Stone & Temple Ltd v Waters
| Jurisdiction | England & Wales |
| Judgment Date | 16 November 1994 |
| Date | 16 November 1994 |
| Court | Chancery Division |
Chancery Division.
Sir John Vinelott.
Ian Richards (instructed by Beveridge Ross & Prevezers) for the companies.
Timothy Brennan (instructed by the Solicitor of Inland Revenue) for the Crown.
The following case was referred to in the judgment:
Lawson (HMIT) v Johnson Matthey plc TAX[1992] BTC 324
This was an appeal by two companies from a decision of the general commissioners for Croydon that a company which simply advanced sums by way of loan to a fellow subsidiary, and later to an individual, to set up and run a restaurant was not trading.
Astrawall UK was a member of a group of companies controlled by Mr Stoakes, the inventor of a successful system of curtain walling for office buildings. By 1979 the company had substantial cash reserves. Mr Stoakes looked at possibilities for employing the reserves and diversifying the business. He was persuaded by his wife's nephew from Canada to provide the finance and building expertise for a restaurant project in Toronto while the nephew, Mr Huffer, was to provide the restaurant expertise.
In 1980 the taxpayer, Stone & Temple Ltd ("S&T"), was acquired as a shell company and a Canadian company, Astrawall Canada Ltd, was incorporated. Both were subsidiaries of Astrawall UK.
Astrawall UK advanced funds amounting to some £2m to S&T and S&T made advances for use by Astrawall Canada, which in turn lent sums on to a company owned as to 50 per cent each by Astrawall Canada and a company ("Northwell") controlled by Mr Huffer. Northwell and Astrawall Canada each held 50 per cent of the shares in a company which had purchased the lease of a restaurant, Pearcy House. The terms of the lease included a provision for forfeiture of the lease for breach of an obligation on the lessee to keep the restaurant open.
The development turned out to be a disaster and Mr Huffer disappeared from the scene. However, a Mr Hordo was willing to take on the restaurant. He offered to purchase the restaurant for Can$1 and to keep the restaurant open on terms that he would himself invest capital in the running of the restaurant and that if the lease were sold Mr Stoakes and Mr Hordo would share the proceeds of sale equally.
In the event Mr Hordo did not invest in the project but continually threatened to shut the restaurant unless further finance was provided by Mr Stoakes. Loans were therefore made to Mr Hordo personally.
The first appeal was against a decision of the general commissioners that advances made by S&T to Astrawall Canada and to Mr Hordo were not deductible in computing its corporation tax liability because they found that S&T was not trading. The second appeal was by Astrawall UK against the commissioners' decision that its claims for group relief were not admissible to the extent that the claims were founded on losses purportedly surrendered by S&T. The issue in both appeals was therefore whether S&T was trading.
The case for S&T was that the advances to Astrawall Canada were made pursuant to a partnership or joint venture between S&T and either Mr Huffer or his company, Northwell, and later between S&T and Mr Hordo.
Held, dismissing both appeals:
There was no evidence that S&T was party to any joint venture. The role played by S&T throughout was to make finance available on loan account for Astrawall Canada and later Mr Hordo. Even if there was a joint venture between S&T and Mr Huffer or his company, and later Mr Hordo, it did not follow that the money advanced by S&T was not advanced by way of loan.
1. At a meeting of the general commissioners for the division of Croydon on 26 and 27 March, 11 and 12 June and 25 August 1992 Stone & Temple Ltd ("S&T") appealed against the following assessments to corporation tax:
31/03/81 |
£3,000 |
31/03/82 |
£4,000 |
31/03/83 |
£5,000 |
31/03/84 |
£6,000 |
31/03/85 |
£1,000 |
31/03/85 |
£108,000 |
31/03/86 |
£158,000 |
31/03/87 |
£200,000 |
31/03/88 |
£200,000 |
31/03/89 |
£300,000 |
2. Our fellow commissioner Mr Silver was forced to withdraw from the hearing on 11 June. He took no further part in these proceedings.
3. By consent of S&T and Astrawall Ltd ("Astrawall UK") we heard this appeal and that of Astrawall UK at the same time. [The case stated in respect of Astrawall UK is not reproduced.]
4. The parties had agreed that the question they wished us to determine was:
(2) whether S&T on the facts before us had been carrying on a trade or an adventure in the nature of a trade.
[We found it necessary to consider and decide the further questions:]
(2) if so, whether certain advances made by S&T to Astrawall (Canada) Ltd ("Astrawall Canada"), to a Mr Hordo and to others had been made in the course of that trade or adventure in the nature of trade;
(3) if so made whether or not they or any of them were capital in nature.
5. S&T and Astrawall UK were represented by Mr Richards of counsel supported by Mr Grant, a solicitor and Mr Morphew FCA, their auditor and by Mr Stoakes. The Revenue were represented by Mr Roach and Mr Waters, inspectors of taxes.
Evidence was given on behalf of S&T and Astrawall UK by Mr Stoakes, the managing director of both companies.
6. [Paragraph 6 listed the documents admitted before the general commissioners.]
7. We found the following facts:
(2) Mr Richard Stoakes had invented, patented and developed into a very successful business a system of providing curtain walling or cladding for office buildings.
(3) As the vehicle of this business Mr Stoakes created a number of companies.
(4) For the purposes of this case the head company was Astralite Ltd ("Astralite") of which Mr Stoakes owned 99 per cent of the shares.
(5) Astralite was the sole employer of all the persons working in the group of companies.
(6) Astralite was the sole shareholder of Astrawall Ltd, a UK company ("Astrawall UK").
(7) Astrawall UK was the "core company" and the company which earned the vast majority if not all the income of the group.
(8) A wholly owned subsidiary of Astrawall UK is Sealed Units Ltd, a UK company in receivership at the time of the appeal hearings.
-
(9) For the purposes of this case two of Astrawall UK's subsidiary companies are relevant:
(a) S&T Ltd (the appellant) which was incorporated on 11 July 1978 and before it had ever traded was acquired on 20 March 1980 by Astrawall UK;
(b) Astrawall Canada Ltd (Astrawall Canada) which was incorporated in one of the provinces of Canada on 10 March 1980 and which was there dissolved on 12 March 1984.
(10) Northwell Holdings Ltd is a Canadian company the totality of the shares in which are owned by Mr David Huffer who was at all relevant times the sole director and the sole officer. ("Officer" is a term of art under the relevant Canadian law. Its precise significance was not explained to us.)
(11) Mr Huffer is a Canadian citizen, the nephew of Mrs Stoakes. He was at all relevant times in addition the sole director and sole officer of Astrawall Canada.
(12) Northwell Holdings and Astrawall Canada each owned at all relevant times 50 per cent of the issued shares in Northdown Ashwell Investments Ltd ("Investments"), a Canadian company.
(13) The sole director of Investments was Mr David Huffer the officers were Mr Huffer and Mr Stoakes.
(14) Investments owned all the issued shares of the Mews Restaurant Ltd, another Canadian company which traded as the Pearcy House (the Mews Restaurant or Pearcy House).
(15) The directors of the Mews Restaurant were Mr Huffer, Mr Stoakes and a Mr Donald Thomson. The sole officer was Mr Huffer.
(16) The success of Mr Stoakes's business was such that by the late 1970s profits had accumulated within Astrawall UK and that company had up to £1m on deposit.
(17) Mr Stoakes was at that time interested in diversifying and utilising Astrawall UK's cash accumulation. During 1979 in pursuit of this intention to diversify Mr Stoakes carried out investigations into a travel agency business in the UK. Nothing came of his investigations.
(18) Later in 1979 Mr Huffer visited the UK and stayed as a guest with Mr and Mrs Stoakes. Mr Huffer was then employed as vice-president of an hotel chain. He explained to Mr Stoakes that he was in charge of his company's new buildings and that he had just refurbished a big new hotel in Toronto. Mr Stoakes was very impressed by Mr Huffer's achievement and his talk of other projects which were available for outside investors as Mr Huffer's employers did not propose to go ahead with them. Following Mr Huffer's visit Mr Stoakes went to Toronto to investigate the possibility of purchasing the Windsor Arms Hotel with the intention of its being refurbished, remodelled with a theme, reopened and then resold.
(19) In addition to moneys lent to Astrawall Canada and to Mr Hordo, S&T made other loans:
(a) By far the largest was a series of advances to Sealed Units Ltd. Mr Stoakes explained to us, a series of minutes of S&T refer to and we find as a fact that Sealed Units Ltd needed continual financial support to stay in business.
(b) The other loans advanced by S&T were all of sums which though substantial in themselves were trifling in comparison with the sums transferred to Canada. All were either advanced against the security of a formal legal charge on land or to a relative or personal or business friend (and in many instances both).
(20) None of the documentary evidence we were shown in respect either of the loans to Sealed Units Ltd nor of the loans to other persons contained any element of profit sharing. All sums were lent on interest and nothing else. Apart from a letter written to Mr Stoakes which refers to discussions about the availability of venture capital from S&T, no other documentary evidence produced before us contained any reference to profit sharing. In the event nothing came of the discussions referred to.
(21) In early 1980 Mr Stoakes made a second visit to Canada to look at another project (the Pearcy House) introduced by Mr Huffer. It was a...
To continue reading
Request your trial