Sharkey (HM Inspector of Taxes) v Wernher
| Jurisdiction | England & Wales |
| Judgment Date | 07 November 1955 |
| Date | 07 November 1955 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income Tax, Schedule D - Stud farm - Horses transferred to racing stables - Whether figure to be credited in stud farm accounts cost of breeding or market value.
The wife of the Respondent carried on a stud farm, the profits of which were agreed to be chargeable to Income Tax under Case I of Schedule D. She also carried on the activities of horse racing and training, which were agreed not to constitute trading. Five horses were transferred from the stud farm to the racing stables.
The cost of breeding these horses had been debited in the stud farm accounts. On the question of the amount to be credited as a receipt the Respondent contended before the Special Commissioners that the proper figure to be brought in in respect of the transferred horses was the cost of breeding. The Crown contended that the market value of the animals, which was considerably higher, was the proper figure. The Commissioners decided in favour of the Respondent and the Crown demanded a Case.
Held, that the figure that should be credited was the market value.
Stated under the Income Tax Act, 1952, Section 64, 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 19th June, 1951, Sir Harold Wernher (hereinafter called "the Respondent") appealed against an assessment to Income Tax in the estimated sum of £5,000 for the year 1949-50 under Case I of
Schedule D, made upon him in respect of the profits of his wife, Lady Zia Wernher (hereinafter referred to as "Lady Zia"), arising to her from a stud farm.The facts proved or admitted before us are as hereinafter set forth.
2. Lady Zia carries on the activities of a stud farm at property known as Someries Stud and Red Lodge Stud, Newmarket. It is common ground between the parties that these activities constitute "farming" which, by virtue of Section 10 of the Finance Act, 1941, and Section 31(1)(a) of the Finance Act, 1948, is to be treated as the carrying on of a trade and the profits whereof are to be charged to tax under Case I of Schedule D.
In addition, she also carries on activities of racing and training. It is common ground between the parties that these activities are not "farming" or "trading" but are purely recreational activities.
At her stud farms Lady Zia breeds horses for her racing stables, and from time to time transfers horses from her stud farms to her stables. In the year ended 31st December, 1948 (being the basic year for the year of assessment 1949-50), she transferred five horses from her stud farm to her stables. The cost of breeding these horses had been debited in the stud farm accounts, and it was common ground between the parties that, consequent upon such transfer, for Income Tax purposes some figure in respect of the transferred horses fell to be brought into the stud farm accounts as a receipt.
The market value of these horses if they had been sold was considerably in excess of their cost, and the sole ground of appeal against the assessment put forward on behalf of the Respondent was that the figure proper to be brought into the accounts as aforesaid was the cost of the transferred horses and not, as contended on behalf of the Appellant, their market value on an assumed sale.
3. At her stud farms Lady Zia keeps stallions, and, in addition to breeding horses for herself, she allows mares of other people to be brought to her stud farms to be serviced by her stallions. For these services she charges the owners fees. Although no ground of appeal in relation to this activity was put forward on behalf of the Respondent, and alternative contention with regard thereto was sought to be put forward on behalf of the Appellant, as hereinafter appearing.
4. The following documents put in evidence before us are hereto annexed, marked respectively as under, and form part of this Case(1), namely:-
"A". Statement headed "Value of horses as at 31st December, 1948", setting out particulars of the five transferred horses, and their value as shown in Lady Zia's accounts and as assessed by the Inland Revenue respectively.
"B". Accounts, consisting of balance sheet of Someries Stud at 31st December, 1948, capital account, profit and loss accounts of Someries Stud and Red Lodge Stud respectively for the year 1948, horse account for the same year and account of "Persian Gulf Syndicate".
5. In amplification of the facts shortly summarised in paragraphs 2 and 3 above, we refer to paragraphs 3 to 15 of the Case stated by the Special Commissioners in the appeal of Lady Zia Wernher v. Commissioners of Inland Revenue, 29 T.C. 20, at pages 21 to 25. It was agreed between the parties at the hearing before us that the facts as stated in these paragraphs
are equally applicable to the year involved in the present appeal, with the following additions, namely:-As regards paragraph 9, the numbers of the stock of horses owned by Lady Zia at the end of each of the years 1947 and 1948 were as follows:-
1947 |
1948 |
|||
Stallions |
… |
… |
2 |
2 |
Teaser |
… |
… |
1 |
0 |
Brood mares |
… |
… |
8 |
9 |
Yearlings |
… |
… |
6 |
1 |
Foals |
… |
… |
0 |
3 |
As regards paragraph 10, the numbers of the services of Lady Zia's stallions to her own mares and to visiting mares (i.e., those of other owners) for the years 1947 and 1948, and the fees received by her in respect of services to visiting mares, were as follows:-
1947 |
1948 |
||
Precipitation |
Casanova |
||
Services to own mares |
… |
2 |
0 |
Services to visiting mares |
… |
39 |
24 |
Fees |
… |
£15,540 |
£3,552 |
As regards paragraph 11, in the year 1948 Lady Zia made two purchases of bloodstock. There were no sales.
6. Mr. A.W. Britton Harvey, a certified accountant, spoke to the accounts exhibited, and also testified that the facts set out in paragraphs 3 to 15 of the said Case referred to in paragraph 5 hereof were still correct (with the additions aforesaid).
In cross-examination on behalf of the Appellant, he further testified that at the beginning of the year 1948 there were 8 brood mares. 2 were purchased during the year from Boussac. One of the 10 died, leaving 9. During the five years 1944 to 1948 20 foals were born at the stud. 2 of these were transferred to Lady Zia's daughter, Mrs. Phillips, 11 were transferred to Lady Zia's racing and training stables and 3 were sold, leaving 4 at the end of the period. 2 were sold in 1947 as yearlings for £1,200, which was quite an average price. They had not raced. He did not know why Lady Zia sold them. She bred to sell as well as to race. He did not admit the suggestion put to him that she bred primarily to race. Paragraph 8 of the said Case accurately represented the facts as prevailing in 1948.
7. It was contended on behalf of the Respondent that:-
(a) the reasoning of the Court of Appeal in Laycock v. Freeman, Hardy & Willis, Ltd., 22 T.C. 288, and Briton Ferry Steel Co., Ltd. v. Barry, 23 T.C. 414, established that there could not be a sale from a person to himself giving rise to a taxable profit;
(b) the decision in the case of Watson Bros. v. Hornby, 24 T.C. 506, relied on by the Appellant, was distinguishable or, in the alternative, was irreconcilable with the reasoning of the Court of Appeal in the two cases above mentioned and should not be followed;
(c) there being no sale in the present case the figure proper to be brought into the accounts in respect of the transferred horses was not their market value on an assumed sale but their cost.
8. It was contended on behalf of the Appellant that:-
(a) the present case was indistinguishable in principle from Watson Bros. v. Hornby(1) and, on the authority of that case, the figure proper to be brought into the accounts in respect of the transferred horses was their market value, namely, the price which they would have fetched if they had then been sold;
(b) in the alternative, even if the figure proper to be brought in was that of cost, the figure of £1,888 credited as cost in the accounts was wholly inadequate. In particular, the figure of "cost" to be brought in should include not merely a proportion of overhead charges, but the total cost of the general activity of breeding at the farm for Lady Zia's own stables;
(c) in the further alternative, Lady Zia's activity of letting out the services of stallions at the stud farm for fees was separable from the general activity of breeding at the farm for her own stables, this latter activity was a recreational one, not attracting liability to tax, and consequently no profit or loss arising out of the breeding at the farm for her own stables fell to be taken into account in the assessment to Income Tax.
9. In reply to the further alternative contention of the Appellant set out in paragraph 8(c) above, it was contended on behalf of the Respondent that it was not open to the Appellant to raise this contention, and, in any event, it was bad in law.
10. We, the Commissioners who heard the appeal, were of opinion that:-
(a) the facts of Watson Bros. v. Hornby were distinguishable, in that in that case there were, for Income Tax purposes, two businesses, namely, a farm (then assessed under Schedule B) and a hatchery (assessed under Schedule D) and stock was transferred from the hatchery to the farm and became stock-in-trade of the latter. In the present case, the horses were simply taken out of the stock of Lady Zia's stud farm and did not become stock-in-trade of any other business;
(b) the horses were not sold or otherwise disposed of by way of trade, but simply taken out of the stud farm stock as aforesaid, and in these circumstances the reasoning of the Court of Appeal in Laycock v. Freeman, Hardy & Willis, Ltd.(2) and Briton Ferry Steel Co., Ltd. v. Barry(3), rendered it inadmissible to postulate a notional sale, so as to assume a notional profit which had never in...
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