Ransom v Higgs (Dickinson v Downes, Grant v Trustees of Mrs Downes’s 1962 Settlement, Kilmorie (Aldridge) Ltd v Dickinson, Lees v Grant, Malcolm-Brown v Restorick, Motley v Pickersgill, Pickersgill v Motley)

For income tax purposes, a person does not carry on a trade merely by procuring companies and other independent actors to undertake trading transactions for that person’s indirect benefit. Trade normally involves providing goods or services to another person for reward. Control, influence or shareholding does not, without agency or statutory authority, attribute a company’s trade to an individual.

Expenditure caused partly by a non-commercial purpose is not wholly and exclusively incurred for a trade where that purpose causes the trader to pay more than the commercial value. An extravagant arm’s-length bargain may remain commercial, but an artificial price dictated by a tax-avoidance scheme does not.

Five conjoined appeals concerned two pre-arranged schemes designed to divert anticipated land-development profits into discretionary family settlements without income tax. In the Higgs and Downes appeals, the Revenue contended that each individual carried on a trade by procuring companies, trustees and other participants to execute the scheme, so that the trustees could be assessed on the resulting profits.

The separate Kilmorie appeal concerned a development company’s payment of a greatly inflated price for building rights. The Special Commissioners, Megarry J and the Court of Appeal treated the payment as serving both a trading purpose and the non-trading purpose of facilitating the avoidance scheme.

The central questions were whether procuring others’ transactions constituted a trade within Schedule D and whether the Kilmorie expenditure was wholly and exclusively incurred for its trade under section 137(a) of the Income Tax Act 1952.

1. Disposition. The House unanimously decided the Higgs and Downes trading issues for the taxpayers. The trustees’ appeals were allowed, and the Revenue’s appeal in Ransom v Higgs was dismissed. Kilmorie’s appeal was dismissed.
2. Meaning of trade. Per Lord Reid, Lord Morris of Borth-y-Gest, Lord Wilberforce, Lord Simon of Glaisdale and Lord Cross of Chelsea, neither Mr Higgs nor Mr Downes carried on a trade or an adventure in the nature of trade. Trade is not exhaustively defined, but it normally involves providing goods or services to another person for reward. A trader ordinarily trades with a customer or counterparty. The individuals bought nothing, sold nothing, provided no services and had no trading stock.
3. Procurement and corporate activity. Procuring companies, trustees and other participants to execute trading transactions did not itself constitute trade. Their acts could not be attributed to the individuals in the absence of agency or another legal basis. Per Lord Wilberforce, control or shareholding does not, without specific statutory provision, make an individual fiscally responsible for a company’s trading. The Revenue’s proposed extension would also risk taxing the same profit once in the hands of the actual trader and again in the hands of the procurer.
4. Composite schemes. Per Lord Wilberforce, it was legitimate to examine a pre-arranged scheme as a whole where each step depended upon the others. That approach did not alter the identity of the persons who performed the transactions or turn the organiser into a trader. The artificial and tax-avoidance character of the schemes could not justify extending the statutory concept beyond its proper limits.
5. Kilmorie expenditure. Per all five Law Lords, the inflated payment was not wholly and exclusively laid out for Kilmorie’s trade within section 137(a) of the Income Tax Act 1952. Its amount was dictated by the avoidance scheme rather than an arm’s-length commercial judgment. A trader acting from commercial motives may pay too much without losing the deduction, but expenditure caused by a material non-commercial purpose does not satisfy the statutory condition.
6. Possible apportionment. The House left open whether an identifiable commercial part of mixed expenditure could be deducted notwithstanding the word “wholly”. The Revenue agreed to allow the amount representing the market value of the rights, so the point required no decision.

1. House of Lords: reversed the Court of Appeal in the Higgs settlement trustees’ appeal and restored Megarry J’s judgment; affirmed the Court of Appeal and dismissed the Revenue’s Ransom appeal; decided the Downes trading appeals for the taxpayers; and affirmed the disallowance in Kilmorie.
2. Court of Appeal: by orders dated 12 April 1973, upheld the Revenue’s trading analysis in the material Higgs and Downes proceedings and upheld the disallowance of Kilmorie’s expenditure.
3. High Court: Megarry J adopted the Special Commissioners’ reasoning that the individuals’ organisation of the schemes amounted to trading, and upheld the disallowance in Kilmorie.
4. Special Commissioners: found Mr Higgs to have engaged in an adventure in the nature of trade, reached the contrary conclusion concerning Mr Downes, and disallowed Kilmorie’s expenditure because it served trading and non-trading purposes.