearing) to the effect that the Appellant was not taxable under Schedule A. We then heard further argument in November 2003 on whether the Inspector could raise the Case VI issue. At that hearing the Inspector was represented by Mr Launcelot Henderson QC and Mr Hugh McKay, and the Appellant by Mr Kevin Prosser QC and Miss Elizabeth Wilson. We issued a Direction permitting the Inspector to raise the Case VI issue on certain terms. At the resumed hearing in May 2004, we heard further evidence, on which we make further findings of fact in the section of this decision relating to Case VI, and argument on whether the Appellant was taxable under Case VI of Schedule D. The Appellant was represented by Mr Kevin Prosser QC, Mr Charles Harpum and Miss Elizabeth Wilson, and the Inspector by Mr Christopher Tidmarsh QC and Mr Hugh McKay.
3. The background to the appeals is that the Appellant was originally the property-owning company in the Cornwall Group. Some of its properties were sold in April 1995 to another group company, Cornwall Group Investments Limited (CGI), and an agreement for lease of other properties was entered into on 15 August 1995 in favour of CGI (the 1995 Agreement for Lease), followed by a further Agreement for Lease of the same plus some additional properties on 16 August 1996 (the 1996 Agreement for Lease). By the Business Sale Agreement the Appellant then sold all its assets to another group company, Cornwall Group Properties Limited (CGP), retaining the next rent payment from CGI due on 31 August 1996 (the Retained Rent Payment). (We should mention that we are following the parties' use of the current names of the companies involved rather than the names they had at the time of the various transactions.) Finally by the Share Sale Agreement, CGI, which was the parent company of the Appellant sold the shares of the Appellant out of the Cornwall Group in September 1996, the Appellant then having the right to the Retained Rent Payment on 31 August 1996 less the expected tax thereon and having a liability in respect of an inter-group debt which was paid off out of the rent. The purchaser of the shares intended to offset the Retained Rent Payment by creating a deduction in the Appellant company, the benefit of the tax saving from which would be split between the Cornwall Group, in the form of the sale price of the shares in the Appellant, and the purchaser, in the form of the balance of the rent. It is now accepted that the proposed tax avoidance scheme to create a deduction did not work. The Appellant now argues that the Retained Rent Payment is not in fact rent and is not taxable under Schedule A because in the accounting period in which it received the payment the Appellant had no interest in land, and at the resumed hearing that the Appellant is not liable to tax under Case VI of Schedule D either.
4. In relation to corporation tax Schedule A applies to: "1. Tax under this Schedule shall be charged on the annual profits or gains arising in respect of any such rents or receipts as follows, that is to say-"
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(a) rents under leases of land in the United Kingdom;
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(b) …
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(c) other receipts arising to a person from or by virtue of his ownership of an estate or interest in or right over such land or any incorporeal hereditament or incorporeal heritable subject in the United Kingdom.
5. We need to determine by what right the Appellant was entitled to the Retained Rent Payment. The following issues arise in relation to Schedule A:
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(2) whether the conditions in the 1995 and 1996 Agreements for Lease mean that no rent is receivable except in relation to properties for which the landlord's consent to subletting is obtained, and the extent to which the landlord's consent to subletting has been obtained;
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(3) whether the effect of the Landlord and Tenant (Covenants) Act 1995 is that the purported retention of the Retained Rent Payment under the Business Sale Agreement is void;
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(4) whether the definition of the Retained Rent Payment is void for uncertainty;
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(5) whether the Retained Rent Payment is not taxable under Schedule A on the ground that no source was possessed during the accounting period in question;
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(6) whether the Retained Rent Payment is capital.
6. We heard evidence from the Cornwall Group Head of Tax, and the Company Secretary of Cornwall Group Limited, in the circumstances described in paragraph 14.
The 1995 Agreement for Lease
7. On 15 August 1995 the Appellant (1) and seven group companies that held properties as nominee for the Appellant (2) to (8) agreed to let to CGI (9) properties listed in the Schedules 1 (properties in the name of the Appellant) and 2 to 8 (properties in the names of each of the seven nominees). The Agreement provided for the properties to be let in the form of the underlease annexed. It provided that the leases were to commence on 1 August (changed in manuscript from July) 1995 and expire 10 days before the date marked "end" in the Schedules; the form of underleases annexed are 20 year leases. The leases were to reserve rent for each property of the amount shown in a column headed "rent" in the Schedules payable annually in advance the first payment of one year's rent to be calculated from 1 August (changed in manuscript from July) 1995. The form of underleases annexed however provided for rent to be payable on the last working day in August with the apportioned rent from the start date (left blank in the case of the underlease of the properties legally owned by the Appellant, and stated to be from 4 December 1994 in the case of the properties beneficially owned by the Appellant) to 31 August 1995 being expressed to be payable on the date of the underlease. The rent is expressed to be payable under the leases when granted; the agreement itself does not provide for rent.
8. The Agreement contains the following clauses:"11. The parties hereto shall where necessary apply for and endeavour to obtain the consent of any Superior Landlord to the grant of the relevant lease as soon as reasonably practicable and shall comply with the reasonable requirements of any Superior Landlord in order to obtain such consent but if consent has not been obtained to the lease of any particular property of properties by 29 February 1996 then this Agreement shall cease to have effect in so far as it relates to that particular property or properties.""12. The parties hereto shall use all reasonable endeavours to complete the granting and taking of leases referred in clauses 1 to 8 above [being the properties described above as Schedules 1 to 8 of the Schedule] within 28 days of the obtaining of the consent to any Superior Landlord to the grant of the relevant lease."We shall consider the effect of these clauses under the heading Issue (1).
9. By an agreement made on 27 February 1996 the date of 31 August 1996 in clause 11 was substituted for 29 February 1996. We shall consider the effect of these clauses later in this decision. We make further findings of fact in relation to the obtaining of landlords' consents to underletting in relation to this and the 1996 Agreement for Lease in paragraph 15. Three underleases were granted pursuant to this agreement. We shall call the properties subject to these three underleases and any other underleases that may have been granted pursuant to the 1995 Agreement for Lease" the 1995 Agreement Properties."
10. On 31 August 1995 rent was invoiced by the Appellant to CGI of £104,116,036.40 plus VAT for the period 1 September 1995 to 31 August 1996. This does not correspond to the 1 August 1995 starting date in the...
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