THE SPECIAL COMMISSIONERS
- and -
ROBERT ARBUCKLE MITCHELL
(HM INSPECTOR OF TAXES) Respondent
Special Commissioner: DR JOHN F. AVERY JONES CBE
Sitting in public in London on 13 and 14 December 2004
Jolyan Maugham, counsel, instructed by Ridley & Co, for the Appellant
Jane Hodge, HM Inspector of Taxes, Southern England Regional Appeals Unit, for the Respondent
This is an appeal by 4Cast Limited against refusal by the Inspector to allow Enterprise Investment Scheme (EIS) relief in respect of share issues made on 8 September 200 and 5 March 2002. The Appellant was represented by Mr Jolyon Maugham, and the Inspector by Miss Jane Hodge.
Mr Brian Park, managing director of the Appellant, gave evidence and a witness statement by Mr Raymond Attrill, global research director of the Appellant, was admitted unopposed.
There was a statement of facts not in dispute as follows:
I find the following further facts.
In order to qualify for EIS relief the Appellant needs to satisfy the following provisions of s.289 of the Taxes Act 1988.
It should be mentioned that in relation to shares issued after 6 March 2001, which therefore applies to the second share issue, a paragraph (d) was added to subsection (1) which contains a different timing requirement for employing the money raised, which it is common ground was satisfied, and so paragraph (d) is not included.
It is common ground that the Appellant was carrying on a qualifying trade at the dates of the share issues in question; that the activities of the Appellant were carried on wholly or mainly in the UK; that the activities of the Appellant and the two Subsidiaries if aggregated were carried on wholly or mainly in the UK; but that the activities of the two Subsidiaries if taken individually were not carried on wholly or mainly in the UK; and that the moneys raised were expended within the relevant time limits. It is not possible to trace the proceeds of the share issues into any particular use but the Appellant concedes that more than the total has been lent to the two Subsidiaries. It is also common ground that the test of purpose is subjective and that a person's stated purpose is not conclusive.
Mr Maugham, for the Appellant contends that in relation to subs (1)(b) the shares were issued in order to raise money for the purpose of the Appellant carrying on a qualifying trade which, on the date the shares are issued, it was carrying on wholly or mainly in the UK. He interprets "for the purpose of" (if necessary) as meaning "for the principal (or predominating or main) purpose of." In relation to paragraph (c) he contends that the money raised was employed within the time limits wholly for the purpose of the qualifying trade which, on the date the shares are issued, it was carrying on wholly or mainly in the UK. He contends that by virtue of the words at the end of subs (3) ("the condition in subsection (1)(c) above does not fail to be satisfied by reason only of the fact that an amount of money which is not significant is employed for another purpose") "employed…wholly" means that the whole of the money was employed in the purpose set out, not that the money was employed wholly for the purpose.
Miss Hodge contends that the Appellant fails to satisfy subs (1)(b) because the shares were issued partly for the purpose of making loans to the Subsidiaries. The words "for the purpose of" meant "for the sole purpose of" and here there was a mixed purpose. Because of the investment in the Subsidiaries, which had their own activities, it was not possible for the purpose test to be satisfied. Nor does the Appellant satisfy subs (1)(c) because the money was not employed wholly for the qualifying business activity, being employed in the Subsidiaries which do not carry on their qualifying trade wholly in the UK.
The first question for me is what was the purpose of raising funds by the share issues. Was it solely (or on his contention, at least predominantly) for the purpose of the Appellant's trade, as Mr Maugham contends, or partly for the Subsidiaries' activities, as Miss Hodge contends? This involves considering the directors' subjective purpose when the shares were issued. I accept the evidence that the Appellant had a qualifying trade carried on wholly or mainly in the UK which required it to have access to information and analysis prepared in New York and Singapore. If it had used the funds raised to buy the service from the Subsidiaries it is common ground that paragraph (b) would be satisfied. Similarly if branches in those countries had provided the service it would be satisfied. I suggested to Miss Hodge that if the Subsidiaries made no local sales but were otherwise funded in the same way the Appellant would have qualified but she contends that the separate personality of the Subsidiaries prevents them from qualifying. I do not think one should go that far. The Appellant requires the services provided by the Subsidiaries in order to carry on its trade. Making loans to the Subsidiaries is the means by which it obtains those services; it would not have a separate purpose of benefiting the Subsidiaries' activities which, on the assumption that they make no local sales, has expenses but no income.
The next question is whether the local sales by the Subsidiaries make any difference. The proportion of the expenses of the office paid by the local sales was: for 2000, 34% New York, 2.7% Singapore (or 6.8% if one ignores the pre-operating expenses written off); and for 2002, 67.6% New York, 34.9% Singapore (taken from a table in the papers as we did not have accounts for that year). At least if these sales do not themselves make a loss (after taking into account any additional expenses resulting from the sales), which seems unlikely that they would, particularly as part of the content is provided by the Appellant and the other Subsidiary free, their effect is merely to reduce the expenses of the Subsidiaries that the Appellant would have paid anyway. The Subsidiaries are insolvent and completely dependent on the Appellant. At 30 June 2000 Singapore had net assets of SGD $58,550 and owed the Appellant SGD $1,365,123; and at 31 December 2000 New York had net assets of US $64,701 and owed the Appellant US $2,564,198. The position was getting worse because losses were continuing although the rate of increase was slowing because the amount of the losses was decreasing (see paragraph 3(8) and (9)). In these circumstances, it cannot realistically be said that the Appellant had a separate purpose of raising money to invest in the Subsidiaries for the purpose of saving the Subsidiaries' businesses; the Appellant is merely indirectly paying for the analysis that it needs. Accordingly I find that the money was raised wholly for the purpose of the Appellant's qualifying business activity, and not partly for the purpose of the Subsidiaries' business activity, and therefore the Appellant qualifies under paragraph (b).
I should mention two subsidiary points. No doubt the Appellant had the immediate purpose of lending the money to the Subsidiaries but that is a purpose envisaged by the section as a necessary step in determining whether the ultimate purpose is for a qualifying business activity. Secondly, Miss Hodge pointed out that in a number of places in Mr Park's witness statement he failed to distinguish between the Appellant and the group. This is not surprising given the circumstances that the Appellant was paying the expenses of the Subsidiaries as a means of obtaining the information that it needed for its own business activities. Accordingly neither point alters the finding I have made.
It is not therefore necessary to decide whether "for the purpose of" means the sole, or main, purpose, but had it been necessary I would have decided that it meant main purpose. The came issue arose in relation to s.741 where paragraph (a) refers avoiding taxation not being "the purpose or one of the purposes" for which certain transactions were effected, and paragraph (b) "…that the transfer and any associated operations were bona fide commercial transactions and were not designed for the purpose of avoiding liability to taxation." In Carvill v IRC [2000] STC (SCD) 143 at [89] I said:
The contentions of the parties are the opposite here but I would apply the same reasoning. In the alternative, if I had not found that the money was raised wholly for the purpose of the Appellant's qualifying business activities, I would have found that, if the money was raised in part for the purpose of the Subsidiaries' business activities, that was not the (or even a) main purpose.
In relation to paragraph (c) I consider first Mr Maugham's interpretation that the word "wholly" means the whole of the money raised must be employed for the stated purpose, rather than that the money is employed wholly for the purpose. The words at the end of subs.(3) are that "the condition in subsection (1)(c) above does not fail to be satisfied by reason only of the fact that an amount of money which is not significant is employed for another purpose." If any money raised by the issue is expended on another purpose it cannot be said that the money (meaning the whole of the money) has been employed wholly for the stated purpose, but subs (3) ignores this if the money employed for another purpose is not significant. Accordingly, it seems to me, contrary to Mr Maugham's submission, that the "wholly" refers to the purpose, and so the question for me is whether the whole of the money raised by the two share issues was employed wholly for the purpose of the Appellant's qualifying trade which it was carrying on wholly or mainly in the UK? In other words, what was in the minds of the directors of the Appellant when employing the money, and therefore their purpose: was it wholly for the purpose of the Appellant's trade, or was it partly for the purpose of the Subsidiary's trade (or activities)? For the same reasons that I found that the condition in paragraph (b) was satisfied, I find that what was in the directors' minds was that the Appellant needed for the purpose of its own business activities the information and analysis from the Subsidiaries for which they were prepared to pay the whole of the running costs of the Subsidiaries. Because of the local sales by the Subsidiaries, the Appellant needed to pay less than the whole of the running costs but at the time of both share issues it was clear that the running costs were well in excess of the local sales income. Indeed even today, Mr Park said, and I accept, that the neither the New York nor the Singapore offices were likely to be able to pay its own running costs for some time. Accordingly, when lending funds to the Subsidiaries in 2000 and 2002 to enable them to pay the balance of the running costs I find that the Appellant did not have a purpose of funding the Subsidiaries for the purpose of the Subsidiaries' business activities, but was employing the money wholly for the purpose of the Appellant's qualifying business activities.
I should stress that the facts of this case are highly unusual. If the Subsidiaries had been carrying on business normally by selling their services to the Appellant for a consideration (whether or not the arm's length price), any investment in the Subsidiaries by way of loan could not qualify as being wholly (or even mainly) for the purpose of the Appellant's trade carried on in the UK. But in that situation the Appellant would not be investing the money in Subsidiaries but would be spending its money directly in acquiring the services of the Subsidiaries. Here it is paying nothing for the services for which the Subsidiaries were set up to provide, and making loans to the Subsidiaries is the means by which the Appellant obtains those services which it requires for the purpose of its trade (incidentally in a way that is disadvantageous to the Appellant from the UK tax point of view, because it can deduct only the expenses paid by the Appellant).
Accordingly the Appellant has shown that on the facts it satisfies s.289(1)(b) and (c) in relation to the two share issues in question and I allow the appeal.
SC 3001/04
Authorities referred to in skeletons and not referred to in the decision: