We assume that the reference to the transfer to "Group" refers to an accounting transfer, rather than the intra-group transfer that took place. We notice that the Head of Group Accounts had been copied a memorandum from the Financial Controller of 8 November giving details of the proposed transfer to the Appellant and it is possible that he contacted Ernst & Young following this, but this seems less likely as the focus of the Ernst & Young memorandum is on the discontinuance. Unfortunately we did not have any further evidence on this point which would have been helpful. The memorandum also states that "FRS3 does not appear to distinguish between operating and non-operating items in the case of discontinued operations" and concludes that the entire net result of the discontinuance should be shown in one place in the accounts. This seems contrary to the basis of the 15 October memorandum which was that investment properties qualified for treatment as an exceptional item in any event. Naturally we treat this advice with great respect but for tax purposes we do not think that anyone would say that on a discontinuance all fixed assets automatically become trading stock. For example, on a discontinuance of a trading business we think there is no doubt that the sale of the factory would for tax purposes be the sale of a capital asset. Accordingly, we do not consider that this advice assists the Appellant's contention that the Properties were acquired by the Appellant as trading stock.
The idea of transferring the Properties to the Appellant started with a memorandum from Mr Brown of the group tax department to the Group Finance Director on 28 October 1996 (which pre-dated the accounting advice) that said "the dealing expertise of this company's [the Appellant's] officers would then be used to market the properties and optimise the timing and value of disposal." The writer said
Mr Smith did not see the memorandum at the time but he agreed with the proposal. The Appellant has carried on business as a property dealing company since 1986 and has been in the group since 1996. It has developed and sold in phases a site near the Angel in London. The directors of the vendor companies and the Appellant at the time of the transfer consisted of Mr Smith, the Commercial Director of the UK property division, and the New Project Manager, who was not a director of three of the vendor companies. The Financial Controller of the UK property division) became a director of all of them on 20 November 1996. They were all employed by a group company. Since the "property dealing expertise" rested in the same persons as were the directors of the investment companies who were already conducting the sale of the Properties, we regard this stated advantage as window dressing by the tax department which has made us approach other statements of the Appellant's purposes more critically.
The tax department originally proposed a sale of the Properties at a price which gave a guaranteed minimum margin of 10 per cent. Mr Smith and the Financial Controller substituted a fixed price. A memorandum by the Financial Controller of 12 November stated:
Mr Smith also said that the price at which the Appellant purchased was designed to enable it to make a profit. The Properties (plus a further property not relevant to this appeal) were contracted to be sold from the various group investment companies to the Appellant on 13 November 1996 for a total of £18,705,000. Mr Smith signed the contract on behalf of the Appellant and the Commercial Director on behalf of the vendor companies. In the absence of any evidence to the contrary we accept that the prices at which the Appellant acquired the Properties were within the range of arm's length prices but at the end of the range designed to show the maximum profit to the Appellant. The minutes of the directors of the vendor companies attended by Mr Smith and the Commercial Director approving the contract reported that agreement had been reached following an approach from the Appellant and stated that the sale would reduce the company's financing costs, which we understood to mean financing by intra-group loans. The same two directors in their capacity as the finance committee of the directors of the Appellant approved the purchase by the Appellant and stated that the Appellant "intends to hold the properties as part of its dealing stock and to use its dealing expertise to maximise its profits." We make the same comment as before on the statement about the company's dealing expertise. The parent company capitalised the Appellant so that it paid cash for the Properties to the vendor group companies.
On 10 December 1996 following a memorandum from Mr Smith of 29 November the board of the Parent Company resolved to discontinue the property division and dispose of the remaining properties. This was the end of a process that had been continuing since 1994. Since the Properties had been in the hands of agents and (as appears below) offers for all of them had been received by that date this seems to be a resolution that recognised an existing state of affairs rather than a new decision to discontinue the property division. The 1996 accounts include the statement that "its exit from retailing and commercial property has now been completed." Property disposals of £167.4m were made in the year, leaving £36.2m of investment properties mainly outside the UK. Those accounts contain an exceptional item before tax of £52.3m arising from the discontinuance of the property business.
The Properties were sold by the Appellant in three parcels: Northampton, Langham Place, and a portfolio of the remaining properties (except for Jarman Fields, which remains unsold). Brief particulars of the progress of the sale of each of them are as follows.
Northampton was put into the hands of agents on 23 May 1996. Two offers were made by 14 August 1996. The higher one of £630,000 was accepted on 21 August 1996 and a draft contract was submitted on 4 September. Negotiations took place concerning VAT resulting in the vendor company electing to waive exemption for VAT on 19 September, following which the draft contract provided for transfer of a going concern treatment. A reduction in the price to £625,000 was agreed on 20 September and the purchaser wanted a loan to cover any VAT liability, which the vendor company was not willing to give. On 6 November Purchaser No.3 made an indicative list of assets they would be prepared to purchase (see paragraph 19 below) including this property at £650,000 but no offer was made for this property. Negotiations with the former purchaser continued and on the third draft of the contract dated 12 November the name of the vendor was changed to the Appellant. A letter of the same date shows that the purchaser wanted a later completion date than 31 December which was required by the Appellant. As already mentioned the contract for acquisition by the Appellant of the Properties was made on 13 November with £605,000 being attributed to this property. Contracts for the sale of Northampton were exchanged at £625,000 on 18 November 1996.
Recommendations for the sale of the remaining Properties (other than Jarman Fields) as a portfolio were made on 22 October 1996 by agents who provided a list of possible purchasers. One of these properties, Langham Place, was treated separately. It adjoins the Hotel which had been sold on 24 May 1996 to a subsidiary of the ultimate purchaser) subject to a 999 year lease of Langham Place to Subsidiary No.1, which had agreed not to dispose of its interest for six months. Planning permission and listed building permission were applied for on the same date. On 10 September 1996 A Bank, who had an onerous lease of part of the site, made an offer of £3.02m, which was increased to £3.45m on 15 October, and increased again to £3.9m on 25 October. Another company made an offer of £4.2m on 13 September. A third company expressed interest on 30 September and made an offer of £3.8m on 17 October. A fourth company made an offer of £3.25m on 17 October. The Bank's offer was accepted on 28 October. On the same day the ultimate purchaser was informed that a number of offers had been received and they were asked whether they wanted to make an offer. The ultimate purchaser was known to be interested as the site could be used for an extension of the Hotel. The Group were also interested in maintaining good relations with the ultimate purchaser as the Group had the management contract on the Hotel and were interested in obtaining such contracts with other hotels the sites of which were owned by the ultimate purchaser. On 6 November Purchaser No.3 made an indicative list of properties they would be interested in buying (see paragraph 19 below) that included Langham Place at £3.5m but no offer was made for this property. On 7 November the Bank withdrew but expressed themselves willing to pay £500,0000 to be released from their lease. As has been mentioned, the intra-group sale to the Appellant took place on 13 November with £3,422,250 being attributed to this property. Negotiations with the ultimate purchaser continued: they offered £3.4m on 22 November subject to planning permission, to which the Appellant replied that the other offers were unconditional. On 29 November the Appellant wrote to the ultimate purchaser accepting their unconditional offer made on the telephone of £3.5m with any excess over £500,000 paid by the Bank being shared between the parties. On 12 December the Appellant expressed concern about the ultimate purchaser's proposal to undertake further planning enquiries in the New Year before exchange of contracts. Contracts were exchanged at £3.99m (including the payment from the Bank) on 3 January 1997 following considerable last minute negotiations on 31 December 1996.
The portfolio of the remaining properties had, as has been mentioned, been the subject of recommendations for their disposal by agents on 22 October 1996. Purchaser No.3, one of the group's principal bankers, set out indicative prices for purchase of the Properties (then including Northampton and Langham Place) on 6 November, for which they offered £28m (now excluding Northampton and Langham Place) on 12 November. Another company which had been initially identified by the agents as a possible purchaser had expressed serious interest on 11 November and offered £30m (of which £5m was in paper) which included Langham Place but not Northampton or Jarman Fields on 15 November, which they changed to £25.3m (of which £4.2 was in paper) now excluding Langham Place on 10 December. As mentioned, the Appellant acquired the properties intra-group on 13 November with £14,060,000 (£14,541,131 including fees) being attributed to these properties. Purchaser No.3 renewed their offer by to the Appellant on 19 November and the Appellant's solicitors made contact with Purchaser No.3's solicitors on 21 November. A memorandum of 29 November by Mr Smith to the main board proposing discontinuance of the property division also refers to interest from two Israeli investors. Purchaser No.3's offer was recorded in the Parent Company's board minute of 10 December resolving to discontinue the property division. The revised offer by the second company was accepted in place of Purchaser No.3's offer on 11 December. Mr Smith said that his instinct was that Purchaser No.3 did not have sufficient enthusiasm for acquiring the Properties, although they had genuine interest in the US properties. Following discussions, Purchaser No.6, another company originally identified by the agents as a possible purchaser, offered £25m (of which £3m was in paper) on 19 December, later changed to a wholly cash consideration which was immediately accepted in place of the second company with the vendor's solicitors sending documents to the purchaser's solicitors on 20 December. Following further negotiations particularly about the apportionment of the price between the various properties, contracts were eventually exchanged with Purchaser No.6 on 3 March 1997 at £15,177,741 in respect of these properties (plus other properties that had been transferred to the Appellant from other group dealing companies) payable in cash but with deferred payment terms with part payable on completion, and further instalments on 31 March 1998, 1999, and 2002. A press release issued at the time of sale on 4 March 1997 formally announcing the closure of the property division stated that the present value of the total £25m consideration was £23.2m, indicating a discount of 7.2 per cent. If this is applied to the proportion of the sale price referable to these properties the effect is that there is an economic profit of £131,563 compared with the profit taking the figures at their face value (which is the relevant figure for tax and accounting purposes) of £636,610 (both profits figures being after fees). As Mr Peacock pointed out, the discounted profit is heavily dependent on the rate of discount chosen. Within those figures is a loss (after fees but before discounting) on three properties of £240,576.
In summary, at the time of the intra-group contract under which the Appellant acquired the Properties on 13 November 1996, Northampton was almost sold, contracts being exchanged five days later, and there was at the time an indication that Purchaser No.3 might be prepared to purchase at a higher price; Langham Place was the subject of three offers and negotiations had been opened with the ultimate purchaser but they had not yet made an offer; and the portfolio of the remaining properties was the subject of one offer and another expression of serious interest, but the eventual purchaser had not yet made an offer. The recital of events shows that the property market at the time was volatile, with people making and withdrawing offers in quick succession. Clearly nothing was certain until contracts were exchanged. But the procedure for selling all the properties was well in hand with at least one offer already made for each of them. The Appellant continued a process of selling that the vendor companies had already started. The sales of the Properties other than Jarman Fields were completed at a profit of £1,224,360 (or £719,313 taking the discounted value of the consideration for the portfolio of properties) with completion taking place on various dates between 19 December 1996 and 31 October 1997. The following table summarises the position (in £).
The legislation with which we are concerned has the obvious purpose of converting a capital loss into a trading loss that is available for group relief. As Lord Templeman pointed out in Reed v Nova Securities Ltd [1985] STC 124 , 131j the Revenue cannot complain if the taxpayer makes use of an opportunity given by Parliament. The issue is simply whether the Appellant acquired the Properties as trading stock, not whether its purpose was to save tax. The legal principle which we apply is the same as the one applied in Ensign Tankers (Leasing) Ltd v Stokes [1992] STC 226 on the question whether the partnership was trading. Lord Jauncey said at 248d:
The question whether the Appellant acquired the Properties as trading stock is not to be decided by whether it acquired the Properties for tax reasons. The issue is one of construction of the legislation.
We agree with Mr Jones's contention on Macniven v Westmoreland Investments Ltd [2001] 2 WLR 377 that whether property is acquired "as trading stock" is a commercial concept, recognised in accountancy. As Lord Hoffmann said of the Ramsay principle in paragraph 32 on page 388b "the court was required to take a view of the facts which transcended the juristic individuality of the various parts of a preplanned series of transactions." However, as in Ensign Tankers, and as Lord Hoffmann said in Macniven at paragraph 59 on page 396a "Even if a statutory expression refers to a business or economic concept, one cannot disregard a transaction which comes within the statutory language, construed in the correct commercial sense, simply on the ground that it was entered into solely for tax reasons. Business concepts have their boundaries no less than legal ones." We approach the facts on this basis.
The first question we ask ourselves is what was the purpose of the change on 13 November 1996, and what really changed on that date? Mr Smith explained the purpose as being first to transfer the risks of holding the Properties to the Appellant and secondly to obtain the tax advantage.
When asked whether the Properties would have been acquired by the Appellant but for the tax advantages Mr Smith replied "This is conjecture because I can only tell you what we did." When pressed for an answer that the only reason was to get the tax benefit he said "Well, there certainly was a tax efficient objective in putting those assets, transferring the beneficial interest into [the Appellant]." The questions then ran:
While we accept that the effect of the contract for the acquisition by the Appellant was to put all the risk relating to the holding of the Properties into one company instead of six group companies, we do not accept that this was a purpose. Purpose was something that the companies were trying to achieve. The holding company had made a decision to dispose of the Properties whichever company owned them, and the directors of the vendor companies and the Appellant were the same. It is not clear that there was any benefit to the holding company or the separate property-owning companies in the risk being in one company; it was not the case that the liability could exceed the value of the asset. Even the convenience of one company being able to sell is not very significant when all the companies had the same directors. The sale of the Properties by the existing property-owning companies was already well in hand. Accounting considerations made it essential for the properties to be disposed of by early March 1997.
What difference did it make whether between 13 November 1996 and March 1997 an unsold property was owned by the Appellant or by the vendor companies? While we also accept Mr Smith's answer that transfers of properties had been made on many occasions in the past within the group, the question related to these particular Properties at the particular time of transfer. We think his answers were prevaricating and we find that there was no purpose other than tax for the transfer. This absence of non-tax purposes does not prevent the acquisition of the Properties by the Appellant from being as trading stock but it makes us approach the question more critically and look at the facts in the wider context of the group, rather than looking at the Appellant's transactions on their own.
If we start with the purpose of the directors of the vendor companies immediately before 13 November 1996 it is clear that it was to realise the Properties. That was a purpose common to all property investment companies in the group and derived from a decision of the group to dispose of all its commercial properties. The directors of each company were group employees. As we have said the stage this process had reached was that Northampton was almost sold, contracts being exchanged five days later, Langham Place was the subject of three offers and negotiations had been opened with the ultimate purchaser, and the portfolio of the remaining properties (except Jarman Fields) was the subject of one offer and another expression of serious interest, although neither of them was the ultimate purchaser. If the vendor companies had continued to carry out that purpose, although Mr Peacock QC did not concede it, there is in our view no doubt that they would merely have realised their capital assets. When the Appellant took over the properties and completed the process of selling we ask ourselves whether the same directors, now in their capacity as directors of the Appellant, had a different purpose. We do not think they did. We cannot point to anything that they did that was different afterwards from what it was before. It remained the group's purpose to dispose of the Properties whichever company owned them. Accordingly we find that the same purpose of realising the assets continued as before.
We now consider what the Appellant actually did and ask ourselves whether it acquired the Properties as trading stock. Looking at the Appellant in isolation it bought the Properties, being the type of asset for which it was already a dealer, and immediately sold them at a profit, which is the classic case of trading. If we were to look at the Appellant in isolation we would have no hesitation in saying that it acquired the Properties as trading stock, whatever the purpose of the Appellant. Normally it is only the individual company's tax position that is relevant. But we do not consider that we should look at the Appellant in isolation from the group. That would be to take an unrealistic and blinkered view of the facts.
First, we are applying a section that deals with intra-group transfers where the two companies hold the asset in different capacities. In order for us to decide that the Appellant acquired the Properties as trading stock when they were not trading stock of the vendor companies we must be able to point to some difference which occurred other than the mere fact of the Appellant acquiring the Properties. We are unable to detect any such change. The Appellant continued to realise the Properties held by the vendor companies as capital assets (and presumably, although it is not in issue in this case, as to the properties acquired on 18 November 1996 as trading assets) in exactly the same way as the vendor companies had done. Mr Smith agreed:
The Appellant was merely a vehicle through which the existing investment companies sold the Properties as investments (and presumably through which the dealing properties acquired on 18 November 1996 were sold as trading properties).
Secondly, the transactions were driven by the Group's purpose in realising all the commercial properties wherever held within the Group. We have not found that the Appellant had any independent purpose in disposing of the Properties.
Thirdly, we are bound to take a commercial view of whether the Properties were acquired as trading stock. In terms of Macniven v Westmoreland would a commercial person knowing all the facts say that the Appellant had acquired the Properties as trading stock? We do not think he would. He would say that nothing had really changed and they continued to be held as investment properties. For the reasons given in paragraph 11 above we do not accept that the accounting advice is relevant to the tax issue.
It is unnecessary for us to deal with Mr Jones' wider submissions about subsidiaries needing to act independently. But we do not in any way suggest that subsidiaries cannot carry out trading transactions with each other.
Accordingly we find that the Properties were not acquired by the Appellant as trading stock and dismiss the appeal in principle.
Note 1 The contract with Purchaser No.6 shows the sale price as £45,000. The sale price shown in the Table is taken from Mr Smith’s statement. [Back]