Spc00689

CORPORATION TAX –Availability of carried forward trading losses under section 343 ICTA 1988 – Appellant acquired a garage business via a series of transactions and hive downs – Appellant claimed the benefit of the trading losses of the garage – the success of its claim depended upon whether the first company in the transactional chain carried on the garage trade – question of fact – satisfied that it did not – Appellant not entitled to the losses – Appeal dismissed

SPECIAL COMMISSIONERS

BARKERS OF MALTON LIMITED Appellant

- and -

HER MAJESTY’S REVENUE and CUSTOMSRespondents

Special Commissioner: MICHAEL TILDESLEY OBE

Sitting in public in London on 10 & 11 April 2008

James Henderson counsel for the Appellant

David Ewart QC , counsel instructed by the Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

1

DECISION

The Appeal

  1. The Appellant was appealing against assessments for corporation tax for the periods to 31 December 1996 and 1997.
  2. The Appeal concerned the availability of carried forward losses under section 343 of the Income and Corporation Taxes Act 1988 (ICTA). The Appellant claimed the benefit of trading losses which accrued to another company called Haws Garage Limited. The broad sequence of events was that between 9.00am and 10.30am on 13 January 1995 Haws Garage Limited transferred its trade to Haws of York Limited which then sold its trade with trading assets and liabilities to the Appellant. The sole issue in this Appeal was whether Haws of York Limited carried on the trade in question, which was a question of fact. If Haws of York Limited carried on the trade in question, the Appeal succeeds; if it did not carry on the trade, the Appeal fails. The parties were content for a decision in principle.

The Legislation

  1. The relevant provisions of section 343 of ICTA were as follows:

(1) Where, on a company (the predecessor) ceasing to carry on a trade, another company (the successor) begins to carry it on, and –

(a) on or at any time within two years after that event the trade or an interest amounting to not less than a three-fourths share in it belongs to the same persons as the trade or such an interest belonged to at some time within a year before that event; and

(b) the trade is not, within the period taken for the comparison under paragraph (a) above, carried on otherwise than by a company which is within the charge to tax in respect of it;

then the Corporation Tax Acts shall have effect subject to subsections (2) to (6) below.

(3) Subject to subsection (4) below and to any claim made by the predecessor under section 393A(1), the successor shall be entitled to relief under section 393(1), as for a loss sustained by the successor in carrying on the trade, for any amount which the predecessor would have been entitled to relief if it had continued to carry on the trade.

The Evidence

  1. I heard evidence for the Appellant from

(1)David Plummer who was a chartered accountant and property developer. He was a director of Erinminster Limited, a property company, which was interested in purchasing the site owned and occupied by Haws Garage Limited but not its trade. Mr Plummer gave evidence on the series of transactions which occurred on 13 January 1995, and the reasons for them.

(2)Anthony Wash who at the material time was the service director of Haws Garage Limited. He also gave evidence on the transactions of 13 January 1995, and the business of Haws Garage Limited.

  1. The Appellant also submitted in evidence a signed statement of Geoffrey Beecroft dated 7 August 2000. At the material time Mr Beecroft was a director of the Appellant and Barkers (Beechwood) Limited. Sadly Mr Beecroft has since died. The Respondents did not object to the admission of Mr Beecroft’s statement but contended that the weight to be attached to its contents would depend upon whether the evidence of Mr Plummer and Mr Wash came up to proof.
  2. A bundle of documents was received in evidence.

The Facts

  1. In the Autumn of 1994 Mr Plummer became interested in a site at Lowther Street in York which was owned and occupied at the time by Haws Garage Limited. The site was large, ripe for redevelopment as residential flats, and attracting interest from other property developers.
  2. Mr Plummer was aware that Haws Garage Limited was in financial difficulties, which started in 1991 when it lost the franchise to sell Citroen cars leaving Haws Garage with car repairs and the sale of second-hand cars. In 1994 Midland Bank Trust Company Limited, one of its major shareholders, put pressure on the company by threatening to withdraw its overdraft facility. The directors of Haws Garage Limited, however, were reluctant to sell the Lowther Street site unless it could be combined with the sale of the business. The directors did not wish to be left with a failing business stripped of its only significant asset.
  3. Mr Plummer realised that the only way he could acquire the Lowther Street site was to buy the Haws Garage business. However, he was only prepared to do this if he could separate out the Lowther Street property from the Haws Garage trade, so that the two could be independently disposed of.
  4. Mr Plummer contemplated the following options for the separation of the garage business from the property, which were:

(1)The sale of the garage business to the existing management, Mr Ankers and Mr Wash. A private investor was prepared to acquire the controlling share of the business in order to assist the management buy-out.

(2)The sale of the business to the Barkers (Beechwood) group which owned Citroen and Peugeot dealerships in York. The Haws garage business could be used to sell second-hand cars acquired in part-exchange for new Citroen and Peugeot cars.

(3)The closure of the garage business.

  1. On 28 October 2004 Mr Plummer in his capacity as director of Alderney Consultancy Limited agreed with Mr Tichener, company secretary of Haws Garage Limited, to purchase the entire share capital of Haws Garage Limited for £215,000 subject to contract. Mr Plummer indicated that Alderney Consultancy Limited would ensure as far as possible the continued employment of staff. In this regard Alderney Consultancy Limited proposed that the garage business would transfer to a new subsidiary company in which the current managers would hold in total a 45 per cent shareholding. On 21 December 1994 Mr Plummer put in a revised offer of £195,000 subject to contract following disclosure of the estimated value of the net assets of Haws Garage Limited. At some stage in the negotiations, Erinminster Limited, replaced Alderney Consultancy Limited as the purchaser of the share capital of Haws Garage Limited.
  2. On 11 January 1995 Mr Plummer invited Mr Beecroft, in his capacity as director and majority shareholder of Barkers (Beechwood) Limited to attend meetings on 13 January 1995 to discuss the proposed purchase of Haws Garage Limited. Mr Beecroft was prepared to consider buying the business of Haws Garage Limited if Mr Plummer secured the freehold in the Lowther Street site.
  3. On 12 January 1995 Mr Plummer on behalf of Erinminster Limited wrote to the directors of Haws Garage Limited informing them that it wished to vary the Agreement for Sale, namely that the business assets and liabilities of Haws Garage Limited must be transferred to Haws of York Limited, a newly formed subsidiary, prior to completion of the share purchase which was to take place the following day on 13 January 1995. The letter did not mention that Haws Garage Limited would continue to trade as the undisclosed agent of Haws of York Limited.
  4. On 13 January 1995 the companies involved in the dealings with Haws Garage Limited held meetings at the Lowther Street premises with a view to concluding the various purchases. The minutes of the various meetings recorded that

(1)At 9.00am on 13 January 1995 the board of directors of Haws Garage Limited resolved with effect from start of business on 13 January 1995 to transfer ownership of the business, trading assets and trading liabilities of Haws Garage (exclusive of the freehold property and related borrowings) to its new subsidiary, Haws of York Limited.

(2) At 9.01am on 13 January 1995 the board of directors of Haws of York Limited acknowledged that it had acquired the business, trading assets and trading liabilities of Haws Garage. It was resolved that Haws Garage should continue the trade as the undisclosed agent of Haws of York Limited.

(3)At 9.30am on 13 January 1995 the board of directors of Erinminster Limited resolved to purchase for the sum of £195,000 the entirety of the issued share capital of Haws Garage Limited which owned Haws of York Limited carrying on the trade of car dealers and repairers from the premises at Lowther Street

(4)At 9.30am on 13 January 1995 the board of directors of Haws Garage Limited acknowledged that the entire issued share capital of Haws Garage Limited had been acquired by Erinminster Limited. The company secretary was instructed to issue new share certificates. A resolution was also passed to appoint new directors.

(5)At 10.00am on 13 January 1995 the board of directors of Haws Garage Limited resolved to sell for the sum of £2 the entire issued share capital of Haws of York Limited to Barkers (Beechwood) Limited with immediate effect.

(6)At 10.00am on 13 January 1995 the board of directors of Barkers (Beechwood) Limited resolved to purchase for the sum of £2 the entire issued share capital of Haws of York Limited.

(7)At 10.01am on 13 January 1995 the board of directors of Haws of York Limited acknowledged that the entire issued share capital of Haws of York Limited had been acquired by Barkers (Beechwood) Limited from Haws Garage Limited. The company secretary was instructed to issue new share certificates.

(8)At 10.30am on 13 January 1995 the board of directors of Haws of York Limited resolved to sell its trade together with all trading assets and liabilities to the Appellant with immediate effect.

(9)At 10.30am on 13 January 1995 the Appellant’s board of directors resolved to acquire the assets and liabilities of Haws York Limited and its trade as a car dealer and repairer with immediate effect. It was also resolved that Haws Garage should continue to run the trade as undisclosed agent on the Appellant’s behalf.

  1. Mr Plummer stated that the minutes were typed up by his secretary, and signed the Monday following the various board meetings on the Friday. Mr Plummer accepted that the references in the minutes to minutes of the previous meetings were read, approved and signed as a correct record did not happen in the majority of the meetings held on 13 January 1995 because minutes of the previous meetings had not been prepared for signature.Mr Plummer could not recall precisely what occurred in the periods between the meetings. He agreed that the time recorded for the meetings might not be exact, but maintained that the sequence of the meetings as recorded was correct.
  2. Mr Plummer believed that Mr Beecroft arrived at the Lowther Street premises between 9.30am and 10.00am. They held a meeting between themselves at around 10.00am to decide whether to go ahead with the purchase of the share capital of Haws of York Limited. Mr Beecroft stated in his statement that Mr Plummer did not ask him to commit to the purchase of the share capital in advance of their meeting on 13 January 1995. Mr Beecroft was of the view that the business of Haws of York Limited was worth acquiring if it could be purchased for a nominal amount with the assets balancing the liabilities. His meeting with Mr Plummer on 13 January 1995 took several minutes after which they decided to proceed with the purchase of the share capital of Haws of York Limited.
  3. Throughout the duration of the various board meetings, the garage business carried on as usual, mechanics were working in the rear building, with about four cars for sale in the showroom. No transactions, however, were completed during the period of about 90 minutes when Haws of York Limited owned the business assets. No customers attended the premises during this period. The servicing of the vehicles which took place on 13 January 1995 was pre-booked.
  4. On 16 November 1996 Mr Plummer submitted a nil corporation tax return for Haws of York Limited for the period 7 December 1994 to 6 December 1995. He added the words to the return that the company had not traded. Mr Plummer now considered his insertion of the additional words to the return was a mistake for which he apologised. He explained that what he really meant by his statement was that Haws of York Limited did not make any profits. He accepted, however, that the return was submitted prior to the current dispute with the Respondents.
  5. Mr Wash stated in evidence that he and his fellow director, Mr Ankers, decided not to proceed with the management buy out on the morning of 13 January 1995 prior to the board meeting of Haws Garage Limited at 9.00am. Their investor withdrew his financial backing for the buy out. Mr Plummer stated that he was not aware of their decision not to proceed with the management buy out. Mr Plummer was in attendance at the board meeting of Haws Garage Limited at 9.00 am. He took no part in the board meeting.
  6. Mr Wash agreed that his recollection of the events on 13 January 1995 as recorded in his witness statement was based on the documents rather than from memory. However, he recalled that he followed the brief given to him by Midland Bank Trust Limited on behalf of the shareholders of Haws Garage Limited which was to sell the shareholding to Mr Plummer’s company. In this respect he followed the instructions of Mr Plummer’s letter of 12 January 1995 regarding the hive down of the business to Haws of York Limited. Mr Wash accepted that Mr Plummer’s offer was the only option on the table.
  7. Mr Wash could not remember who produced the minutes of the various board meetings on 13 January 1995. The meetings happened in the sequence recorded. There were no precise reasons for the gaps between the meetings. Mr Wash had never met Mr Beecroft before the 13 January 1995. Mr Wash held no shares in Haws Garage Limited. Mr Wash indicated that he was required to report back to Midland Bank Trust Limited on the outcomes from the meetings held on 13 January 1995. Mr Wash stated that the business expenses incurred during the period that Haws of York Limited owned the business assets were apportioned between Haws Garage Limited and Barkers (Moulton) Limited. There were no separate accounts kept for Haws of York Limited.

Consideration

  1. In order for the Appellant to succeed to the trading losses incurred by Haws Garage Limited it must satisfy three conditions as laid down by section 343 of ICTA 1988, namely:

(1)There has been no change of ownership in the trade, namely the person who carried on the trade following the company reconstruction was the same person who owned the trade before it ceased. Ownership within the meaning of section 343 ICTA 1988 equated with beneficial ownership with a 75 per cent share sufficient.

(2)The companies carrying on the trade should be within the charge to corporation tax.

(3)The successor company must carry on the trade in question.

  1. The parties acknowledged that the companies involved in this Appeal were within the charge to corporation tax. Further they agreed that the no change in ownership condition was met. Haws Garage Limited beneficially owned Haws of York Limited at the time when it transferred the trade to Haws of York Limited. Barkers (Beechwood) Limited beneficially owned both Haws of York Limited and the Appellant at the time when the Appellant acquired the trade from Haws of York Limited. The Respondents accepted that there was no prior agreement by Haws Garage Limited to sell Haws of York Limited to the Appellant when Haws of York Limited was under its ownership. The Respondents, however, disagreed with the Appellant’s assertion that the sale of Haws of York Limited to the Appellant was problematical and one of three options being contemplated on 13 January 1995. In their view of the facts, the sale to the Appellant was by far the most likely outcome of the proceedings conducted on 13 January 1995.
  2. The dispute concerned the trading condition. The Appellant claimed the trading losses of Haws of York Limited on the transfer of the trade from Haws of York Limited to it. These trading losses had been incurred by Haws Garage Limited. Thus the Appellant could only claim the benefit of the losses if Haws of York Limited began to carry on the trade which was originally owned and carried on by Haws Garages between 9.00am and 10.30am on 13 January 1995.
  3. The Appellant submitted that section 343 of ICTA 1988 did not require the trading to take any particular form or to be of specific duration. It mattered not whether Hays of York Limited carried on the trading for one minute or several years. The fact that it traded for only one hour and thirty minutes was not determinative of the disputed issue. The oral and documentary evidence proved that the trade of Haws Garage Limited was transferred to Haws of York Limited at 9.00am on 13 January 1995. Further the minutes recorded that Haws Garage should continue the trade as the undisclosed agents of Haws of York Limited. The Appellant pointed out that there were no strict formalities for the establishment of an agency relationship.