Reed v Nova Securities Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Keith of Kinkel,Lord Edmund-Davies,Lord Bridge of Harwich,Lord Brandon of Oakbrook,Lord Templeman |
| Judgment Date | 31 January 1985 |
| Judgment citation (vLex) | [1984] UKHL J1122-2 |
| Date | 31 January 1985 |
| Court | House of Lords |
[1984] UKHL J1122-2
Lord Keith of Kinkel
Lord Edmund-Davies
Lord Bridge of Harwich
Lord Brandon of Oakbrook
Lord Templeman
House of Lords
My Lords,
I have had the opportunity of reading in advance the speech to be delivered by my noble and learned friend, Lord Templeman. I agree with it, and for the reasons he gives would dismiss the appeal.
My Lords,
I am in respectful and complete agreement with the views expressed in the speech prepared by the noble and learned Lord, Lord Templeman. I accordingly concur in holding that this appeal should be dismissed.
My Lords,
For the reasons given in the speech of my noble and learned friend, Lord Templeman, with which I agree, I would dismiss this appeal.
My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Templeman. I agree with it, and for the reasons which he gives I would dismiss the appeal.
My Lords,
Town and City Properties Ltd. is the parent of a group of companies which includes the three wholly-owned subsidiary companies featured in this appeal. The first subsidiary, Sovereign Property Investments (Newport) Ltd. ("SPI"), carries on business as a property developer. SPI acquired a lease for 125 years of land at Newport in Gwent and developed the site at a total cost of £5.3 million. The market value of the lease on 30 March 1973, according to the group, was £3.1 million. SPI thus faced a potential capital loss of £2.2 million which might be reduced or eliminated by an increase in the value of the land prior to its eventual disposal. Any loss in fact suffered on disposal would then rank as an allowable loss which could only be set off for corporation tax purposes against chargeable gains (if any) made by SPI The second subsidiary, the appellant Arndale Properties Ltd. ("Arndale"), carries on business as a property dealer; any losses incurred by Arndale in carrying on that business are trading losses which can be set off in any year against trading profits made by Arndale or by any other member of the group. There were therefore sound commercial reasons for converting the potential capital loss of SPI into a trading loss suffered by Arndale and there is express statutory provision which enables this to be done for corporation tax purposes. By assignment dated 30 March 1973 SPI assigned the lease to Arndale for £3.1 million. According to the accounts of SPI and Arndale the price in fact paid was £3,090,000 and in these proceedings it has been assumed that the accounts, supported as they were by the auditors, are more accurate than the assignment. The object of the assignment was to enable Arndale to convert the potential capital loss of £2.2 million which threatened SPI into a trading loss for corporation tax purposes of £2.2 million to be suffered by Arndale and then to be available for distribution between all members of the group to set against trading profits. This conversion is made possible by the legislation but only if Arndale acquired the lease "as trading stock" for the purposes of its property-dealing business.
The third subsidiary of the group, Arndale Property Trust Ltd. ("APTL"), carries on business as an investment company. By assignment also dated 30 March 1973 Arndale assigned the lease to APTL for £3.1 million. Arndale could then proceed to complete the conversion of the potential capital loss of £2.2 million into an actual trading loss for corporation tax purposes and to distribute that trading loss between the companies of the group, provided that Arndale had acquired the lease "as trading stock." The effect of the assignment to APTL was to ensure that the lease became a capital asset of APTL and thus remained a capital asset of the group.
The legislation which confers power on a group of companies to procure the conversion of a potential capital loss into a trading loss provided certain conditions are fulfilled must now be considered.
By section 238 of the Income and Corporation Taxes Act 1970 a company is chargeable to corporation tax in respect of income and in respect of chargeable gains. By section 265 chargeable gains are to be included in the total profits of a company assessable to corporation tax after deducting any allowable losses accruing to that company. Chargeable gains to be included for corporation tax purposes are computed in accordance with the principles applying to capital gains tax subject to any express provisions enacted with regard to companies. Thus, as I have already indicated, if SPI having acquired and developed land at a cost of £5.3 million had sold it on the open market for £3.1 million, the sale would have produced an allowable loss of £2.2 million deductible in computing the chargeable gains (if any) liable to corporation tax of SPI.
Sections 272 to 281 make express provisions for corporation tax in connection with a group of companies and each member of that group. In particular, section 273(1) provides:
"where a member of a group of companies disposes of an asset to another member of the group, both members shall … be treated, so far as relates to corporation tax on chargeable gains, as if the asset … were acquired for a consideration of such amount as would secure that … neither a gain nor a loss would accrue…"
Thus although the lease was in fact assigned by SPI to Arndale for £3,090,000, the lease is deemed for corporation tax purposes to have been assigned for £5.3 million. If that provision had stood alone, then the assignment by one member of the group, SPI, to another member of the group, Arndale, would have had no effect on the corporation tax liability of either company save that when Arndale eventually sold the lease a chargeable gain or allowable loss would result to Arndale depending on the difference between the price obtained by Arndale and the original cost to SPI, namely £5.3 million.
Where, however, a member of a group transfers an asset to a trading member, difficulties arise. These difficulties are similar to those which arise when an individual who carries on a trading business appropriates property to or from his business activities as trading stock. In Sharkey v. Wernher [1956] A.C. 58, for example, a transfer of a horse from a stud farm carried on as a business to a racing stable carried on as a recreation produced tax consequences for the business similar to those which would have been produced by a sale of the horse at market value.
By section 274(1) of the Income and Corporation Taxes Act 1970:
"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 purposes of paragraph 1 of Schedule 7 to the Finance Act 1965 as having acquired the asset otherwise than as trading stock and immediately appropriated it for the purposes of the trade as trading stock."
The lease did not form part of the trading stock of SPI. Provided that Arndale acquired the lease "as trading stock" of the property dealing business carried on by Arndale, then Arndale is deemed to have acquired the lease otherwise than as trading stock and immediately appropriated it for the purposes of the trade as trading stock. Paragraph 1 of Schedule 7 to the Finance Act 1965 makes provisions, similar in some respects to the results achieved in the case of individuals by the decision in Sharkey v. Wernher, in the event of the appropriation of an asset as trading stock.
Paragraph 1(1) of Schedule 7 to the Act of 1965 as amended provides:
"Subject to sub-paragraph (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 … 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."
The confusing result is that if Arndale acquired the lease as trading stock it is treated as having first acquired the lease for £5.3 million otherwise than as trading stock, then as having appropriated the lease as trading stock, then as having sold the lease for its market value, namely £3.1 million, thus as having made an allowable loss of £2.2 million. Paragraph 1(3) of Schedule 7 however confers an option on the trading company to convert the allowable loss of £2.2 million into a trading loss of £2.2 million. By paragraph 1(3):
"Sub-paragraph (1) above shall not apply in relation to a persons 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 … 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 that sub-paragraph, and where that sub-paragraph does not apply by reason of such an election, the profits of the trade shall be computed accordingly: …"
Thus if Arndale purchased the lease from SPI "as trading stock" for the purposes of the property-dealing trade of Arndale then Arndale may elect that the acquisition cost of the lease shall be entered in its trading accounts as £5.3 million and not £3.1 million and thus when Arndale sold the lease to APTL for £3.1 million Arndale for corporation tax purposes would suffer a trading loss of £2.2 million.
Provision is made for such a trading loss to be applied...
To continue reading
Request your trial
- Lower Perak Co-operative Housing Society Bhd v Ketua Pengarah Hasil Dalam Negeri
- Perak Construction Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2001) MSTC 3, 866;
-
New Angel Court Ltd v Adam (Inspector of Taxes)
...corporation tax purposes as having appropriated the painting as trading stock pursuant to section 161. 24 In Reed v. Nova Securities Ltd [1985] 1 WLR 193 (to which further reference will be made below) the issue was whether certain shares and book debts which had been transferred to the tax......
-
Eclipse Film Partners (No. 35) LLP v Revenue and Customs Commissioners
...remote from trade"; it was "incapable of being fairly regarded as a trading transaction." In Coates (HMIT) v Arndale Properties LtdTAX[1984] BTC 438 and Overseas Containers (Finance) Ltd v Stoker (HMIT)TAX[1989] BTC 153 the alleged commercial profit consisted of a payment from one wholly-ow......