Salt v Chamberlain
| Jurisdiction | England & Wales |
| Date | 1975 |
| Court | Unspecified Court |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income tax, Schedule D - Losses on transactions on Stock Exchange - Whether trading losses - Income and Corporation Taxes Act 1970, s 168(1).
The taxpayer, a mathematician with knowledge of computers, entered into a series of Stock Exchange transactions as a result of which he incurred losses for which he claimed relief under s 168(1), Income and Corporation Taxes Act 1970.
The taxpayer appealed against the Inspector's refusal of his claim.
The General Commissioners dismissed his appeal holding that the transactions were not trading transactions.
The Chancery Division, dismissing the appeal, held that on the facts the General Commissioners were entitled to hold that the transactions did not amount to a trade.
Lewis Emanuel & Son, Ltd. v. White 42 TC 369 explained.
Held,
Stated under s 56 of the Taxes Managment Act 1970 by the Commissioners for the General Purposes of the Income Tax for the Division of West Brixton in the County of Greater London for the opinion of the High Court of Justice.
1. At a meeting of the said Commissioners held in the Civic Suite, Wandsworth High Street, London SW 18, on 9 June 1977 Michael Stuart Salt (hereinafter called "the Appellant") of 86 York Mansions, Prince of Wales Drive, London SW 11, appealed against the refusal of a claim for relief under s 168(1) of the Income and Corporation Taxes Act 1970 for the year 1972-73 in the sum of £3,373.
2. The question for determination was whether transactions carried out by the Appellant in 1972-73 amounted to a trade, thus entitling him to relief under s 168(1) aforesaid.
3. The Appellant gave evidence before us and was represented by Mr. R. Briscoe, a certified accountant. The Inspector of Taxes addressed us in person.
4. The following documents were put in evidence before us:
(a) A copy of the Appellant's accounts for the four months from 11 December 1968 to 31 March 1969 and the four years to 31 March 1973.
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(b) Copy memorandum of deposit of securities dated 21 September 1970 with the National Employers Life Assurance Co., under which the Appellant had received loans to finance his activities.
(c) Copy letter from the Inland Revenue to Mr. Briscoe dated 20 November 1973 in which the view was expressed that an individual who speculates in shares-notwithstanding the scale and skill with which he does so-is not carrying on an activity in the nature of a trade and that share speculating is a form of gambling.
(d) Copy letter from Mr. Briscoe to the Inland Revenue dated 22 January 1977. This letter contains the following paragraph:
There are, as you will understand, many ways in which Mr. Salt reached his decision to buy or sell particular securities. They may result from a detailed study of the rights attached to a particular security; they may derive from his appraisal of the effect of political or other events on a particular industry or company; they may simply be the result of a recommendation in a publication or from his stockbroker or other contacts; they may stem from his view on the probable effect of management changes. Each case is somewhat different and decisions are obviously affected by the availability of funds at the time.
These documents are available for the use of the Court if required.
5. The following facts were proved or admitted before us:
(a) The Appellant is a mathematics graduate whose academic studies included the application of computers to the forecasting of share movements, involving the analysis of share prices over a period of five to ten years.
(b) On 1 December 1968 the Appellant set up as a freelance operational research consultant.
(c) In this connection the Appellant applies his expertise to the solution of problems in complex business operations.
(d) A large proportion of this work involves the application of powerful computers to the analysis of statistical data.
(e) On 15 January 1969 the Appellant began to buy and sell on the Stock Exchange, using his academic training in relation to Stock Exchange transactions on a considerable scale.
(f) Approximately 200 purchases/sales were undertaken in the period covered by the accounts referred to in para 4(a) above.
(g) About one-third of the Appellant's transactions were either purchases or sales within the account with settlements only for balances or call or put options. There were also disposals of stocks before acquisition.
(h) The Appellant's transactions in many cases were short term.
(i) The Appellant's Stock Exchange transactions called for a telephone and money. No office was necessary.
(j) The forecasting of share movements called for a large number, (about 500) different shares to provide a continuing source of price movement.
(k) The difficulty of conducting such a scheme commercially is the cost- about £10,000 initially together with £6,000 for continuous running.
(l) The extent of the Appellant's Stock Exchange activities has been largely determined by the availability of funds.
(m) In the period since 1969 the Appellant has devoted virtually all his own available funds to this activity as well as a substantial amount of borrowed money.
(n) On 1 April 1970 he took out a £10,000 life assurance policy with British Life Office Ltd; the annual premium being £148.
(o) On 28 August 1970 he commenced a £5,000 life assurance policy with National Employers Life Assurance Co. Ltd. the annual premium being £361.
(p) This latter policy is coupled with an agreement dated 21 September 1970 whereby the insurance company undertook to advance to the Appellant £5,000 in five equal annual instalments on the security of the assurance policy and the shares purchased with the money advanced.
(q) The Appellant had also borrowed from his bank to finance the transactions in stocks and shares.
(r) On 11 August 1973 the Appellant had made returns of his income for the years ended 5 April 1969 and 1970. In each of these he had disclosed a trade of stock and share dealer, the profits in each year being returned at nil.
(s) In the year ended 31 March 1973 the Appellant made a loss on his buying and selling on the Stock Exchange.
(t) On 21 March 1975 the Appellant claimed relief under s 168 aforesaid in respect of this loss.
(u) On 23 May 1977 the Inspector of Taxes formally rejected this claim.
(v) On 27 May 1977 the Appellant appealed against the rejection of his claim.
6. It was contended on behalf of the Appellant that: (a) his Stock Exchange transactions amounted to the carrying on of a trade within the meaning of s 526(5) of the Income and Corporation Taxes Act 1970; (b) he was entitled to the relief claimed under s 168 aforesaid.
7. It was contended by the Inspector of Taxes that:
(a) unless there were special circumstances when it would be correct to regard dealing in securities on the Stock Exchange as a trading activity, in the general run of cases individuals buying and selling such securities were not trading;
(b) such transactions were not usually entered into as part of a trading activity;
(c) such transactions were not trading transactions even though (i) there may have been a large number of them and (ii) they were entered into with a profit-seeking motive;
(d) the organisation of his activity of buying and selling shares was such as to indicate that these activities were not part of a trade carried on by the Appellant;
(e) the number, frequency and repetition of the Appellant's Stock Exchange transactions merely point to activities which fall to be considered under the capital gains tax legislation;
(f) the Appellant did not sell on the share market, but bought and sold quoted shares as a customer of the market;
(g) he did not appear to have any customers but was merely a passive observer;
(h) the transactions entered into by the Appellant during the year ended 31 March 1973 did not amount to a trade of dealing in stocks and shares and accordingly he is not entitled to relief under s 168(1) aforesaid.
8. The following cases were cited to us in argument:Commissioners of Inland Revenue v. Livingston 11 TC 538; 1927 SC 251; Commissioners of Inland Revenue v.Fraser 24 TC 498; 1942 SC 493; Cooper v.Stubbs 10 TC 29; [1925] 2 KB 753; Graham v.Green 9 TC 309; [1925] 2 KB 37; Lewis Emanuel & Son, Ltd. v. White 42 TC 369; Californian Copper Syndicate v. Harris 5 TC 159.
9. Our attention was also drawn on behalf of the Appellant and by the Inspector to the final report of the Radcliffe Committee (Commd. 9474) in para 116 of which six "badges of trade" were listed. These were: (a) The subject-matter of the realisation. (b) The length of period of ownership. (c) The frequency or number of similar transactions by the same person. (d) Supplementary work on or in connection with the property realised. (e) The circumstances that were responsible for the realisation. (f) Motive. In response to a question from Mr. Briscoe, the Inspector of Taxes confirmed that the subject-matter of the transactions was the only question at issue in this case.
10. We, the Commissioners who heard the appeal, found as a fact that the transactions entered into by the Appellant during the year ended 31 March 1973 were not a trade and accordingly he was not entitled to relief under s 168(1) of the Income and Corporation Taxes Act 1970.
11. Immediately upon the determination of the appeal, the Appellant declared to us his dissatisfaction with our decision as being erroneous in point of law, and in due course required us to state a Case for the opinion of the High Court which Case we have stated and do sign accordingly.
12. The question for the opinion of the High Court is whether our decision expressed in para 10 above is correct in law.
2 March 1979.
The case was heard in the Chancery Division by Oliver J. on 18 June 1979 when judgment was reserved. On 19 June 1979 judgment was given in favour of the Crown, with costs.
Oliver J.-This is a taxpayer's...
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