New Angel Court Ltd v Inspector of Taxes

Fiscal motive does not prevent a transaction from being trading where, viewed commercially, it is genuinely a trading transaction. But a transaction whose essence is explicable only by tax considerations does not become trading merely because it contains trading elements, is undertaken by a dealer, or produces a profit.

The court must examine the transaction as a whole, including the relevant group context. The asset must be of a kind sold in the ordinary course of the taxpayer’s trade and acquired for that trade with a view to resale at a genuine profit. Commercial justification and profit are important factors, but neither is conclusive. The taxpayer bears the burden of proof, and the commissioners’ conclusion is reviewable only under Edwards v Bairstow principles.

The appellant, a property-dealing subsidiary, acquired nine investment properties from fellow group companies. The properties had been held as capital assets, and the group had already decided to dispose of its commercial property portfolio.

The appellant claimed that the properties were acquired as trading stock under sections 161 and 173 of the Taxation of Chargeable Gains Act 1992, so that the resulting capital loss could be treated as a trading loss available for group relief. The Special Commissioners found that the transfer was driven solely by tax considerations, that the appellant merely continued the vendors’ disposal process, and that the transaction had been dressed up as commercial. They dismissed the appeal. The issue was whether those directions and factual conclusions were legally sustainable.

1. Appeal dismissed. The Special Commissioners had directed themselves correctly in law, and their factual conclusions could not be disturbed.
2. “Trade” and “trading stock” are commercial concepts. The first question is whether the statutory language applies on its proper commercial construction. A transaction is not disregarded merely because it was entered into for tax purposes.
3. Fiscal motive, even if paramount, does not change the nature of an otherwise commercial transaction. Conversely, where the essence of the transaction is explicable only on fiscal grounds, the presence of trading features will not make it a trading transaction.
4. The transaction must be examined as a whole. In the context of section 173 of the Taxation of Chargeable Gains Act 1992, the Special Commissioners were entitled to consider the group’s purposes and the effect of the transfer within the group. The group relationship did not itself prevent trading status, but it was relevant to the commercial analysis.
5. The asset must be of a kind sold in the ordinary course of the company’s trade and must be acquired for that trade with a view to resale at a genuine profit. Commercial justification or a profit is relevant, but neither is sufficient by itself. The taxpayer bears the burden of proving trading-stock status, and the normality of the transaction may be relevant, particularly where the case is doubtful.
6. The findings that the transfer changed nothing substantive, that the same directors continued the existing disposal programme, and that the documents created a misleading commercial appearance were supported by the evidence. The claimed transfer of risk was rejected as a genuine purpose. The properties therefore remained investment assets in substance and had not been acquired as trading stock.

The Special Commissioners of Income Tax dismissed the appellant’s appeal on 13 January 2003. The High Court (Chancery Division), on appeal, dismissed the appeal and upheld the Commissioners’ decision.