Ransom (HM Inspector of Taxes) v Higgs
| Jurisdiction | England & Wales |
| Judgment Date | 13 November 1974 |
| Date | 13 November 1974 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income tax, Schedule D - Trade - Profits from dealing in and developing land - Scheme of tax avoidance through transactions to which companies and settlement trustees parties - Scheme planned and operated by person not a party to the transactions - Whether planning and operation thereof a trade - Whether operator assessable as person entitled to the profit - Whether trustees assessable as persons receiving it - Whether developer entitled to deduct sums paid to landowner under arm's length agreement comprised in tax avoidance scheme - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), ss. 137(a) and 148.
(1) The Respondent in the first case had since 1950-51 carried out property dealing and development through companies under his control but had not been personally engaged in property dealing; nor had his wife, except as mentioned below. On 1st March 1961 the Respondent's wife entered into an agreement with two companies in the H group (with which neither he nor she had any connection) to carry on in partnership the business of land dealers and developers, the wife having a 90 per cent. interest. On 29th March she settled that interest on discretionary trusts for the benefit of herself, the Respondent and his issue. The partnership commenced trading on 1st March, and on 30th March purchased properties from companies controlled by the Respondent for the aggregate price of £87,135, a little over the cost price in the vendors' books. On 4th April H Ltd. bought the 90 per cent. interest from the trustees for £170,000, and H Ltd. succeeded the Respondent's wife as a member of the partnership. Later on the same day the partners agreed to sell the properties to H Ltd. for £87,600, and H Ltd. sold them together with the 90 per cent. partnership interest to one of its subsidiaries for £286,000. On 5th April the purchaser sold the partnership interest and the properties to other companies of the H group for £275 and £286,750 respectively. On the same day D Ltd., the new purchaser of the properties, appointed C Ltd., a company controlled by the Respondent, its sole agent to lay out, develop or sell them. C Ltd. undertook to produce for D Ltd. a net yield of £200,000 (£30,000 more than the price paid by H Ltd. for the 90 per cent. partnership interest) in addition to the £87,135 originally paid for the properties by the H group. C Ltd. was to bear any deficiency below the £200,000 and receive any surplus above it.
On 5th April the Respondent's wife's trustees advanced £170,000 (the sum received from H Ltd.) to C Ltd. on terms that it should bear interest at 6 per cent. and be repayable on demand. It was still outstanding in October 1970Assessments to income tax under Case I of Schedule D for the year 1960-61 on the £170,000 received by the trustees were made on the Respondent on the footing that it constituted profits of a trade carried on by him ("the personal assessment") and alternatively, on the same footing, on the trustees as the persons receiving that sum. On appeal, the Special Commissioners found (a) that the transactions had been planned with the broad object that properties belonging to companies controlled by the Respondent should be developed by a company so controlled but in such a manner that a large slice of the profit should escape tax; (b) that the Respondent was the person who put the scheme into operation and controlled it throughout, although the details were left to his professional advisers; although not a party he procured the parties connected with him to act as they did; (c) that he had placed the £170,000 where it suited him to place it, and the circumstance that it was not his money had not much weight; (d) that although he did not venture any property or capital of his own, the only explanation of the sales by his companies at a substantial undervalue was that in reality it was the Respondent who was venturing the properties for the purposes of the scheme. The Commissioners concluded that the Respondent engaged in an adventure in the nature of trade in so exploiting the properties. They held, however, that the trustees received the £170,000 on the understanding that they would pass it on for the purposes of the scheme and there was no knowing whether they would get it back in full (so that no profit had yet arisen), and on that ground allowed the appeals.
In the House of Lords the Crown's contention was that the first Respondent engaged in an adventure in the nature of trade by procuring others to enter into the relevant transactions, most if not all of which were trading transactions, and that the trustees were liable to tax in respect of the profits of that adventure. The Crown did not argue in support of the personal assessment.
Held, that merely by procuring others to enter into a scheme which involved trading by some of those others on their own account the first Respondent did not himself engage in any trade or adventure in the nature of trade.
(2) The second group of cases concerned the exploitation of the development rights in an estate under a scheme similar to that in the first group of cases, which was authorised by the Respondent D and worked out by his professional advisers and which also involved companies in the H group. The rights were initially held by a company controlled by D, which on 30th March 1962 sold them for £2,250, a price regarded by the vendo r's board as fully reflecting their then value. After resale those rights were eventually acquired by O Ltd., a company in the H group. On 5th April 1962 O Ltd. sold them to K Ltd., a company controlled by D, on the terms, inter alia, that K Ltd. should pay to O Ltd. premiums aggregating £77,250 as and when the plots on the estate were developed and sold. By virtue of an associated intermediate transaction the trustees of a settlement made by D's wife received £60,000 in respect of the said rights from a company in the H group. An assessment to income tax under Case I of Schedule D for the year 1964-65 was made on K Ltd. on the footing that the premiums were not paid exclusively for trading purposes and so not allowable, and alternative assessments under that Case for the year 1961-62 were made on D and the trustees of the associated settlement in respect of the sum of £60,000 received by the trustees.
On appeal, the Special Commissioners found (a) that the transactions were planned with a view to enabling the development of the estate to be carried out by companies controlled by D and to arranging that if a substantial profit arose a large slice of it should not attract liability to income tax; (b) that the agreement between K Ltd. and O Ltd., which was an essential prerequisite to the carrying out by K Ltd. of the development of the estate, was entered into by K Ltd. with the objects both of enabling it to do that and of facilitating the scheme for avoiding liability to tax, and since the latter object was one of the main purposes the outlay on the premiums was incurred for dual purposes including a non-trading purpose; (c) that, although D authorised the scheme and so was concerned in putting the transactions in train, neither he nor his wife was engaged in carrying on personally in relation to the estate any adventure in the nature of trade. The Commissioners accordingly dismissed the appeal of K Ltd. and allowed those of D and the trustees.
In the House of Lords the Crown did not argue in support of the assessment on D and its contentions in the trustees' case were the same as those in the first group of cases. On the appeal of K Ltd. the Crown stated that £2,250, being the market value of the building rights acquired by K Ltd., would in any event be allowed as a deduction. K Ltd. contended that, since it could not have acquired the rights without paying the £77,250, and even so they yielded a profit, the whole £77,250 was deductible as an expense of a commercial transaction.
Held, (1) in the case of D and the trustees, following their decision in the first group of cases, that D did not engage in any trade or adventure in the nature of trade;
(2) in the case of K Ltd., that the £77,250 was a price dictated by the tax avoidance scheme, in which K Ltd. and O Ltd. had been procured to play their part, and not a price paid by K Ltd. as a free agent acting from commercial motives in its own interest, and accordingly that sum was not paid wholly and exclusively for the purposes of the trade of K Ltd.
(1) Ransom (H.M. Inspector of Taxes) v. Higgs
CASE
Stated under the Taxes management Act 1970, s. 56, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 3rd December 1968 Alan Edward Higgs (hereinafter called "Mr. Higgs") appealed against the following assessments to income tax
1960-61 |
£170,000 |
1961-62 |
£170,000 |
made upon him under Case I of Schedule D in respect of profits of the trade of land dealer and developer.
2. The question for our decision in this appeal (shortly stated) was whether a sum of £170,000 received, in the circumstances hereinafter set out, by the trustees of the settlement hereinafter referred to was assessable to income tax upon Mr. Higgs as a profit chargeable under Schedule D in either of the said years of assessment.
3. The following witnesses gave evidence before us: (a)Mr. Higgs; (b) Freda Gwendoline Higgs (wife of Mr. Higgs, hereinafter called "Mrs. Higgs"); (c) Harold Josiah Jenkins (hereinafter called "Mr. Jenkins").
4. The...
To continue reading
Request your trial
-
Commissioners of Inland Revenue v Plummer
... ... of deduction of income tax pursuant to the Income and Corporation Taxes Act 1970 Section 55 and handed these to Slater Walker with instructions to ... consideration in determining the nature of the annual payments ( Ransom v. Higgs , 50 Tax Cases, 1, per Lord Wilberforce at page 90 at A) ... If ... ...
-
Vibroplant Ltd v John Holland (HM Inspector of Taxes)
... ... 13 Mr. Bates was unable to find authority which was helpful in his cause He referred to the speech of Lord Wilberforce in Ransom v. Higgs (1974) 50 TC 1 at p. 88 where Lord Wilberforce discussed the difficulty of defining trade and said "Trade involves, normally, the exchange ... ...