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Petitioner: KIRKHAM VS Respondent: WILLIAMS (INSPECTOR OF TAXES)
Court Name: Court of Appeals Judge(s): Lloyd, Nourse, Ralph Gibson Title: KIRKHAM vs WILLIAMS (INSPECTOR OF TAXES) Case No.: NOT Date of Judgment:1991-04-25 Reported As: 1992 PTD 1234 Result: Appeal allowed
JUDGMENT
JUDGMENT ' NOURSE, L.J.---The question here is whether it was open to the general commissioners for the division of Macclesfield to decide that the purchase, development and sale of a piece of land was an adventure in the nature of trade giving rise to a charge for income-tax under Case I of Schedule D. On an appeal by the taxpayer to the High Court by way of case stated Vinelott, J. Held that it was. The taxpayer now brings a further appeal to this Court. In both Courts he has contended that the true and only reasonable conclusion from the facts found by the commissioners is that the transaction was not an adventure in the nature of trade. ' The facts arc fully stated or referred to in the judgment of Vinelott, J. (1989) STC 333, where the case stated is also set out in full. I will restate the facts so far as the arguments advanced on this appeal make it necessary to do so. ' From June, 1974 to November 1982 the taxpayer, Mr. William Brian Kirkham, worked on his own account as a general dealer and demolition contractor doing a limited amount of farming as well. His work included plant hire subcontract work, levelling, draining and ditching. During that period he and his family lived at Purdy House, 81, Rudyard Road, Biddulph Moor, Stoke-on-Trent. The facts on which the outcome of this appeal mainly depend are stated in paragraph 5(ii), (iii) and (iv) of the case stated. I will restate them in the commissioners' own words, although I have rearranged the sentences in paragraph 5(iii) so that they conform with what both sides agree is their chronological sequence: "(ii) Whilst living at Purdy House the (taxpayer) experienced difficulties with the local authority over the storage of demolition materials at his mother's address at Fairview, Biddulph Moor, Staffordshire. (iii) An opportunity presented itself to the (taxpayer) to carry out demolition works at
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Havannah Mills, Congleton Cheshire for Mr. Radivan. The contract involved the demolition of one of the two mills which were on site, together with five cottages and some outbuildings. After the contract had been concluded the owner of Havannah Mills offered to sell the (taxpayer) what was left, which by that time comprised of (sic) one remaining mill and ten acres of adjoining land. The site was acquired principally to provide office and storage space for the (taxpayer's) demolition and plant hire business. Havannah Mills was purchased in the (taxpayer's) sole name for the sum of 17,000 Sterling by a conveyance dated 9th May, 1978. Of the purchase price 8,000 Sterling was left outstanding under a private mortgage with the vendor, Mr. Radivan. Subsequently the (taxpayer) used the site for the storage of materials for use in connection with his business. He used part of the mill as his office. He grew a few crops on the land and bought a few calves-for fattening up for resale; but the level of his farming activities in this regard were very limited to the extent that they were never recorded in his books of account. The site continued to be used in these various ways until its sale in October 1982. (iv) Subsequently in or about October 1978 the (taxpayer) applied for planning permission for the erection of an agricultural workers dwelling at Havannah Mills. That application was refused. A further application was submitted to the local planning authority and outline planning permission was granted on 22nd August 1980 for the erection of an industrial/agricultural dwelling house for the (taxpayer) at The Old Mill, Havannah Lane, Eaton..." ' Before the Judge an additional fact was agreed, namely that the contract to purchase Havannah Mills was entered into by the taxpayer in the summer of 1977 at the latest. It is also agreed that the reference in paragraph 5(iv) to October 1978 as being the month when the taxpayer first made an application for planning permission is an error for October 1977. It is, therefore, agreed that the taxpayer entered into the contract before making any application for planning permission. ' Following the grant of outline planning permission on 22nd August 1980 the taxpayer instructed a local builder to draw up plans for the construction of a dwelling house on the property and thereafter, with some assistance from his brother-in-law and over a period of about nine months, he erected a dwelling house on the property. In paragraph 5(vii) of the case stated we find: "It was never the (taxpayer's) intention at any time to purchase Havannah Mills as a residence for himself and his family...." In about November 1980, before he erected the dwelling house at Havannah Mills, the taxpayer first became interested in another property, Sandy Lane Farm, Giants Wood Lane, Hulme Walfield, Congleton, Cheshire. On 6th October 1982 Havannah Mills was sold by the taxpayer for 110,000 Sterling, realising a net profit of 90,971 Sterling. Completion of the sale took place on 29th October, 1982. On 3rd June, 1982 contracts had been exchanged for the purpose of Sandy Lane Farm in the joint names of the taxpayer and his wife at a price of 176,000 Sterling. Completion of the purchase took place on 9th November, 1982. In the same month the taxpayer and his family moved into Sandy Lane Farm as their home. Purdy House was sold in September 1983 for 13,000 Sterling. The Commissioners found that the taxpayer did not entirely cease in business as a general dealer and demolition contractor when he moved into Sandy Lane Farm, but that thereafter he increased his interest in business as a farmer. ' In due course the inspector of taxes assessed the taxpayer to income tax for the year 1982-83 under Case I of Schedule D on a sum of 91,000 Sterling, being the approximate amount of the net profit on the sale of Havannah Mills. The business of the taxpayer not having included dealings in land, the assessm ent can only be supported if the purchase, development and sale of Havannah Mills was an adventure in the nature of trade, for which purpose it must, inter alia, have been acquired as trading stock, that is to say with the intention of disposing of it at a profit. The taxpayer has throughout contended that Havannah Mills was acquired not as trading stock but as a capital asset of his business, on whose disposal at a profit capital gains tax was chargeable, subject to roll-over relief allowable by virtue of his purchase of Sandy Lane Farm. It is not appropriate to
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determine the taxpayer's liability for capital gains tax unless and until he succeeds in defeating the claim for income tax and no such determination has been made. Before the commissioners the Crown raised an alternative claim for income-tax under Case VI of Schedule D pursuant to section 488 of the Income and Corporation Taxes Act, 1970, which relates to artificial transactions in land. That claim was rejected by the commissioners and there has been no attempt to revive it. ' The commissioners expressed their decision as follows: ' We the commissioners, having carefully considered all the evidence put before us were of the opinion thaf the profits of 90,971 Sterling arising on the sale of Havannah Mills were assessable under Case I of Schedule D." ' In other words, it must be assumed that they were of the opinion, inter alia, that Havannah Mills was acquired as trading stock and not as a capital asset of the taxpayer's business. The commissioners gave no reasons for their decision. In that state of affairs the taxpayer, in order to succeed on an appeal to the Court, must show that the facts which they found are such that no person acting judicially and properly instructed as to the relevant law could come to the same conclusion or, if you prefer, that the true and only reasonable conclusion from the facts found contradicts the decision: see Edwards v. Bairstow (1956) AC 14, 36, per Lord Radcliffe. ' The convenient course is for me to start with the facts found by the commissioners, including inferences which they could properly draw from the primary facts found. It cannot be doubted that their most significant finding was that "the site" was acquired principally to provide office and storage space for the taxpayer's demolition and plant hire business, being one which followed their earlier finding that the taxpayer had experienced difficulties with the local authority over the storage of demolition materials at his mother's address. The first question which arises out of this finding is what did the commissioners mean by "the site?" Although the case stated, especially perhaps in paragraph 5(iii), is not artistically drawn, I am in no doubt that, in referring to the site, they intended throughout to refer to the whole of the site, that being the area of land whose purchase, development and sale had given rise to the assessment. ' And so the commissioners found that the taxpayer's principal purpose in acquiring the site as a whole was the provision of office and storage space for his business. I see no reason why that purpose should have had any the less substance because there was, a probability, even a certainty, that at any given time large areas of the site could not and would not be used as office or storage space. But the finding of a principal purpose presupposes the coexistence with it of one or more subsidiary purposes, as to which the commissioners have not enlightened us. What might those purposes have been? One possibility was agricultural use of the whole or some part or parts of the land available for such use; another was development and sale of some part or parts of the site; a third was development and sale of the whole of the site. ' Notwithstanding Mr. Good fellow's arguments for the taxpayer to the contrary, I am in no doubt that it was open to the commissioners to infer from the primary facts found that the taxpayer's subsidiary purpose-in acquiring the site was development and sale either of some part or parts of it or of the whole. It necessarily follows from their determination that they inferred that the purpose extended to the whole, an inference which was entirely consistent with the taxpayer's subsequent actions. That is a point of some importance. But simply to say that the taxpayer's subsidiary purpose in acquiring the site was development and sale of it as a whole does not go far enough to enable us to answer the question raised by this appeal. In order to define the limits of the inference which the commissioners could properly draw, we must look more closely at the other primary facts as found or agreed. ' The taxpayer entered into the contract to purchase Havannah Mills before making any application for planning permission. He could not have developed the site without permission and at the date of the contract he did not know whether he would be able to obtain it or not. Moreover, if the
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principal purpose of the acquisition was the provision of office and storage space for his business, he must have intended to retain the site for the immediate future, perhaps for longer, and certainly not to dispose of it unless and until he had made such provision elswhere. This view of the mater is rather confirmed by his erection of the dwelling house at Havannah Mills after he first became interested in Sandy Lane Farm. None of this, I may add, is inconsistent with the commissioner's finding that it was never the taxpayer's intention at any time to purchase Havannah Mills as a residence for himself and his family a finding on which Mr. Henderson, for the Crown, naturally relied. ' Viewing the primary facts found by the commissioners and the inferences which they could properly draw from them in the light least favorable to type taxpayer, I would state the position thus. The taxpayer acquired Havannah Mills in order to provide the office and storage space which he needed for his business as a result of the difficulties he had had with the local authority over storage at his mother's address. He also intended to develop and sell the site as a whole if he could obtain planning permission to do so and if and When he had been able to provide himself with suitable office and storage space elsewhere, an event which would not occur in the immediate future and might not occur for some time. ' Was that state of facts a sufficient basis in law for the conclusion that Havannah Mills was acquired as trading stock and not as a capital asset of the taxpayer's business? In order that question may be answered, an examination of some of the authorities is necessary. It was established by the decision of this Court in Taylor v. Good (1974) 1 WLR 556 that where a taxpayer, not being a dealer in land, acquires a property, enhances its value and disposes of it at a profit, there is no adventure in the nature of trade unless he had the intention of so disposing of it at the time of its acquisition. In Simmons as liquidator of Lionel Simmons Properties Ltd. v. Inland Revenue Commissioners (1980) 1 WLR 1196, in a passage which both sides accept as a correct statement of the law, Lord Wilberforce said, at p. 1199: "Trading requires an intention to trade: normally the question to be asked is whether this intention existed at the time of the acquisition of the asset. Was it acquired with the intention of disposing of it at a profit, or was it acquired as a permanent investment? Often it is necessary to ask further questions: a permanent investment may be sold in order to acquire arbiter investment thought to be more satisfactory; that does not involve an operation of trade, whether the first investment is sold at a profit or at a loss. Intentions may be changed. What was first an investment may be put into the trading stock and, I suppose, vice versa. If findings of this kind are to be made precision is required, since a shift of an asset from one category to another will involve changes in the company's accounts, and, possibly, a liability to tax: see Sharkey v. Wernher (1956) A.C. 58. What I think is not possible is for an asset to be both trading stock and permanent investment at the same time nor to possess an indeterminate status neither trading stock nor permanent asset. It must be one or other, even though, and this seems to me legitimate and intelligible, the company, in whatever character it acquires the asset, may reserve an intention to change its character. To do so would, in fact, amount to little more than making explicit what is necessarily implicit in all commercial operations, namely that situations are open to review." ' In the present case the Crown has never suggested that there was any change in the character of the asset between its acquisition in 1977 and its disposal in 1982. Mr. ,Henderson submitted that Havannah Mills was acquired as trading stock, for which purpose he accepted that the date of acquisition was the date of the contract and not the date of its completion. In an argument which at no point sought to discount the difficulties with which the commissioners' finding as to the taxpayer's principal purpose had confronted him, he nevertheless submitted that the property was acquired with a sufficient intention to dispose of it at a profit to give it the character of trading stock. In regard to dual purpose cases generally, he placed special reliance on the decisions of the
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Privy Council in Iswera v. Inland Revenue Commissioners (1965) 1 WLR 663 and of this Court in Ensign Tankers (Leasing) Ltd. v. Stokes (1991) 1 WLR 341. ' In the Sacra's case (1965) 1 WLR 663 the taxpayer, in order to finance the acquisition of two lots on a building site in Colombo for a house of her own, had to buy the whole of the site and sell off nine of the other ten lots to sub-purchasers, each of whom took a direct conveyance from the vendor. The subsales having been effected on terms favourable to the taxpayer, she only had to find Rs,15,275 in order to acquire two lots worth Rs,87,040. She was assessed to income tax on the difference of Rs,71,765, on the footing that the whole transaction was an adventure in the nature of trade. The Board of Review in Ceylon, the equiN7alent of the special or general commissioners in England, confirmed the assessm ent on the ground that the taxpayer's dominant motivation in the transaction had been to sell the property in lots so as to make a profit on the transaction and obtain two lots for herself below the market value. The Privy Council, affirming the judgment of the Supreme Court of Ceylon, held that the decision of the Board of Revenue could not be interfered with. In delivering the judgment of the Board Lord Reid said at p. 668: "Before their Lordships, counsel for the appellant came near to submitting that, if it is a purpose of the taxpayer to acquire something for his own use and enjoyment, that is sufficient to show that the steps which he takes in order to acquire it cannot be an adventure in the nature of trade. In their Lordships' judgment that is going much too far. If, in order to get what he wants, the taxpayer has to embark on an adventure which has all the characteristics of trading, his purpose or object alone cannot prevail over what he in fact does. But if his acts are equivocal his purpose or object may be a very material factor when weighing the total effect of all the circumstances. ' In the present case not only has it been held that the appellant's dominant motive was to make a profit, but her actions are suggestive of trading as regards the greater part of the site which she bought. She had to and did make arrangements for its sub-division and immediate sale to the nine sub-purchasers before she could carry out her contract With the vendor of the site." ' In the Ensign Tanker's case (1991) 1 WLR 341 the taxpayer company, having become a partner in two limited partnerships set up to finance the production and exploitation of two films, claimed that it was "a person carrying on a trade" which had incurred capital expenditure on the provision of plant for the purposes of the trade, so as to entitle it to first-year allowance under section 41(1) of the Finance Act, 1971. The special commissioners rejected the claim, holding that the partnerships were entered into with fiscal motives as their paramount object and could not therefore have been trading transactions. An appeal by the company was allowed by Millett, J., who held that the purpose of the transactions had to be determined objectively solely by reference to their nature, not subjectively by reference to the motives of the parties. On an appeal by the Crown to this Court it was held that if a transaction was equivocal in nature the subjective intention of the parties was relevant; on the other hand, a paramount fiscal purpose was not decisive because it postulated the existence or some other purpose which might be commercial. The case was accordingly remitted to the commissioners for reconsideration. The leading judgment in this Court was delivered by Sir Nicolas Browne-Wilkinson V.C. Having considered a number of earlier decisions, including the Iswera case, he said at pp. 353-354: "In my judgment, these authorities demonstrate that, at least where the transaction is equivocal and the purpose may or may not have been commercial, the commissioners are entitled to look at evidence of the subjective intention or motives of the relevant party. That is not because the legally relevant question is 'with what motive did the parties enter into the transaction', but because such motive is evidence, sometimes compelling, on which to decide the legally relevant question, viz. Was the purpose of the transaction a trading purpose?" And, at p. 355:
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"It will be remembered that the commissioners expressed their conclusion by holding that, as a matter of law, this was not a trading transaction since the paramount intention was to obtain a fiscal advantage. In my judgment, this constitutes an error of law: Overseas Containers (Finance) Ltd. v. Stoker (1989) 1 WLR 606. In the summary, that case decides: (1) trade involves not only the badges of trade but a commercial purpose; (2) the question whether a transaction is a trading transaction is a question of fact for tile commissioners, not a question of law; (3) if the commissioners find as a fact that the sole object of the transaction was fiscal advantage, that finding can in law only lead to one conclusion, viz. That it was not a trading transaction. Since a fiscal advantage was the sole purpose there is no place for there being any commercial purpose; (4) if the commissioners find as a fact only that the paramount intention was fiscal advantage, as a matter of law that is not decisive since it postulates the existence of some other purpose, albeit not paramount, which may be commercial. In such a case, the commissioners have to weigh the paramount fiscal intention against the non-fiscal elements and decide as a question of fact whether in essence the transaction constitutes trading for commercial purposes." ' These two authorities show that the first question to be answered is whether the transaction is equivocal or unequivocal. If it has all the characteristics of trading, that is to say, if it is unequivocal, then in the words of Lord Reid in Iswera v. Inland Revenue Commissioners (1965) 1 WLR 663, 668: "(the taxpayer's) purpose or object alone cannot prevail over what he in fact does. But if his. Acts are equivocal his purpose or object may be a very material factor when weighing the total effect of all the circumstances." ' Similarly, if an equivocal transaction is entered into for two different purposes, both must be taken into account when weighing the total effect of all the circumstances. In the words of Sir Nicolas Browne-Wilkinson V.C. In the Ensign Tanker's case (1991) 1 WLR 341, 355: ' In such a case, the commissioners have to weigh the paramount fiscal intention against the non- fiscal elements and decide as a question of fact whether in essence the transaction constitutes trading for commercial purpose". ' The taxpayer's acquisition of Havannah Mills was an equivocal transaction. If viewed on its own, it does not tell you whether the property acquired was trading stock or a capital asset of the taxpayer's business. . It might have been either. So account must be taken of the two purposes which the commissioners have attributed to the taxpayer, in the one case by express finding and in the other by presumed inference. At this point Mr. Henderson, relying on the judgment of Sri Nicolas Browne-Wilkinson V.C. In the Ensign Tanker's case, submitted that, just as it was there held to be open to the commissioners to find that a paramount fiscal purpose did not prevent the activities of the partnerships from being trading transactions, so it was open to the commissioners here to find that the taxpayer's principal purpose of providing office and storage space for his business did not prevent the acquisition of Havannah Mills from being an acquisition of trading stock. That submission, although superficially persuasive, is one which on reflection I feel bound to reject. ' It is important to bear in mind that the activities of the partnerships in the Ensign Tanker's case were continuing transactions, whose fiscal and commercial purposes, if both there were, would necessarily have been implemented concurrently. In such a case, it is easy to understand that the commissioners, looking at the two purposes, the nature of the activities and all the circumstances of the case, might reasonably conclude, despite the paramount fiscal purpose, that there had been trading for commercial purposes. But here we have a different state of affairs. ' I. Have already expressed my view, in the light least favourable to the taxpayer, of the primary facts found by the commissioners and the inferences which they could properly draw from them. From that it is clear that The taxpayer's subsidiary purpose of developing and selling Havannah Mills could not have been implemented concurrently with his principal purpose of providing office and storage space for his business. To begin with, there was no certainty that he would be able to
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obtain planning permission. True, if he had obtained it straightaway, he could no doubt have got on with part at least of the development. But he would not have been able to sell the site unless and until he had been able to provide himself with suitable office and storage space elsewhere, an event which might not have occurred for some time. ' And so the taxpayer's "purpose" or "object" or "intention" in regard to the development and sale of the property was severely circumscribed, its implementation indefinite in point of time. The question is whether…
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