A Property Dealing Co. v HM Inspector of Taxes [2003] UKSC SPC00360 (13 January 2003)

TRADING STOCK – whether properties in course of sale by group investment companies were acquired by another group company as trading stock – no

THE SPECIAL COMMISSIONERS

	A PROPERTY DEALING COMPANY	Appellant

	- and -

	HM INSPECTOR OF TAXES	Respondent

		Special Commissioners:	DR JOHN F AVERY JONES CBE
						JOHN CLARK

Sitting in private in London on 9, 10 and 12 December 2003

Jonathan Peacock QC instructed by Ernst & Young for the Appellant

Philip Jones instructed by the Solicitor of Inland Revenue for the Respondents

© CROWN COPYRIGHT 2003

ANONYMISED DECISION

1.	This is an appeal by A Property Dealing Company against a Notice of Determination of loss for the period ended 31 December 1996.  The issue is whether certain properties were acquired by the Appellant as trading stock.  The Appellant was represented by Mr Jonathan Peacock QC and the Respondent by Mr Philip Jones.
2.	We had three binders of documents. Mr Smith of the Group’s UK Property Division gave evidence.
Agreed facts
3.	There was a statement of agreed facts as follows:
(1)	The Appellant” is a company incorporated in England.  The Appellant is and has always been resident in the UK for tax purposes.
(2)	the Appellant is a wholly owned subsidiary of the Parent Company..
(3)	At the start of 1996 the Parent Company (through its subsidiary companies) owned the following properties (“the Properties”):
(1)	“Northampton” owned by Subsidiary No.1.
(2)	“Langham Place” owned by Subsidiary No.1.
(3)	“Winchester” owned by Subsidiary No.2.
(4)	“Queens Terrace” owned by Subsidiary No.3.
(5)	“Park St James” owned by Subsidiaries Nos.4 and 5.
(6)	“Lincoln Place” owned by Subsidiary No.5.
(7)	“West Thurrock” owned by Subsidiary No.1.
(8)	Hyde Park Square” owned by Subsidiary No.3.
(9)	“Jarman Fields” owned by Subsidiary No.6.
(3)	The Properties did not form a part of the trading stock of any trade carried on by the subsidiary companies which owned the Properties.
(4)	Had the Properties been sold on 13 November 1996 a loss, for capital gains tax purposes, of about £68m would have arisen (“the Loss”).
(5)	All but one of the properties were sold in the period between 18 November 1996 and 3 March 1997.
(6)	On 24 December 1997 the Appellant signed a corporation tax return for the period ended 31 December 1996 (which was delivered to the Inland Revenue on 6 January 1998).  This was prepared on the basis that it had acquired from its fellow subsidiaries the Properties on 13 November 1996 “as trading stock” of a trade carried on by it within section 173(1)(a) TCGA 1992 and that the market value of the Properties on 13 November 1996 be increased by the amount of the loss that would have arisen on that date for capital gains tax purposes and that the Appellant’s profits, for corporation tax purposes, should be computed accordingly.  The Inspector of Taxes, in a letter dated 22 April 1998, accepted the computational entries accompanying the return as the election under section 161(3).
(7)	On 31 May 2000 the Inland Revenue issued a Notice of Determination of loss for the period ended 31 December 1996 in the sum of £448,332 that did not take the Loss into account.
(8)	On 5 June 2000 the Appellant appealed against the Notice of Determination.”
4.	To give a more complete picture of the surrounding circumstances it should be mentioned that on 18 November 1996 other properties held by group dealing companies were also contracted to be sold to the Appellant.  The Respondent accepts that the Appellant acquired them as trading stock.
Legislation
5.	The legislation relevant to this case is first section 161(1) Taxation of Chargeable Gains Act 1992:
“Subject to subsection (3) below, where an asset acquired by a person otherwise than as trading stock of a trade carried on by him is appropriated by him for the purposes of the trade as trading stock (whether on the commencement of the trade or otherwise) and, if he had then sold the asset for its market value, a chargeable gain or allowable loss would have accrued to him, he shall be treated as having thereby disposed of the asset by selling it for its then market value.”
On its own this brings into charge or relieves any existing gain at the time of appropriation of an asset to trading stock.  That is subject to subsection (3) which allows the taxpayer to elect that the existing gain or loss should be taken into account in computing its trading profits:
“…subsection (1) above shall not apply in relation to a person’s appropriation of an asset for the purposes of a trade if he is chargeable to income tax in respect of the profits of the trade under Case I of Schedule D, and elects that instead the market value of the asset at the time of the appropriation shall, in computing the profits of the trade for purposes of tax, be treated as reduced by the amount of the chargeable gain or increased by the amount of the allowable loss referred to in subsection (1), and where that subsection does not apply by reason of such an election, the profits of the trade shall be computed accordingly.”
Section 173(1) applies the foregoing sections where there is an intra-group transfer with the transferor company holding the asset as a capital asset and the transferee company acquiring the asset as trading stock by providing that the existing capital gain or loss arises accrues to the transferee company, which may elect under section 161(3) to treat the gain or loss as part of its trading profits. At the relevant time, it took the following form:
“Where a member of a group of companies acquires an asset as trading stock from another member of the group and the asset did not form part of the trading stock of any trade carried on by the other member, the member acquiring it shall be treated for the purposes of section 161 as having acquired the asset otherwise than as trading stock and immediately appropriated it for the purposes of the trade as trading stock.”
6.	It is common ground that the Appellant made an election under section 161(3) and the effect of the legislation is that if the Appellant acquired the Properties as trading stock the Loss will be available for group relief.  Accordingly the question for us is whether the Appellant did acquire the Properties as trading stock.
Contentions of the parties
7.	Mr Peacock QC for the Appellant contended that the Appellant carried on an existing property dealing trade.  It acquired the Properties from other group companies on 13 November 1996 and except for one of them which remains unsold, sold them all on or before 3 March 1997.  As such it was, he says, a normal dealing operation and the Properties were acquired as trading stock.
8.	Mr Jones for the Respondent contended that whether something was acquired as trading stock was a commercial concept in terms of Macniven v Westmoreland Investments Ltd [2001] 377, to the question of which we should adopt a commercial approach.  While there is the appearance of dealing, the reality is that the Properties were being sold anyway because the Parent Company was closing down its property operations.  The Appellant never had a trading purpose; it was merely carrying out the group’s purpose of disposing of the Properties and it had no purpose of its own other than to obtain the Loss in the form of a trading loss.
9.	Mr Jones also contended that it was difficult for one member of a group to acquire an asset from another member of the group with a view to making a turn.  Also that the section required that the two group companies act independently with their own directors.
Further findings of fact
10.	It is necessary to go into the surrounding facts in more detail.  In 1994 following a strategic review the Group decided not to make any further commercial property investments and to sell the whole portfolio in an orderly manner.  The Parent Company’s 1994 accounts stated that the “group will continue to dispose of its property portfolio at acceptable prices.”  Sales of £189.2m were made in that year.  Sales continued in 1995, and in the second half of 1996 the Group board decided to accelerate the disposal programme.  By the time with which we are concerned the best properties had been sold and only complicated or difficult properties remained.  
11.	Consideration was given to showing the property division as a discontinued business.  A memorandum of 15 October 1996 from the Head of Group Accounts to the Group Finance Director explained that the accounting treatment for a discontinued business as an exceptional item required that the sale would need to take place by the first week in March 1997 and that the sale has a material effect on the nature and focus of the group.  The memorandum explained that investment properties qualify as exceptional items in any case but dealing properties must qualify under the definition of discontinued business to be an exceptional item.  It seems therefore that the transfer of the Properties to the Appellant made it more difficult for the Loss to be shown as an exceptional item because it required the Properties to be sold by the first week in March 1997.  There is a note of an undated phone call with Ernst & Young, the group auditors, saying that they would prefer the remaining US assets to be clarified under current assets as “assets held for resale,” which implies that this treatment was not necessary to the UK assets.  A memorandum was sent by Ernst & Young to the Head of Group Accounts on 11 November 1996 giving Mr Allister Wilson’s initial thoughts on the accounting issues on discontinuance.  This contains the following:
“My view is that since you will have discontinued the property division, the remaining properties cannot, by definition, continue to be classified as investment properties.  My preference, therefore, is to transfer the properties from the property division to Group (in order to reinforce the fact that the property division has been closed) and include them within current assets as assets held for resale.”
We assume that the reference to the transfer to “Group” refers to an accounting transfer, rather than the intra-group transfer that took place.  We notice that the Head of Group Accounts had been copied a memorandum from the Financial Controller of 8 November giving details of the proposed transfer to the Appellant and it is possible that he contacted Ernst & Young following this, but this seems less likely as the focus of the Ernst & Young memorandum is on the discontinuance.  Unfortunately we did not have any further evidence on this point which would have been helpful.  The memorandum also states that “FRS3 does not appear to distinguish between operating and non-operating items in the case of discontinued operations” and concludes that the entire net result of the discontinuance should be shown in one place in the accounts.  This seems contrary to the basis of the 15 October memorandum which was that investment properties qualified for treatment as an exceptional item in any event.  Naturally we treat this advice with great respect but for tax purposes we do not think that anyone would say that on a discontinuance all fixed assets automatically become trading stock.  For example, on a discontinuance of a trading business we think there is no doubt that the sale of the factory would for tax purposes be the sale of a capital asset.  Accordingly, we do not consider that this advice assists the Appellant’s contention that the Properties were acquired by the Appellant as trading stock.
12.	The idea of transferring the Properties to the Appellant started with a memorandum from Mr Brown of the group tax department to the Group Finance Director on 28 October 1996 (which pre-dated the accounting advice) that said “the dealing expertise of this company’s [the Appellant’s] officers would then be used to market the properties and optimise the timing and value of disposal.”  The writer said 
“I imagine that the discussion you would have at the Board Meeting could be summarised as follows: 
▪ 	the intentions of the Group towards property have changed.  We no longer consider ourselves property investors and instead wish to use our property dealing expertise to optimise the value/timing of disposal of our existing portfolio…”.  
Mr Smith did not see the memorandum at the time but he agreed with the proposal.  The Appellant has carried on business as a property dealing company since 1986 and has been in the group since 1996.  It has developed and sold in phases a site near the Angel in London.  The directors of the vendor companies and the Appellant at the time of the transfer consisted of Mr Smith, the Commercial Director of the UK property division, and the New Project Manager, who was not a director of three of the vendor companies. The Financial Controller of the UK property division) became a director of all of them on 20 November 1996.  They were all employed by a group company.  Since the “property dealing expertise” rested in the same persons as were the directors of the investment companies who were already conducting the sale of the Properties, we regard this stated advantage as window dressing by the tax department which has made us approach other statements of the Appellant’s purposes more critically.
13.	The tax department originally proposed a sale of the Properties at a price which gave a guaranteed minimum margin of 10 per cent.  Mr Smith and the Financial Controller substituted a fixed price.  A memorandum by the Financial Controller of 12 November stated:
“It has been decided that [the Appellant] should expand its dealing activity by purchasing a portfolio of properties from other Group companies which it will then market using its dealing expertise….In the majority of cases the consideration is less than the current book value but this will enable [the Appellant] to have the opportunity to trade the properties profitably, and optimise the sales proceeds from a Group perspective….”
14.	Mr Smith also said that the price at which the Appellant purchased was designed to enable it to make a profit.  The Properties (plus a further property not relevant to this appeal) were contracted to be sold from the various group investment companies to the Appellant on 13 November 1996 for a total of £18,705,000.  Mr Smith signed the contract on behalf of the Appellant and the Commercial Director on behalf of the vendor companies.  In the absence of any evidence to the contrary we accept that the prices at which the Appellant acquired the Properties were within the range of arm’s length prices but at the end of the range designed to show the maximum profit to the Appellant.  The minutes of the directors of the vendor companies attended by Mr Smith and the Commercial Director approving the contract reported that agreement had been reached following an approach from the Appellant and stated that the sale would reduce the company’s financing costs, which we understood to mean financing by intra-group loans.  The same two directors in their capacity as the finance committee of the directors of the Appellant approved the purchase by the Appellant and stated that the Appellant “intends to hold the properties as part of its dealing stock and to use its dealing expertise to maximise its profits.”  We make the same comment as before on the statement about the company’s dealing expertise.  The parent company capitalised the Appellant so that it paid cash for the Properties to the vendor group companies.  
15.	On 10 December 1996 following a memorandum from Mr Smith of 29 November the board of the Parent Company resolved to discontinue the property division and dispose of the remaining properties.  This was the end of a process that had been continuing since 1994.  Since the Properties had been in the hands of agents and (as appears below) offers for all of them had been received by that date this seems to be a resolution that recognised an existing state of affairs rather than a new decision to discontinue the property division.  The 1996 accounts include the statement that “its exit from retailing and commercial property has now been completed.”  Property disposals of £167.4m were made in the year, leaving £36.2m of investment properties mainly outside the UK.  Those accounts contain an exceptional item before tax of £52.3m arising from the discontinuance of the property business.
16.	The Properties were sold by the Appellant in three parcels: Northampton, Langham Place, and a portfolio of the remaining properties (except for Jarman Fields, which remains unsold).  Brief particulars of the progress of the sale of each of them are as follows.
Northampton
17.	Northampton was put into the hands of agents on 23 May 1996.  Two offers were made by 14 August 1996.  The higher one of £630,000 was accepted on 21 August 1996 and a draft contract was submitted on 4 September.  Negotiations took place concerning VAT resulting in the vendor company electing to waive exemption for VAT on 19 September, following which the draft contract provided for transfer of a going concern treatment.  A reduction in the price to £625,000 was agreed on 20 September and the purchaser wanted a loan to cover any VAT liability, which the vendor company was not willing to give.  On 6 November Purchaser No.3 made an indicative list of assets they would be prepared to purchase (see paragraph 19 below) including this property at £650,000 but no offer was made for this property.  Negotiations with the former purchaser continued and on the third draft of the contract dated 12 November the name of the vendor was changed to the Appellant.  A letter of the same date shows that the purchaser wanted a later completion date than 31 December which was required by the Appellant.  As already mentioned the contract for acquisition by the Appellant of the Properties was made on 13 November with £605,000 being attributed to this property.  Contracts for the sale of Northampton were exchanged at £625,000 on 18 November 1996.
Langham Place
18.	Recommendations for the sale of the remaining Properties (other than Jarman Fields) as a portfolio were made on 22 October 1996 by agents who provided a list of possible purchasers.  One of these properties, Langham Place, was treated separately.  It adjoins the Hotel which had been sold on 24 May 1996 to a subsidiary of the ultimate purchaser) subject to a 999 year lease of Langham Place to Subsidiary No.1, which had agreed not to dispose of its interest for six months.  Planning permission and listed building permission were applied for on the same date.  On 10 September 1996 A Bank, who had an onerous lease of part of the site, made an offer of £3.02m, which was increased to £3.45m on 15 October, and increased again to £3.9m on 25 October.  Another company made an offer of £4.2m on 13 September.  A third company expressed interest on 30 September and made an offer of £3.8m on 17 October.  A fourth company made an offer of £3.25m on 17 October.  The Bank’s offer was accepted on 28 October.  On the same day the ultimate purchaser was informed that a number of offers had been received and they were asked whether they wanted to make an offer.  The ultimate purchaser was known to be interested as the site could be used for an extension of the Hotel.  The Group were also interested in maintaining good relations with the ultimate purchaser as the Group had the management contract on the Hotel and were interested in obtaining such contracts with other hotels the sites of which were owned by the ultimate purchaser.  On 6 November Purchaser No.3 made an indicative list of properties they would be interested in buying (see paragraph 19 below) that included Langham Place at £3.5m but no offer was made for this property.  On 7 November the Bank withdrew but expressed themselves willing to pay £500,0000 to be released from their lease.  As has been mentioned, the intra-group sale to the Appellant took place on 13 November with £3,422,250 being attributed to this property.  Negotiations with the ultimate purchaser continued: they offered £3.4m on 22 November subject to planning permission, to which the Appellant replied that the other offers were unconditional.  On 29 November the Appellant wrote to the ultimate purchaser accepting their unconditional offer made on the telephone of £3.5m with any excess over £500,000 paid by the Bank being shared between the parties.  On 12 December the Appellant expressed concern about the ultimate purchaser’s proposal to undertake further planning enquiries in the New Year before exchange of contracts.   Contracts were exchanged at £3.99m (including the payment from the Bank) on 3 January 1997 following considerable last minute negotiations on 31 December 1996.
The remaining Properties (other than Jarman Fields)
19.	The portfolio of the remaining properties had, as has been mentioned, been the subject of recommendations for their disposal by agents on 22 October 1996.  Purchaser No.3, one of the group’s principal bankers, set out indicative prices for purchase of the Properties (then including Northampton and Langham Place) on 6 November, for which they offered £28m (now excluding Northampton and Langham Place) on 12 November.  Another company which had been initially identified by the agents as a possible purchaser had expressed serious interest on 11 November and offered £30m (of which £5m was in paper) which included Langham Place but not Northampton or Jarman Fields on 15 November, which they changed to £25.3m (of which £4.2 was in paper) now excluding Langham Place on 10 December.  As mentioned, the Appellant acquired the properties intra-group on 13 November with £14,060,000 (£14,541,131 including fees) being attributed to these properties.  Purchaser No.3 renewed their offer by to the Appellant on 19 November and the Appellant’s solicitors made contact with Purchaser No.3’s solicitors on 21 November.  A memorandum of 29 November by Mr Smith to the main board proposing discontinuance of the property division also refers to interest from two Israeli investors.  Purchaser No.3’s offer was recorded in the Parent Company’s board minute of 10 December resolving to discontinue the property division.  The revised offer by the second company was accepted in place of Purchaser No.3’s offer on 11 December.  Mr Smith said that his instinct was that Purchaser No.3 did not have sufficient enthusiasm for acquiring the Properties, although they had genuine interest in the US properties.  Following discussions, Purchaser No.6, another company originally identified by the agents as a possible purchaser, offered £25m (of which £3m was in paper) on 19 December, later changed to a wholly cash consideration which was immediately accepted in place of the second company with the vendor’s solicitors sending documents to the purchaser’s solicitors on 20 December.  Following further negotiations particularly about the apportionment of the price between the various properties, contracts were eventually exchanged with Purchaser No.6 on 3 March 1997 at £15,177,741 in respect of these properties (plus other properties that had been transferred to the Appellant from other group dealing companies) payable in cash but with deferred payment terms with part payable on completion, and further instalments on 31 March 1998, 1999, and 2002.  A press release issued at the time of sale on 4 March 1997 formally announcing the closure of the property division stated that the present value of the total £25m consideration was £23.2m, indicating a discount of 7.2 per cent.  If this is applied to the proportion of the sale price referable to these properties the effect is that there is an economic profit of £131,563 compared with the profit taking the figures at their face value (which is the relevant figure for tax and accounting purposes) of £636,610 (both profits figures being after fees).  As Mr Peacock pointed out, the discounted profit is heavily dependent on the rate of discount chosen.  Within those figures is a loss (after fees but before discounting) on three properties of £240,576. 
20.	In summary, at the time of the intra-group contract under which the Appellant acquired the Properties on 13 November 1996, Northampton was almost sold, contracts being exchanged five days later, and there was at the time an indication that Purchaser No.3 might be prepared to purchase at a higher price; Langham Place was the subject of three offers and negotiations had been opened with the ultimate purchaser but they had not yet made an offer; and the portfolio of the remaining properties was the subject of one offer and another expression of serious interest, but the eventual purchaser had not yet made an offer.  The recital of events shows that the property market at the time was volatile, with people making and withdrawing offers in quick succession.  Clearly nothing was certain until contracts were exchanged.  But the procedure for selling all the properties was well in hand with at least one offer already made for each of them.  The Appellant continued a process of selling that the vendor companies had already started.  The sales of the Properties other than Jarman Fields were completed at a profit of £1,224,360 (or £719,313 taking the discounted value of the consideration for the portfolio of properties) with completion taking place on various dates between 19 December 1996 and 31 October 1997.  The following table summarises the position (in £).
	Buying price	Including
 costs	Selling 
price	
Farringdon Court	3,300,000	3,350,507	3,118,000	
Queens Terrace	160,000	161,946	155,000	
Hyde Park Square	55,000	55,753	60,000	
Park St James	45,000	45,864	44,741	
Thurrock	1,500,000	1,534,635	1,800,000	
Winchester	9,000,000	9,392,426	10,000,000	
Jarman Fields	640,000			
Northampton	605,000	605,000	625,000	
Langham Place	3,400,000	3,422,250	3,990,000	
Total	18,705,000	18,568,381	19,792,741	
Profit after costs			1,224,360	

The law
21.	The legislation with which we are concerned has the obvious purpose of converting a capital loss into a trading loss that is available for group relief.  As Lord Templeman pointed out in Reed v Nova Securities Ltd [1985] STC 124, 131j the Revenue cannot complain if the taxpayer makes use of an opportunity given by Parliament.  The issue is simply whether the Appellant acquired the Properties as trading stock, not whether its purpose was to save tax.  The legal principle which we apply is the same as the one applied in Ensign Tankers (Leasing) Ltd v Stokes [1992] STC 226 on the question whether the partnership was trading.  Lord Jauncey said at 248d:
“I do not consider that FA &AB Ltd v Lupton requires that the trading transaction be de-natured because the taxpayer had incorporated it within a tax avoidance scheme which seeks to obtain for him greater fiscal advantages than the trading transaction if standing alone would produce.  When Parliament has provided that a taxpayer shall be entitled to certain allowances in certain circumstances I can see no reason in principle why when those circumstances exist he should be deprived of those allowances simply because he has sought and failed to engineer a situation in which he obtained allowances greater than those to which the circumstances entitled him.”
The question whether the Appellant acquired the Properties as trading stock is not to be decided by whether it acquired the Properties for tax reasons.  The issue is one of construction of the legislation.  
Reasons for our decision
22.	We agree with Mr Jones’s contention on Macniven v Westmoreland Investments Ltd [2001] 2 WLR 377 that whether property is acquired “as trading stock” is a commercial concept, recognised in accountancy.  As Lord Hoffmann said of the Ramsay principle in paragraph 32 on page 388b “the court was required to take a view of the facts which transcended the juristic individuality of the various parts of a preplanned series of transactions.”  However, as in Ensign Tankers, and as Lord Hoffmann said in Macniven at paragraph 59 on page 396a “Even if a statutory expression refers to a business or economic concept, one cannot disregard a transaction which comes within the statutory language, construed in the correct commercial sense, simply on the ground that it was entered into solely for tax reasons.  Business concepts have their boundaries no less than legal ones.”  We approach the facts on this basis.
23.	The first question we ask ourselves is what was the purpose of the change on 13 November 1996, and what really changed on that date?  Mr Smith explained the purpose as being first to transfer the risks of holding the Properties to the Appellant and secondly to obtain the tax advantage.  
24.	When asked whether the Properties would have been acquired by the Appellant but for the tax advantages Mr Smith replied “This is conjecture because I can only tell you what we did.”  When pressed for an answer that the only reason was to get the tax benefit he said “Well, there certainly was a tax efficient objective in putting those assets, transferring the beneficial interest into [the Appellant].”  The questions then ran:
Q.	Is that a “yes”?
A.	I don’t know what the word “only “ means.
Q.	Would you have done this transfer if it had no beneficial tax advantages?
A.	I honestly cannot say.  The number of occasions in this group that transferred assets into specifically focused companies where you collect the risks, you clear out the other companies so that they are clearly defined in their purpose, so I cannot say we would not have done it save for the reason you gave.
25.	While we accept that the effect of the contract for the acquisition by the Appellant was to put all the risk relating to the holding of the Properties into one company instead of six group companies, we do not accept that this was a purpose.  Purpose was something that the companies were trying to achieve.  The holding company had made a decision to dispose of the Properties whichever company owned them, and the directors of the vendor companies and the Appellant were the same.  It is not clear that there was any benefit to the holding company or the separate property-owning companies in the risk being in one company; it was not the case that the liability could exceed the value of the asset.  Even the convenience of one company being able to sell is not very significant when all the companies had the same directors.  The sale of the Properties by the existing property-owning companies was already well in hand.  Accounting considerations made it essential for the properties to be disposed of by early March 1997.  
26.	What difference did it make whether between 13 November 1996 and March 1997 an unsold property was owned by the Appellant or by the vendor companies?  While we also accept Mr Smith’s answer that transfers of properties had been made on many occasions in the past within the group, the question related to these particular Properties at the particular time of transfer.  We think his answers were prevaricating and we find that there was no purpose other than tax for the transfer.  This absence of non-tax purposes does not prevent the acquisition of the Properties by the Appellant from being as trading stock but it makes us approach the question more critically and look at the facts in the wider context of the group, rather than looking at the Appellant’s transactions on their own.
27.	If we start with the purpose of the directors of the vendor companies immediately before 13 November 1996 it is clear that it was to realise the Properties.  That was a purpose common to all property investment companies in the group and derived from a decision of the group to dispose of all its commercial properties.  The directors of each company were group employees.  As we have said the stage this process had reached was that Northampton was almost sold, contracts being exchanged five days later, Langham Place was the subject of three offers and negotiations had been opened with the ultimate purchaser, and the portfolio of the remaining properties (except Jarman Fields) was the subject of one offer and another expression of serious interest, although neither of them was the ultimate purchaser.  If the vendor companies had continued to carry out that purpose, although Mr Peacock QC did not concede it, there is in our view no doubt that they would merely have realised their capital assets.  When the Appellant took over the properties and completed the process of selling we ask ourselves whether the same directors, now in their capacity as directors of the Appellant, had a different purpose.  We do not think they did.  We cannot point to anything that they did that was different afterwards from what it was before.  It remained the group’s purpose to dispose of the Properties whichever company owned them.  Accordingly we find that the same purpose of realising the assets continued as before.
28.	We now consider what the Appellant actually did and ask ourselves whether it acquired the Properties as trading stock.  Looking at the Appellant in isolation it bought the Properties, being the type of asset for which it was already a dealer, and immediately sold them at a profit, which is the classic case of trading.  If we were to look at the Appellant in isolation we would have no hesitation in saying that it acquired the Properties as trading stock, whatever the purpose of the Appellant.  Normally it is only the individual company’s tax position that is relevant.  But we do not consider that we should look at the Appellant in isolation from the group.  That would be to take an unrealistic and blinkered view of the facts. 
29.	First, we are applying a section that deals with intra-group transfers where the two companies hold the asset in different capacities.  In order for us to decide that the Appellant acquired the Properties as trading stock when they were not trading stock of the vendor companies we must be able to point to some difference which occurred other than the mere fact of the Appellant acquiring the Properties.  We are unable to detect any such change.  The Appellant continued to realise the Properties held by the vendor companies as capital assets (and presumably, although it is not in issue in this case, as to the properties acquired on 18 November 1996 as trading assets) in exactly the same way as the vendor companies had done.  Mr Smith agreed:
Q.	So what happened after 13 November that was any different to what was going on before?
A.	I certainly did not try any harder.  I was trying as hard as I could throughout the whole time.
The Appellant was merely a vehicle through which the existing investment companies sold the Properties as investments (and presumably through which the dealing properties acquired on 18 November 1996 were sold as trading properties).  
30.	Secondly, the transactions were driven by the Group’s purpose in realising all the commercial properties wherever held within the Group.  We have not found that the Appellant had any independent purpose in disposing of the Properties.
31.	Thirdly, we are bound to take a commercial view of whether the Properties were acquired as trading stock. In terms of Macniven v Westmoreland would a commercial person knowing all the facts say that the Appellant had acquired the Properties as trading stock?  We do not think he would.  He would say that nothing had really changed and they continued to be held as investment properties.  For the reasons given in paragraph 11 above we do not accept that the accounting advice is relevant to the tax issue.
32.	It is unnecessary for us to deal with Mr Jones’ wider submissions about subsidiaries needing to act independently.  But we do not in any way suggest that subsidiaries cannot carry out trading transactions with each other.
33.	Accordingly we find that the Properties were not acquired by the Appellant as trading stock and dismiss the appeal in principle.

J F AVERY JONES

JOHN CLARK
SPECIAL COMMISSIONERS

SC 3034/02

Authorities referred to in skeletons and not referred to in the decision:
Coates v Arndale Properties Ltd [1984] STC 637
Marson v Morton [1986] STC 463
Overseas Containers (Finance) Ltd v Stoker [1989] STC 364
N Ltd v Inspector of Taxes [1996] STC (SCD) 346