ALLISON PLAGER reports four recent decisions.
What is business?
ALLISON PLAGER reports four recent decisions.
What is business?
The appellant, Land Management Ltd, claimed a reduction in the corporation tax rate for the four accounting periods ending 30 September 1992, 1993, 1994, and 1995. The Revenue refused the claim on the grounds that the appellant's associated company had carried on business in each of those periods. The taxpayer said that while the associated company was trading in those periods, it was not carrying on a business within the meaning of section 13(4), Taxes Act 1988. Furthermore, section 13 was not intended to apply to an investment company interposed between a trading company and its shareholders. The receipt of income did not necessarily indicate evidence of business, and the associated company was effectively no more than a family trust.
The Special Commissioner said that, in order to reach a conclusion, she would have to decide whether the activities carried on by the associated company constituted business.
One of the associated company's activities was to manage and let freehold property. Referring to American Leaf Blending Co v Director-General of Inland Revenue [1978] STC 561, where Lord Diplock said that '"business" is a wider concept than "trade"', she said that the associated company was incorporated for the purpose of carrying on business of an investment nature and making profits for its shareholders. The 1992 and 1993 accounts showed payments made by the company for insurance, repairs and renewals to the property. In 1994 there were professional fees and in 1995 only insurance. However, Lord Diplock's words were wide, and she concluded that in each of the four years of account the associated company did carry on business in the managing and letting of property.
The second activity was the holding and making of investments. While cautious of calling in aid the provisions of section 130, Taxes Act 1988 when considering the application of section 13, the Commissioner said that section 130 reinforced the view that the activities of a company whose income was mainly derived from the making of investments did constitute a business. The associated company in question held investments, and also paid administration expenses and distributed dividends to its shareholders. She concluded therefore that the activity of making and holding investments amounted to the carrying on of business.
Thirdly, the associated company made a loan to the appellant, and received interest thereon. The Commissioner said that while an individual making such a loan would not be considered to be in business, the associated company was incorporated in order to make profits, and therefore was bound to make best use of its assets. This included the making of loans. Thus the making of the loan to the appellant amounted to carrying on a business.
Finally, the associated company placed money on deposit at the bank. On its own, this might not have constituted the company carrying on business, but in the light of the company's other activities it did so constitute.
Overall, the Commissioner concluded that the associated company did carry on business in each relevant year, so the appeal failed.
(Land Management Ltd (SpC 306).)
Valid notices of enquiry
The taxpayer submitted his 1999-2000 tax return in March 2001. Parts were incomplete, and an amended return was submitted on 17 March. In June 2001, the Revenue issued a notice of enquiry under section 9A(1)(a), Taxes Management Act 1970, listing a number of matters which it thought merited further clarification. The taxpayer was asked to respond by 10 July 2001. A further letter dated 27 June 2001 was then sent to the taxpayer asking for information to be sent by 31 July 2001. The first letter had originally been sent on 6 June 2001, but returned as the taxpayer was apparently unknown at the address to which it was sent.
The taxpayer did not comply with the letter. The Revenue subsequently, on 12 October 2001, gave notice under section 19A, Taxes Management Act 1970 to the taxpayer to produce the information. He was given 30 days in which to provide the information, and warned that failure to do so might render him liable to a penalty. He was also informed of his right of appeal against the notice. On 30 October the taxpayer wrote to the Revenue, saying that the 14 June letter constituted a section 19A notice, and appealed against the section 19A notice.
The issues before the Special Commissioners were:
- was the Revenue's letter of 14 June a valid notice under section 9A;
- was the Revenue's letter dated 12 October a valid notice.
The Special Commissioner said that the 14 June letter gave the taxpayer notice of the Revenue's intention to enquire into his tax return for the year ended 5 April 2000. The return had not been the subject of enquiry prior to that letter. Section 9A had therefore been complied with. The Commissioner noted that the letter was a request for information, not a requirement, and thus it could not be a section 19A notice, as this would require the production of information.
It was quite acceptable for a section 19A notice to be issued after a section 9A notice, and the Commissioner mentioned that the Revenue had been asked by the accountancy bodies to adopt an informal approach before exercising its statutory powers.
The Commissioner ruled that the 14 June letter was a valid section 9A notice, and that the 12 October letter was a valid section 19A letter. The appeal was dismissed.
(Dr A G Siwek (SpC 314).)
Accountant's failings
The Inland Revenue conducted an arduous and protracted investigation into the accounts and tax affairs of Mr Mashood. He practised as a tax accountant, and was an associate of The Chartered Institute of Taxation, a fellow of the Institute of Administrative Accountants and a fellow of the Association of Public Accountants. The investigation related to Mr Mashood's affairs back to 1976, and were undertaken because the Revenue believed that he had knowingly under-stated his income.
Firstly, the Special Commissioners considered whether, in respect of the out-of-time assessments, there had been loss of tax because of the fraudulent or negligent conduct of Mr Mashood. They said that the Revenue had to prove such conduct, and that the standard of proof was on the balance of probabilities. Looking at the facts before them, the Commissioners concluded that the taxpayer's conduct had been fraudulent or negligent. They said for the years 1976-77 to 1985-86, he had under-stated his income as a tax practitioner and accountant. In reaching this decision, the Commissioners took into account the fact that bankings exceeded income as shown in the accounts, that divorce proceedings referred to the ownership of various properties without any indication of where the source of the funds needed to acquire the properties, that unexplained building society accounts existed showing amounts greater than those accounted for, and that there was no explanation of how the taxpayer's lifestyle was funded.
Next the Commissioners had to decide whether the Revenue's assessments for the years 1976-77 to 1993-94 and sundry others should be confirmed, reduced or increased. The burden of proof to show that the assessments were too high lay with the taxpayer, but he did not produce any evidence to support his appeals. The Commissioners therefore confirmed, reduced and increased the assessments as requested by the Revenue. A penalty of £250 was also imposed against the taxpayer for earlier failure to comply with directions of the Commissioners.
The taxpayers' appeals were dismissed.
Avoidance scheme
In June 1996, Citibank proposed to the Scottish Provident Institution, the appellant, a scheme which aimed to create expenses within the Revenue's proposed new régime for gilts and bonds (consultative document dated 25 May 1995). In essence, under Option A, Citibank paid £29.75 million to Scottish Provident for the option to acquire £100 million 8 per cent Treasury 2000 stock at a price of £70 million between 30 August 1995 and 1 April 1996. Under Option B, Scottish Provident paid £9.81 million to Citibank for the option to buy 3100 million of the gilt at a price of £90 million between 30 August 1995 and 1 April 1996.
The idea was that the £30 million (approximately) paid for the grant of Option A before the new legislation came into force would fall out of account. The amount was not taxable under the old rules because options over gilts were not liable to capital gains tax. When the legislation took effect, Option A would be exercised, the appellant would receive £70 million and transfer out £100 million of gilts worth par. Thus the appellant would make a £30 million loss. If Option A were the only transaction, the appellant might have had to buy the gilt at over £100 million, making a commercial loss.
Option B was intended to hedge the transaction and protect against this risk. However, Option B was to Scottish Provident's tax disadvantage, since the mirror image of the Option A tax treatment applied with the result that it paid £90 million to receive gilts worth £100 million, and made a taxable profit of £10 million, reducing the loss to £20 million. Both transactions were entered into by Scottish Provident and Citibank acting at arm's length.
The Revenue issued a notice of corporation tax assessment for the year to 31 December 1996 in October 2000, against which Scottish Provident appealed.
The appellant accepted that the purpose behind the transactions was to exploit the statutory rules to produce a loss, and this could have been achieved by transaction A alone. The £30 million paid before the new régime began was excluded from any tax charge, but the transfer of £100 million gilts for £70 million was specifically included in the new régime, and created a loss of £30 million. Counsel for the appellant said that the situation had arisen because of a drafting 'own goal', whereby the draftsman had not considered the case where initial payments excluded from the computation in the new rules were also excluded from tax by the old régime. He submitted that a loan relationship included a gilt, and that the relationship between the parties constituted a debt contract or option within section 150A, Finance Act 1994. Each option should be treated as a separate contract.
The Revenue treated the transactions, however, as one single transaction, and said that it had no other commercial purpose than to secure a tax advantage.
The Special Commissioners said that it was well recognised that the only time when a series of transactions could be considered as one, was when there was no practical likelihood that the events would not take place in the order specified. They concluded that this was not the case with Option B, given that the price of gilts depended on market rates, and these were out of the hands of both parties.
There was a degree of uncertainty which saved the transactions from being ignored for tax purposes. The legislation contained mainly legal concepts which are not susceptible to the Ramsay approach, and there were genuine transactions under which the parties could make a profit or a loss. Each party was free to exercise the options if it wanted to do so.
Turning to the basis of accounting, the Commissioners decided that the mark to market basis was the appropriate one. They then asked if a loss of £30 million and a gain of £10 million could occur in the course of 1 April 1996, when the value of the options did not change, and such a loss and gain did not accord with normal accountancy practice. The result was 'unexpected', but the detailed statutory provisions made no other result possible. The transitional provisions did not apply in these circumstances, because the draftsman appeared not to have foreseen such circumstances arising.
The appealed was allowed.
(Scottish Provident Institution (SpC 315).)