Reed v Nova Securities Ltd
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE LAWTON,LORD JUSTICE FOX,LORD JUSTICE KERR |
| Judgment Date | 06 December 1983 |
| Judgment citation (vLex) | [1983] EWCA Civ J1206-2 |
| Docket Number | 83/0478 |
| Court | Court of Appeal (Civil Division) |
| Date | 06 December 1983 |
[1983] EWCA Civ J1206-2
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(REVENUE PAPER)
(1) (MR. JUSTICE GOULDING)
(2) (MR. JUSTICE WALTON)
Royal Courts of Justice
Lord Justice Lawton
Lord Justice Fox
and
Lord Justice Kerr
83/0478
MR. JONATHAN F. PARKER QC and MR. J. MUMMERY (instructed by the Solicitor of Inland Revenue, Somerset House, Strand, London WC2R 1LB) appeared on behalf of the Appellant (Appellant) in the first appeal.
MR. A. PARK QC and MR. M. FLESCH QC (instructed by Messrs.Speechly Bircham & Co, Solicitor, London EC4A 2HX) appeared on behalf of the Respondent (Respondent) in the first appeal.
MR. J. HOLROYD PEARCE QC and MR. P.H. GOLDSMITH (instructed by the Solicitor of Inland Revenue, Somerset House, Strand, London WC2R 1LB) appeared on behalf of the Appellant (Appellant) in the second appeal.
MR. C.N. BEATTIE QC and MR. C.J.F. SOKOL (instructed by Messrs. Allan & Overy, Solicitors, London EC2V 6AD) appeared on behalf of the Respondent (Respondent) in the second appeal.
These two appeals, which we heard one after the other, raise the same issues and are concerned with the application of the same statutory provisions and the same principles of law to those issues. In each case the principal issue was whether the company taxpayer, being a member of a group of companies, had acquired "an asset as trading stock" so as to bring into operation ss.265 (1) and 274 (1) of the Income and Corporation Taxes Act 1970 and paragraph 1 (3) of Schedule 7 to the Finance Act 1965. If they had, they could bring into account as trading losses capital losses which had been sustained by the members of the group from whom they had acquired the assets. In both cases this would have meant that for the year of assessment the company would have had no liability for corporation tax and other members of the group would have obtained substantial fiscal advantages because in each case the company, pursuant to s.258, had surrendered part of its right to relief for trading losses to other members of its group. In both cases the Commissioners for the General Purposes of the Income Tax decided that the tax-paying companies had acquired the assets as trading stock. The Inland Revenue, as appellants, have submitted that these findings were such that no Commissioners, acting judicially and properly instructed as to the relevant law, could have made them, so that they were erroneous in point of law: see s.56 of the Taxes and Management Act 1970 and Edwards v. Bairstow, (1956) Appeal Cases 14. The reason for this submission was that in both cases on the admitted facts the sole, or alternatively the paramount, reason for acquiring the assets was to get fiscal advantages. In neither case did the tax-paying company call evidence. The facts which the parties thought relevant were agreed at the hearings before the Commissioners. Convenient though this practice may be in many cases, in my opinion it is unsatisfactory when the amounts in issue are large and the Inland Revenue are alleging that the transactions being examined were nothing more than machinery to obtain fiscal advantages. Because of what was agreed, in this court we have been unable to look beyond the facts found in the cases and in the documents exhibited to them. In the Arndale Properties Ltd. case, however, it was admitted in this court that before the Commissioners the company's case had been conducted on the basis that the relevant asset had been acquired solely in order that the group to which it belonged should obtain a fiscal advantage in the form of tax relief.
By Part 3 of the Finance Act 1965 persons become chargeable to capital gains tax in respect of chargeable gains accruing to them in a year of assessment: see s.20. Chargeable gains were defined by s.22. They were to arise from the disposal of assets, which were deemed to be all forms of property, including debts. Profits made in the course of trade were not chargeable gains. Provision, however, had to be made for the case where a trader acquired an asset otherwise than as trading stock and later appropriated it for the purposes of his trade as trading stock. A chargeable gain could accrue (see paragraph 1 (1) of Schedule 7); but that sub-paragraph was not to 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…and elects that instead the market value of the asset at the time of the appropriation shall, in computing profits of the trade for the purposes of tax, be treated as reduced by the amount of the gain or increased by the amount of the 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".
The effect of this provision was that a trader who had made a capital loss on the acquisition of an asset could turn it into a trading loss by bringing it into his trading stock and then making the election provided for by paragraph 1 (3).
Capital gains tax was not payable by companies; but they could make gains and losses on the disposal of capital assets. By s.49 (1) of the Finance Act 1965 companies became chargeable to corporation tax on all their profits wherever arising; but by s.55 (now s.265 of the 1970 Act) the computation of chargeable gains was to take into account any allowable losses. We were told by Mr. Beattie, for Nova Securities Limited, that a loss on the disposal of a capital asset may be an allowable loss but when computed it may not have the same fiscal advantage as if it were treated as a trading loss. I accept that this is so.
Special provisions had to be made for the disposal of assets within a group of companies. This was done in Schedule 13, paragraph 3 (1), which provides as follows:
"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 paragraph 1 of Schedule 7 to this Act as having acquired the asset otherwise than as trading stock and immediately appropriated it for the purposes of the trade as trading stock".
This sub-paragraph is now s.274 (1) of the 1970 Act. When read with s.273 (1) this provision produces this result, as the Inland Revenue in this court accepted, viz., that if one member of a group of companies, not being a dealing company, sustains a capital loss on an asset and sells that asset at its market value to a dealing member which acquires it "as trading stock", the dealing company is deemed to have acquired it for a consideration which gives the disposing company neither a gain nor a loss. From this it follows that if the dealing company sells it to another company at its market value and that value is less than the cost to the original disposing member, the dealing company is deemed to have made a trading loss. Trading losses can be used to give tax relief from corporation tax. When there are a number of companies in a group this relief can be surrendered to one or more members of the same group. The fiscal advantages which can flow from all this are illustrated by the facts of the Nova Securities Limited case. If that company did acquire the assets which it did "as trading stock" it made a deemed trading loss for the year of assessment of £3.9 million which it could properly set off against the admitted chargeable gains of £850; but if it surrendered that relief to other members who had made large chargeable gains those members could get substantial fiscal advantages by way of tax relief.
The managers and advisers of a group of companies, one of whose members has sustained a capital loss, are entitled to keep in mind the statutory provisions to which I have referred and to arrange the affairs of the group to get the best fiscal advantages they can. This is trite law but in order to get the maximum fiscal advantages the transactions which are intended to produce those advantages must be such as to come within the statutory provisions which give it. In both these appeals the fiscal advantages could not be obtained unless the two companies had acquired the relevant assets "as trading stock". What do these words mean?
The word "as" coming after "acquires" connotes the purpose for which the acquisition was made. Trading stock is defined in S.137 (4) of the 1970 Act as follows:
"For the purposes of this section, 'trading stock', in relation to any trade, means property of any description whether real or personal, being either–
(a) the property such as is sold in the ordinary course of the trade, or would be so sold if it were mature or if its manufacture, preparation or construction were complete or
(b)…..".
Mr. Park, for Arndale Properties Ltd., accepted that this definition, although prefaced with the words "for the purposes of this section", applied whenever the words "trading stock" were used in the 1970 Act. Mr. Beattie, for Nova Securities Ltd., submitted that these prefacing words limited the application of the definition to the subject matter of s.137, namely the valuation of trading stock on discontinuance of trade. When the words "trading stock" were used in other...
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