New Angel Court Ltd v Inspector of Taxes [2003] EWHC 1876 (Ch)

Case No CH/2003/APP/0053[2003] EWHC 1876 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE SPECIAL COMMISSIONERS
OF INCOME TAX
Venue Royal Courts of JusticeDate Friday, July 25, 2003
Strand
London WC2A 2LL
Before
MR JUSTICE LAWRENCE COLLINS
Between
NEW ANGEL COURT LIMITEDAppellantDANNY EDWARD ADAMRespondent(HM Inspector of Taxes)RespondentNEW ANGEL COURT LIMITED -AppellantDANNY EDWARD ADAM(HM Inspector of Taxes) -Respondent
Mr Jonathan Peacock QC (instructed by Levy Watters) for AppellantMr Philip Jones (instructed by the Solicitor of Inland Revenue) for Respondent
JUDGMENT

I Introduction

[1]New Angel Court Ltd ("the Appellant") is a wholly owned subsidiary in the Hilton Group of companies. The parent company, Hilton Group plc, was formerly known as Ladbroke Group plc ("Ladbroke"). On 13 November 1996 the Appellant acquired nine properties from its fellow subsidiaries. The properties had previously been held as investment properties and the question on this appeal is whether the Appellant acquired them as "trading stock."[2]This is an appeal against the decision of the Special Commissioners of 13 January 2003 ("the Decision"), dismissing the Appellant’s appeal against a notice of determination of loss (for corporation tax purposes) for the period to 31 December 1996 in the sum of £448,332. That determination did not take account of the loss of approximately £68m on the sale of the nine properties.[3]The appeal raises the important question of the relevance of fiscal motive on the tax consequences of transactions which are carried out to save tax.

II Legislation

[4]By the Taxation of Chargeable Gains Act 1992 ("TCGA 1992"), section 161(1):
"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."
[5]That 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."
[6]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, section 173(1) applies those sections 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 having been amended in immaterial respects in 2000), 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."
[7]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.[8]By section 288(1) "trading stock" has the meaning given by section 100(2) of the Income and Corporation Taxes Act 1988, and includes in relation to any trade, property such as is sold in the ordinary course of the trade. III The facts

The Appellant, the Properties and the vendors

[9]The Appellant has carried on business as a property dealing company since 1986. It was formed to develop and dispose of a site at the Angel, Islington. In 1987 it became a joint venture company in which the Ladbroke group (through Gable House Estates Ltd) had a 50% interest, and in 1993 it became a wholly owned subsidiary of Gable House Estates Ltd. From November 1996 its shares were owned directly by Hilton Group plc.[10]The directors of the vendor companies and the Appellant at the material time (13 November 1996) consisted of Mr Taljaard (the chief executive of the Ladbroke Group property division), Mr Neil Earp (Commercial Director of the UK property division), Mr Geoff Leonard (chartered accountant and property negotiator), and also Mr Peter Gosling (new project manager), who was not a director of three of the vendor companies. Ms Pam Barker (chartered accountant and 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.[11]At the start of 1996 Ladbroke (through its subsidiary companies) owned the following properties ("the Properties"):(1) Old Texas Store, St James Mill Road, Northampton ("Northampton") owned by Ladbroke (Rentals) Ltd.(2) 14/15 Langham Place and 2 Cavendish Place, London ("Langham Place") owned by Ladbroke (Rentals) Ltd.(3) The Brooks, Winchester ("Winchester") owned by LCC (Winchester) Ltd.(4) Queens Terrace, Finchley Road, London ("Queens Terrace") owned by Ladbroke Group Homes Ltd.(5) St James's Terrace, St James's Terrace Mews and Primrose Court, Marylebone, London ("Park St James") owned by Park St James Ltd and Gable House Properties (Regents Park) Ltd.(6) Lincoln Place, Farringdon, London ("Lincoln Place") owned by Gable House Estates (City of London) Ltd.(7) Oliver Road, West Thurrock, Essex ("West Thurrock") owned by Ladbroke (Rentals) Ltd.(8) 8/12 Hyde Park Square, London ("Hyde Park Square") owned by Ladbroke Group Homes Ltd.(9) Jarman Fields, Hemel Hempstead, Hertfordshire ("Jarman Fields") owned by Techno Ltd.[12]Among the agreed facts were that(1) had the Properties been sold on 13 November a loss, for capital gains tax purposes, of about £68m would have arisen; and(2) the Properties did not form a part of the trading stock of any trade carried on by the subsidiary companies which owned the Properties.

Background

[13]The background was that in 1994, following a strategic review, the Ladbroke group decided not to make any further commercial property investments and to sell the whole of its portfolio in an orderly manner. Ladbroke’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 material time the best properties had been sold and only complicated or difficult properties remained.[14]The idea of transferring the Properties to the Appellant started with a memorandum from Mr Phil Turner of the group tax department to Mr Brian Wallace (Group Finance director) on 28 October 1996 which said that "the dealing expertise of [the Appellant's] officers would then be used to market the properties and optimise the timing and value of disposal." Mr Turner said: "I imagine that the discussion you would have at the Board Meeting could be summarised as follows … [T]he 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...".[15]The tax department originally proposed a sale of the Properties at a price which gave a guaranteed minimum margin of 10 per cent. Mr Taljaard and Ms Barker (financial controller of the UK property division) substituted a fixed price. A memorandum by Ms Barker 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. "
[16]Mr Taljaard also said in evidence that the price at which the Appellant purchased was designed to enable it to make a profit.

Sale and disposal

[17]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 Taljaard signed the contract on behalf of the Appellant and Mr Earp signed on behalf of the vendor companies.[18]In the absence of any evidence to the contrary the Special Commissioners accepted 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.[19]The minutes of the directors of the vendor companies attended by Mr Taljaard and Mr Earp 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, i.e. 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." The parent company capitalised the Appellant so that it paid cash for the Properties to the vendor companies.[20]On 10 December 1996 following a memorandum from Mr Taljaard of 29 November the board of Ladbrokes resolved to discontinue the property division and dispose of the remaining properties. 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.[21]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).[22]In summary, at the time of the intra-group contract under which the Appellant acquired the Properties on 13 November 1996:(1) Northampton was almost sold, contracts being exchanged five days later, and there was at the time an indication that Bankers Trust might be prepared to purchase at a higher price;(2) Langham Place was the subject ofthree offers and negotiations had been opened with Great Eagle but they had not yet made an offer; and(3) 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.[23]The events showed 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.[24]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. Contracts for the sale of Northampton were exchanged on 18 November 1996, and completed on the following day. Contracts for Langham Place were exchanged on 3 January 1997 and completed on 25 July 1997. Contracts for the remaining properties were exchanged on 3 March 1997 and completed on various dates between 3 March and 31 October 1997. The ninth property (Jarman Fields) is still retained.[25]The Appellant’s corporation tax return for the period ended 31 December 1996 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 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 of £68m into account.

IV The Special Commissioners’ findings

[26]The Special Commissioners made these findings in relation to the genuineness of the transaction. The first was in relation to the October 1996 memorandum from Mr Turner of the tax department, in which he said that "the dealing expertise of [the Appellant's] officers would then be used to market the properties and optimise the timing and value of disposal" and "I imagine that the discussion you would have at the Board Meeting could be summarised as follows … [T]he 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...". The Special Commissioners decided that since "the property dealing expertise" rested in the same persons as were the directors of the companies which held the Properties as investments, the stated advantage was window-dressing by the tax department which made the Special Commissioners approach other statements of the Appellant’s purposes more critically.[27]They referred in the same context to Ms Barker’s memorandum of 12 November 1996, in which she said that it had "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." But they made no express reference to window-dressing in this context.[28]So also the Special Commissioners found that the minutes of the finance committee of the Appellant were window-dressing. The minutes of the directors of the vendor companies attended by Mr Taljaard and Mr Earp approving the contract reported that agreement had been reached "following an approach" from the Appellant and the same two directors in their capacity as the finance committee of the Appellant approved the purchase by the Appellant as directors of the vendor companies, and stated that the Appellant "intends to hold the properties as part of its dealing stock and to use its dealing exercise to maximise its profits." The Special Commissioners found that the reference to the Appellant’s dealing expertise was window dressing.[29]The Special Commissioners also found that since the Properties had been in the hands of agents and offers for all of them had been received by the time of the Board Resolution of 10 December 1996, which resolved to discontinue the property division and dispose of the remaining properties, the Board resolution seemed to be one which recognised an existing state of affairs rather than a new decision to discontinue the property division.[30]The Special Commissioners thought that the evidence of Mr Taljaard was prevaricating and found that there was no purpose other than tax for the transfer, and rejected his evidence that there was a dual purpose, namely firstly to transfer the risks of holding the Properties to the Appellant and secondly to obtain the tax advantage.[31]Their other findings of fact included these:(a) by the time of the transfer the best properties had been sold and only complicated or difficult properties remained;(b) the Appellant had carried on a property dealing business since 1986;(c) 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;(d) the Appellant paid cash for the Properties from capital provided by the parent company;(e) the property market was "volatile" at the time with people making and withdrawing offers in quick succession; and "nothing was certain until contracts were exchanged";(f) While it was accepted 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, this was not a purpose;(g) 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;(h) it was not clear that there was any benefit to the holding company or the separate property-owning companies in the risk being in one company, since the liability would not exceed the value of the asset;(i) the convenience of one company being able to sell was not very significant when all the companies had the same directors;(j) the sale of the Properties by the existing property-owning companies was already well in hand, and accounting considerations made it essential for the properties to be disposed of by early March 1997;(k) it made no difference whether between 13 November 1996 and March 1997 an unsold property was owned by the Appellant or by the vendor companies;(l) it was clear that the purpose of the directors of the vendor companies immediately before 13 November 1996 was to realise the Properties, and that purpose was common to all property investment companies in the group and derived from a decision of the group to dispose of all its commercial properties;(m) the directors of each company were group employees;(n) 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 Great Eagle, 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, and if the vendor companies had continued to carry out that purpose, there was no doubt that they would merely have realised their capital assets;(o) when the Appellant took over the Properties and completed the process of selling the same directors, now in their capacity as directors of the Appellant, did not have a different purpose, and there was nothing 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, and accordingly the same purpose of realising the assets continued as before.[32]The Special Commissioners directed themselves on the law as follows. The legislation had the obvious purpose of converting a capital loss into a trading loss that is available for group relief. The Revenue could not complain if the taxpayer makes use of an opportunity given by Parliament: Reed v Nova Securities Ltd [1985] 1 WLR 193 at 202. The issue was simply whether the Appellant acquired the Properties as trading stock, not whether its purpose was to save tax, or it acquired the Properties for tax reasons.[33]Whether property was acquired "as trading stock" was a commercial concept, recognised in accountancy. 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: Ensign Tankers (Leasing) v. Stokes [1992] 1 AC 655, 685, per Lord Jauncey; Macniven v Westmoreland Investments Ltd [2001] UKHL 6; [2001] 2 WLR 377, 388, per Lord Hoffmann.[34]Their conclusions were as follows:
"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 ofthe vendor companies we must be able to point to some difference which occurred other than the mere fact ofthe Appellant acquiring the Properties. We were 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 Taljaard 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. 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. …..[W]e do not accept that the accounting advice is relevant to the tax issue. …. 33. Accordingly we find that the Properties were not acquired by the Appellant as trading stock and dismiss the appeal in principle."

V Appellant’s argument

[35]The argument of Mr Jonathan Peacock QC for the Appellant can be summarised as follows.[36]The fact that the taxpayer’s parent company has an object, even a sole object, of converting a capital loss into a trading loss available for surrender by way of group relief does not, of itself, lead necessarily to the conclusion that the taxpayer does not acquire the assets concerned as "trading stock."[37]The assets will be acquired as "trading stock" where they are acquired "for the purpose of being used in the course of trade"; that is, where the assets are of a kind which is sold in the ordinary course of the company’s trade and are acquired for the purposes of that trade with a view to resale at a profit. The asset will be "trading stock" if there is a commercial justification for the acquisition, but if there is no commercial justification for the acquisition (e.g. where the asset is worthless) it will not be trading stock of the company. There will be commercial justification where there is a prospect of making a profit at the time of acquisition. See Reed v Nova Securities [1985] 1 WLR 193, at 197, 202; Ensign Tankers (Leasing) v. Stokes [1992] 1 AC 655, at 679.[38]There is no "trade" carried on by a company (of which any asset could form "trading stock") where an artificial loss is artificially created with the object of manufacturing a tax advantage: Lupton v. FA and AB Securities Ltd [1972] AC 634; Ensign Tankers (Leasing)Ltd v. Stokes [1992] 1 AC at 670-1. But a sole fiscal object does not serve to ‘de-nature’ what would otherwise be a trading transaction: Ensign Tankers (Leasing)Ltd v. Stokes [1992] 1 AC at 677.[39]The Special Commissioners found certain key facts:(1) the Appellant had carried on a property dealing business since 1986;(2) The price at which the Appellant acquired the Properties was designed to enable the Appellant to make a profit;(3) the prices at which the Appellant acquired the Properties were within the range of "arm’s length" prices at the end of the range designed to enable the Appellant to make the maximum profit;(4) the Appellant paid cash for the Properties from capital provided by the parent company;(5) the property market was "volatile" at the time with people making and withdrawing offers in quick succession; and "nothing was certain until contracts were exchanged";(6) When the Appellant acquired the Properties it intended to realise them;(7) the Appellant in fact sold the Properties (save for one which is still retained) over the succeeding months.[40]In the light of those key findings (and, in particular the findings that the Appellant carried on, prior to November 1996, a property dealing trade and acquired the Properties intending to sell them), the Appellant acquired the Properties on 13 November 1996 as "trading stock" of that trade.[41]By reference to the badges of trade identified in Marson v Morton [1986] 1 WLR 1343, the properties were acquired, held and (as to eight out of nine) disposed of as a part of the Appellant’s trade. The Properties were of a type which is sold in the ordinary course of the Appellant’s trade and were acquired with a view to resale at a profit. There was here no instant resale of the Properties by the Appellant to another group investment company at a fixed price (as in Coates v Arndale Properties Ltd [1984] 1 WLR 537) nor were the Properties worthless (as were the shares in Reed v Nova Securities Ltd [1985] 1 WLR 193).[42]The Special Commissioners correctly concluded that the Appellant acquired the Properties as trading stock, albeit that their conclusion was constrained by looking at the Appellant "in isolation" and they had "no hesitation" about such a conclusion "whatever the purpose" of the Appellant".[43]But the Commissioners wrongly asked themselves what was the purpose of the sale to the Appellant. The purpose of the sale to the Appellant is not a material factor in determining whether the Properties were trading stock of the Appellant. Either the assets became a part of the trading stock of the Appellant on acquisition or they did not; and why they were sold to the Appellant has no bearing on that issue.[44]Nevertheless, the Special Commissioners concluded that:(1) there was no purpose for the sale to the Appellant other than tax;(2) the absence of a non-fiscal purpose for the sale requires an examination of the facts in the wider context of the group;(3) the subsidiary vendor companies intended to sell the Properties and, had they done so, that would have been a realisation of capital assets; and(4) the Appellant’s purpose on acquisition was the same as that of the subsidiary vendor companies (and the group), namely to sell the Properties.[45]In fact, the Commissioners’ conclusion as to a sole fiscal purpose was not one reasonably open to them on the evidence before them (and, in particular, in light of the evidence of Mr Taljaard). Even if the sale had no purpose other than tax, this would not require an examination of the purposes of companies other than the Appellant; whether nor not the Appellant acquired the Properties as trading stock does not depend (to any extent) on the purpose (fiscal or otherwise) of such other companies.[46]The tax position of each company in a group must (in the absence of specific statutory provision, e.g. that dealing with such matters as group relief from tax) be considered by reference to the circumstances of that company alone.[47]This erroneous "group" approach to the question of whether assets were acquired by the Appellant as trading stock led the Special Commissioners to identify three reasons which led to their conclusion that the appeal should be dismissed.[48]The first was that it was necessary, in order to find that the Properties had been acquired as trading stock when they were not trading of the vendor subsidiaries, to point to some difference which occurred other than the mere fact of the Appellant acquiring the Properties.[49]The Special Commissioners proceeded on the basis that the Properties could not be acquired by the Appellant as trading stock unless "some difference [has] occurred", other than the acquisition by the Appellant and concluded:(1) that no such change could be detected;(2) that the Appellant "continued to realise the Properties held by the vendor companies as capital assets…in exactly the same way as the vendor companies had done"; and(3) that the Appellant was "merely a vehicle through which the existing investment companies sold the Properties as investments."[50]While mere acquisition of an asset by the Appellant would not make that asset trading stock of the Appellant, its acquisition by a person who carried on a trade of dealing in that type of asset and who intended, at acquisition, to sell the asset would (and did) allow the Commissioners to conclude that the asset was acquired by the Appellant as trading stock. It follows that each of those conclusions is incompatible with the conclusion that, looking at the Appellant alone, the Appellant acquired the Properties as trading stock. In short, there was a change in the status of the Properties.[51]The Properties were acquired by the Appellant and there is no basis in law for such an acquisition to be disregarded, nor for the Special Commissioners to conclude that the Properties were sold by the Appellant "as investments".[52]The Special Commissioners concluded that the transactions were driven "by the group’s purpose in realising all the commercial properties" and that the Appellant had no "independent purpose in disposing of the Properties." That the group wished to sell its commercial properties and the Appellant had no other purpose is not (necessarily or at all) incompatible with the Appellant acquiring the properties as trading stock. Indeed, acquiring an asset with the intention of selling it is one of the hallmarks of trading.[53]The Special Commissioners concluded that, on a commercial view, the Appellant had not acquired the Properties as trading stock since "nothing had really changed and they continued to be held as investment properties". Insofar as the Special Commissioners rely on the absence of change, this is to repeat the error. The Special Commissioners conclude that the Appellant did not acquire the Properties as trading stock on the basis that they "continued to be held as investment properties". This is to beg the very question to be answered and is incompatible with the conclusion that the Appellant, looked at alone, acquired the Properties as trading stock.

VI Inland Revenue’s argument

[54]The arguments of Mr Philip Jones for the Inland Revenue may be summarised as follows. The Special Commissioners properly directed themselves as regards the law and determined on the facts that the Appellant did not acquire the properties as trading stock of a trade carried on by it.[55]In order for there to be an appropriation of property as trading stock which immediately prior to acquisition was held by another group company as a capital or investment property there must be something more than a mere transfer of the asset to a group company which carries on a trade in relation to that property.[56]There must be some commercial justification for the acquisition of the property. But the making of a profit in the short term by the transferee, or the intention that a profit should, or might, be made in the short term by the transferee, does not of itself amount to the appropriation of the transferred asset as trading stock of a trade carried on by the transferee.[57]Where a transaction is in fact undertaken by a company for group purposes, it is legitimate to have regard to the purposes of the group as a whole and the effect of the implementation of the transactions on the group as a whole in order to ascertain whether in truth the transactions undertaken by the company are in the nature of trading transactions: Overseas Containers (Finance) Ltd. v Stoker [1989] 1 WLR 606.[58]The conclusion to which the Special Commissioners came was justified by these findings of fact in particular:(1) the Properties were capital assets, and not trading stock, of the vendor companies;(2) in the second half of 1996 the Group board decided to accelerate the disposal programme of the Properties;(3) accounting considerations made it essential for the Group to dispose of the Properties by early March 1997;(4) the marketing and sale of the Properties was well in hand by 13 November 1996;(5) the Appellant did nothing after 13 November 1996 other than continue the selling process started by the vendor companies, and did nothing which the vendor companies would not have done had they retained the Properties;(6) the stated purpose for the transfer to the Appellant in the internal documentation, and before the Special Commissioners, namely, that the properties were being transferred to the Appellant so as to make use of the Appellant’s "dealing expertise" was a mere pretence;(7) the stated purpose of transferring the risks of holding the Properties was also a pretence;(8) each of the vendor companies sold the Properties to the Appellant at a price which was designed to show the maximum profit to the Appellant;(9) the only purpose for the Appellant acquiring the Properties was a tax purpose, namely, to try to convert the Group’s allowable losses into trading losses for the Group’s benefit by asserting to the Inland Revenue that the Properties had been acquired as trading stock for the purpose of the Appellant’s trade.

VII Applicable legal principles

[59]The question is whether the Special Commissioners correctly directed themselves in law, and whether their findings of fact can be interfered with in accordance with the principle in Edwards v Bairstow [1956] AC 14 (itself a case on whether a transaction was an adventure in the nature of trade).[60]In his comment on Macniven v. Westmoreland Investments Ltd [2001] UKHL 6, [2001] 2 WLR 377 in (2001) 117 LQR 575 Lord Templeman described tax avoidance as a scheme including one or more steps which had no commercial purpose except for the avoidance of tax, and tax mitigation as including expenditure which reduces taxable income, but which does not include any artificial step though the motive which inspires a taxpayer may be mainly or wholly the desire to reduce tax.[61]Macniven v Westmoreland Investments Ltd [2001] UKHL 6, [2001] 2 WLR 377 confirms that the first task is to construe the statutory language to determine whether the concept to which the legislation refers was a commercial concept: "… if the legal position is that tax is imposed by reference to a commercial concept, then to have regard to the business ‘substance’ of the matter is not to ignore the legal position but to give effect to it," per Lord Hoffmann, at para 39, p 390. If a transaction came within the statutory language, construed in the correct legal or commercial sense, it could not be disregarded merely because it was entered into solely for tax purposes: per Lord Hoffmann, at para 59, p 396,.[62]It is well established (and is indeed obvious) that expressions such as "trade" and "trading stock" are to be interpreted as commercial concepts. Trading requires an intention to trade: Simmons v IRC [1980] 1 WLR 1196. Whether or not there has been an adventure in the nature of trade depends on all the facts and circumstances of each particular case and depends on the interaction between the various factors that are present in any given case, or "badges of trade": Marson v Morton [1986] 1 WLR 1343, at 1348. They are neither comprehensive nor decisive, but include whether the transaction was related to the trade which the taxpayer otherwise carried on: ibid.

Fiscal motive

[63]There has been much discussion on this appeal of the relevance of fiscal motive, and I was taken to many of the leading cases. They show that fiscal motive (even if it is the sole or paramount motive) will not de-nature what would otherwise be a commercial transaction, but that if the essence of the transaction is explicable only on fiscal grounds, then the mere presence of trading elements will not turn it into a trading transaction.[64]In the dividend stripping cases (Griffiths v J P Harrison (Watford) Limited [1963] AC 1; Finsbury Securities Ltd v. Bishop [1966] 1 WLR 1402; Lupton (Inspector of Taxes) v F A & A B Limited [1972] AC 634) the issue was whether the losses on the shares (after the dividends had been stripped out) had been sustained "in any trade … carried on" by the taxpayer, where trade included "every trade … adventure or concern in the nature of trade.".[65]In Lupton (Inspector of Taxes) v F A & A B Limited [1972] AC 634 it was held that the transactions were tax devices and not trading transactions. The key point was not that the transactions had a tax motive, but that there was an arrangement or scheme which could not fairly be regarded as being a transaction in the trade of dealing in shares.[66]Lord Morris said (at 646) "The question then arises whether a trading transaction which is entered into with a view to the obtaining subsequently of such benefit as may or could result from the application of revenue law will cease to be such a trading transaction or will never have been such a transaction once the motive which inspired it is known. … [O]nce it is accepted, as it must be, that motive does not and cannot alter or transform the essential and factual nature of a transaction, it must follow that it is the transaction itself and its form and content which is to be examined and considered. If the motive or hope of later obtaining a tax benefit is left out of account, the purchase of shares by a dealer in shares and their later sale must unambiguously be classed as a trading transaction."[67]But he accepted (at 647) that:
"It is manifest that some transactions may be so affected or inspired by fiscal considerations that the shape and character of the transaction is no longer that of a trading transaction."
He quoted ([1972] AC at 648) with approval from the judgment of Megarry J at first instance ([1968] 1 WLR 1401 at 1419):
"If upon analysis it is found that the greater part of the transaction consists of elements for which there is some trading purpose or explanation (whether ordinary or extraordinary), then the presence of what I may call ‘fiscal elements’, inserted solely or mainly for the purpose of producing a fiscal benefit, may not suffice to deprive the transaction of its trading status. The question is whether, viewed as a whole, the transaction is one which can fairly be regarded as a trading transaction. If it is, then it will not be denatured merely because it was entered into with motives of reaping a fiscal advantage. Neither fiscal elements nor fiscal motives will prevent what in substance is a trading transaction from ranking as such. On the other hand, if the greater part of the transaction is explicable only on fiscal grounds, the mere presence of elements of trading will not suffice to translate the transaction into the realm of trading. In particular, if what is erected is predominantly an artificial structure, remote from trading and fashioned so as to secure a tax advantage, the mere presence in that structure of certain elements which by themselves could fairly be described as trading will not cast the cloak of trade over the whole structure."
[68]Lord Simon of Glaisdale said (at 660):
"… a share-dealing which is palpably part of the trade of dealing in shares will not cease to be so merely because there is inherent in it an intention to obtain a fiscal advantage, or even if that intention conditions the form which such share-dealing takes; … what is in reality merely a device to secure a fiscal advantage will not become part of the trade of dealing in shares just because it is given the trappings normally associated with a share-dealing within the trade of dealing in shares; … if the appearance of the transaction leaves the matter in doubt, an examination of its paramount object will always be relevant and will generally be decisive …" 69. In Ensign Tankers (Leasing) Ltd v Stokes [1992] 1 AC 655, the issue was whether the taxpayer company was carrying on a trade for the purposes of capital allowances. The House of Lords rejected the view that if the sole object of a transaction was fiscal it could not be a trading transaction. Lord Templeman said (at 676-7): "
In the present case the commissioners felt bound to ignore all the fiscal consequences which are beneficial to the taxpayer company because Victory Partnership had entered into the scheme ‘with fiscal motives as the paramount object’. Similarly, in the view of Sir Nicolas Browne-Wilkinson V.-C., the taxpayer is deprived of all the beneficial effects of the scheme if the scheme was entered into ‘essentially for the purpose of obtaining a fiscal advantage under the guise of a commercial transaction:’ [1991] 1 W.L.R. 341, 357. In the view of Sir Nicolas Browne-Wilkinson V.-C., expressed at p. 355:
‘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 … if the commissioners find as a fact only that the paramount intention was fiscal advantage … 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.’
My Lords, I do not consider that the commissioners or the courts are competent or obliged to decide whether there was a sole object or paramount intention nor to weigh fiscal intentions against non-fiscal elements." 70. In Overseas Containers (Finance) Ltd v Stoker [1989] 1 WLR 606 (C.A.), Sir Nicolas Browne-Wilkinson V-C had also said (at 613):
"If … the sole (and I emphasise the word ‘sole’) purpose of a transaction is to obtain a fiscal advantage, it is logically impossible to postulate the existence of any commercial purpose."
In Ensign Tankers (Leasing) Ltd v Stokes Lord Templeman approved at least the result in that case (at 679-680)):
" … a parent company, anticipating losses on capital account in respect of loans repayable in German currency formed the taxpayer company as a finance company which took over the loans, sustained the losses and claimed to deduct the loans for the purposes of corporation tax. The commissioners, Vinelott J [1987] 1 W.L.R. 1521 and the Court of Appeal [1989] 1 W.L.R. 606 held that the acquisition of the loans by the financing company was not a trading transaction. Vinelott J said [1987] 1 WLR 1521, 1530: ‘The only purpose of the interposition of the taxpayer company was to transmute the base metal of an exchange loss on capital account into the pure gold of a revenue loss. A transaction designed to achieve that fiscal alchemy is not a trading transaction.’ "

Groups of companies

[71]Section 173(1) of the TCGA 1992 is ex hypothesi concerned with groups of companies, and so the group relationship itself cannot de-nature the transaction, but that does not mean it should be ignored. In Overseas Containers (Finance) Ltd v Stoker [1989] 1 WLR 606 (CA) (which was not a case on these sections, but was concerned with whether the activity was trading activity) it was held that it would be wrong to look at the individual company without regard to the group. Sir Nicolas Browne-Wilkinson VC said (at 614-5):
"When, as in the present case, there are a number of associated companies, is the relevant purpose that of the individual company (the taxpayer company) viewed in isolation or the purpose of the group as a whole? Is the whole scheme to be looked at or only that part of it in which the taxpayer company is a direct participant? … I have no doubt that in such a case regard has to be had both to the overall fiscal purpose of the group and the impact of its implementation on the group. In Coates v. Arndale Properties Ltd [1984] 1 W.L.R. 537, the taxpayer dealer company bought property at market value and sold at a small profit: viewed in isolation, therefore, it was dealing in property with a view to profit, a trading transaction. Yet the House of Lords held that the taxpayer company did not acquire the property as trading stock because the transaction was only entered into as part of the tax scheme of the whole group: the purpose was that of the group and the advantage accrued to the group. In Lupton v. F.A. and A.B. Ltd [1972] A.C. 634 Viscount Dilhorne, at p. 657, looked at the transaction ‘viewed as a whole’, i.e. not simply at the specific transactions in question: see also per Lord Simon of Glaisdale, at p. 660."
[72]Even if the decision is no longer good law on the relevance of fiscal motive, the decision, and the cases to which it refers, show that the transaction must be looked at in the light of the circumstances as a whole.

Coates v Arndale Properties Ltd [1984] 1 WLR 1328

[73]This is the first of the cases on the legislation in question on this appeal. It was a case on the Income and Corporation Taxes Act 1970, section 274(1) ("ICTA 1970"), which is equivalent to section 173(1) of the TCGA 1992. Town and City Properties was the parent company. One of its subsidiaries, SPI, was a property developer which incurred a loss of £2.2 on the development of a site in Newport which it had leased. The development cost £5.3m and the value of the lease was £3.1m. Another subsidiary, Arndale, was a property dealer.[74]There were sound commercial reasons for converting the potential capital loss of SPI into a trading loss suffered by Arndale. In 1973 SPI assigned the lease to Arndale for £3,090,000. The object was to enable Arndale to convert the capital loss into a trading loss to be available to all members of the group. On the same day Arndale assigned the lease to a third subsidiary, APTL, an investment company for £3.1m, so that(a) Arndale could complete the conversion into a trading loss and distribute it and(b) the lease remained a capital asset of the group.[75]It was held that Arndale never decided to acquire, and never did acquire, the lease as trading stock:(a) the group’s advisers procured the transfer of the lease to Arndale and then to APTL with the object of obtaining group relief of £2.2m without in fact changing the lease from a capital asset to a trading asset;(b) the group was seeking the advantage of treating the lease as trading stock while ensuring that the group retained the lease as a capital asset at all times;(c) Arndale followed instructions and lent to the transaction its name and its description as a property dealing company;(d) Arndale did not trade and had no intention of trading with the lease;(e) Arndale was awarded £10,000 to give the transaction a faint air of commercial verisimilitude, ostensibly at the expense of APTL but in reality at the expense of SPI which sold for £10,000 below the market value;(f) the profit of £10,000 was a "timid veil designed to conceal the fact that the lease was not being traded", and was a book entry which had no material effect on the overall financial position of the group[76]Accordingly, the property dealing company did not acquire the lease as trading stock. The legislation allowed a potential capital loss to be converted into a trading loss in respect of an asset which becomes part of the trading assets of the group. The lease never became part of the trading assets of any company in the group.[77]Lord Templeman said ([1984] 1 WLR 1328 at 1332-3):
"The conversion of a potential capital loss into a trading loss for corporation tax purposes and the distribution of the benefit of that trading loss by way of group relief cannot however be achieved unless an asset is transferred from a non-trading member of the group to a trading member and is acquired by the trading member as "trading stock" of the business carried on by the trading member. If this were not the case the practical distinction between chargeable gains and profits for the purposes of calculation of corporation tax could be largely eliminated by including at least one trading company in a group. The extent to which such distinction is desirable is not a matter for present discussion. For the conversion of a capital loss into a trading loss it must be shown that a capital asset has been appropriated as trading stock. 76. "
In my opinion Arndale never decided to acquire and never did acquire the lease as trading stock. The group’s advisers procured the transfer of the lease from SPI to Arndale and from Arndale to APTL with the object of obtaining group relief of £2,2 million trading loss without in fact changing the lease from a capital asset to a trading asset. The group seeks the advantage of treating the lease as trading stock while ensuring that the group retains the lease as a capital asset at all times. Arndale followed instructions and lent to the transaction its name and its description as a property-dealing company. Arndale did not trade and never had any intention of trading with the lease. In order to give the whole transaction a faint air of commercial verisimilitude, the trading company Arndale was awarded the modest sum of £10,000 for entering into two assignments of property worth over £3 million. The award of £10,000 was ostensibly made at the expense of APTL which paid Arndale for the lease £10,000 more than the price paid by Arndale to SPI. In reality the award of £10,000 was made at the expense of SPI which sold for £10,000 did not represent the difference between the price at which Arndale negotiated the purchase and the price at which Arndale negotiated the sale. The profit of £10,000 did not represent the difference between the value of the lease to SPI and the value of the lease to APTL. The profit of £10,000 was a timid veil designed to conceal the fact that the lease was not being traded. Moreover, all three companies being wholly owned subsidiaries of the same parent, the £10,000 was a book entry which had not material effect on the overall financial position of the group."[78]It was unnecessary to consider the application of IRC v. Burmah Oil Co Ltd [1982] STC 30 and Furniss v Dawson [1984] AC 474 to a case where the legislature had made express provision for the mitigation of tax by the conversion of a capital loss into a trading loss provided certain conditions were fulfilled:
"In the present case the legislature has expressly provided a method of tax mitigation designed no doubt to ensure that a group of companies is in no worse position than an individual whose activities embrace all the activities of a group of companies. The taxing statutes allow a potential capital loss to be converted into a trading loss in respect of an asset which becomes part of the stock-in-trade of the trading activities of the group."
(pp 1333-4)[79]The ratio of this decision is that Arndale did not trade and had no intention of trading with the lease, and merely lent its name to the transaction. The profit was a "timid veil." The fact that the sole purpose was tax mitigation was not decisive. In Reed v Nova Securities Ltd [1985] 1 WLR 193, 200, Lord Templeman said that the scheme ensured that the lease was never traded, and so Arndale did not acquire the lease as trading stock. In Ensign Tankers (Leasing) Ltd v Stokes [1992] 1 AC at 679, Lord Templeman said that Arndale did not acquire the lease as trading stock, because the assignments had no commercial justification, and only transferred a capital asset from the first member of the group to the third member of the group via the second member in order to convert group capital into income temporarily; on a true analysis the taxpayer did not trade at all. Sir Nicolas Browne-Wilkinson V-C’s view (expressed in Overseas Containers at 613 and in the Court of Appeal in Ensign Tankers [1991] 1 WLR at 356) was that the ratio was that a transaction was not trading if the sole object was to obtain a fiscal advantage. That view cannot stand in the light of Ensign Tankers (Leasing) Ltd v Stokes [1992] 1 AC 655.

Reed v Nova Securities Ltd [1985] 1 WLR 193

[80]This was also a case under s 274(1) of ICTA 1970, and argument was heard at the same time as Coates v Arndale Properties Ltd. But judgment was delivered some months later, after further argument.[81]Littlewoods had had a disastrous business venture in West Germany. It bought the share capital of Medaillon Mode GmbH for about £1.5m, and guaranteed its overdrafts. When it was called on under the guarantees it paid the banks and took an assignment of Medaillon’s debts to the banks, and the acquisition costs of the debts was about £2.4m. It also lost a further £4.8m in advances to Medaillon. The losses of £1.5m on the shares and £2.4m on the debts could only be set off against capital gains (if any) made by Littlewoods, and could not be transferred within the Littlewoods group.[82]Nova was a company which had traded in shares "in a small way" ([1984] 1 WLR 537 at 547, per Lawton LJ) since 1955. It made a profit on the tax year to April 5, 1973 of about £1,000 on a turnover of £20,000. It was acquired by Littlewoods, as Lord Templeman said (at 197) "with the object, no doubt, of converting their allowable losses into trading losses available for group relief."[83]In August 1973 Littlewoods offered to sell to Nova (whose board of three by then contained two directors who were also directors of Littlewoods) the Medaillon shares and the book debts for £30,000. The offer letter held out the prospect that the sale of a property in Germany owned by Medaillon might produce some £55,000 towards payment of the book debts.[84]The shares were transferred to Nova for the apportioned price of £10 and the book debts for the balance of £29,990. As a result Littlewoods sustained a capital loss of some £1.5m on the shares and £2.4m on the book debts.[85]If Nova, as a trading company, acquired the shares and bank debts as trading stock then it became in a position to convert the potential allowable loss into a trading loss under section 274(1) by electing to treat it as a trading loss. By the Finance Act 1965, schedule 7, para 1(1) (equivalent to section 161(1) of the TCGA 1992) Nova would be deemed to have sold the shares and debts for £30,000 having acquired them for £3.9m, thus sustaining a loss of almost the whole amount. Nova made the election. It subsequently surrendered its trading loss to other members of the group.[86]In October 1979 Nova received on the sale of the German premises about £35,000 towards payment of the debts. It therefore made a very small profit on the acquisition of the debts.[87]The issue whether the shares and debts had been acquired as trading stock was referred to the General Commissioners. The General Commissioners found in their stated case that the shares and debts were acquired by Nova in the course of its trading in shares and securities and were acquired as trading stock, and stated the question for the court as being whether the decision was justified on the evidence before them.[88]The issue was determined on the basis of an agreed statement of facts, which did not deal with the reasons and intentions of Littlewoods and Nova and as to the possibility of trading with the assets acquired by Nova. Both Lord Templeman criticised the Revenue’s approach, and Lord Bridge said that oral evidence might have elicited material to support Lawton LJ’s conclusion of fact. Lawton LJ had considered that the commissioners had failed to look at the transaction as a whole, and that if they had done so they could not reasonably have come to the conclusion that Nova had acquired the debts and shares as trading stock: the transaction was abnormal; the circumstances in which the agreement was made were not those of normal trading.[89]The issue in the courts, and ultimately in the House of Lords, was whether the General Commissioners could reasonably have come to the view that the shares and debts were acquired as trading stock.[90]Lord Templeman accepted ([1985] 1 WLR at 199) that the onus of proving that the assets were acquired as trading stock lay with the taxpayer. He agreed with the unanimous view of the Court of Appeal that property could only be acquired as trading stock if it was acquired for the purpose of being used in the course of trade. The asset must not only be of a kind which is sold in the ordinary course of the company’s trade "but must also be acquired for the purposes of that trade with a view to resale at a profit. A company which acquired an asset for purposes other than trading would not … acquire the asset as trading stock even though the company habitually traded in similar assets." (at 200)[91]Parliament had conferred on a group of companies power to convert an allowable loss into a trading loss which could then be shuffled to secure a tax advantage. The only requirement was that there must be an acquisition by a trading company "as trading stock."[92]As regards the transfer of the debts, Lord Templeman did not feel that he could interfere with the decision of the General Commissioners as a decision which no reasonable tribunal could have come to. The debts were worth £55,000, and £30,000 had been paid. He said (at 202):
"It is conceivable that Nova might have decided to acquire similar bank debts from a source unconnected with the group and in the hope of making a profit either by waiting until the realisation of the debts or by resale."
But different considerations applied, however, to the Medaillon shares: "Medaillon’s assets were valued at not more than £200,000. Medaillon’s debts amounted to £8.7m. The shares were worthless. There was no commercial justification for the acquisition of the shares by Nova. There was no conceivable reason, apart from section 274, why the shares should change hands at all. In my opinion no reasonable tribunal could have concluded that the shares were acquired by Nova as trading stock." (ibid) In Ensign Tankers Lord Templeman said ([1992] 1 AC at 679) in relation to Reed that there was no commercial justification for the acquisition of the book debts[93]But the shares were different, since the shares were worthless and there was no "commercial justification" or "conceivable reason" (at 202) for their acquisition, and no reasonable tribunal could have concluded that the shares were acquired as trading stock. They were not commercially saleable at any price.[94]In Ensign Tankers Lord Templeman said ([1992] 1 AC at 679) in relation to Reed that there was no commercial justification for the acquisition of the book debts, but none for the acquisition of the shares: there was a tax avoidance motive in both transactions, but this did not prevent the taxpayer from claiming and proving that the book debts had been acquired and disposed of as trading stock. In Reed (at 197) he said that the acquisition of Nova was made with the object of converting their losses into trading losses available for group relief.[95]For the sake of completeness I should also mention that in Overseas Tankers ([1989] 1 WLR at 613) Sir Nicolas Browne-Wilkinson V-C said that in the case of the bank debts in Reed the company could have had a commercial purpose and therefore the House of Lords did not disturb the finding of the commissioners that it was a trading transaction notwithstanding the obvious fact that the transaction also had the purpose of obtaining a fiscal advantage, but the share transaction had no possible commercial purpose and therefore the House of Lords held that the only possible conclusion was that they had not been acquired as trading stock. In Ensign Tankers ([1991] 1 WLR 341 356 he said that it was manifest that both the Court of Appeal and the House of Lords considered that if the objective was primarily to obtain a fiscal advantage, the commissioners could properly have found that the transaction was not trading despite the possibility of profit. As I have indicated (para 76 above) I do not think that this explanation can stand with the decision of the House of Lords in Ensign Tankers.[96]But I do not consider that these decisions are authority for the proposition (as the Appellant contends) that a transaction which is entered into with a view to profit or which has some commercial justification will necessarily qualify. In Coates v. Arndale Properties Ltd Lord Templeman referred to the profit of £10,000 being a timid veil. In Reed v. Nova Securities Ltd he referred to the requirement that the stock must be acquired for the purposes of that trade with a view to resale at a profit, and it was held that the debts had been acquired as trading stock because it was conceivable that Nova might have decided to acquire similar bank debts from a source unconnected with the group and in the hope of making a profit. In Reed the shares did not qualify because they were worthless and there was no commercial justification or conceivable reason for their purchase, and in Ensign Tankers (Leasing) Ltd v Stokes Lord Templeman said that Arndale did not acquire the lease as trading stock, because the assignments had no commercial justification. In my judgment he was not doing more than confirming that the view to profit and the presence of commercial justification were relevant factors. The cases do not decide that they are sufficient factors.[97]To summarise the legal principles:(1) Parliament has conferred on a group of companies power to convert an allowable loss into a trading loss which could then be shuffled to secure a tax advantage. The only requirement was that there must be an acquisition by a trading company "as trading stock": Reed v Nova Securities Ltd [1985] 1 WLR 193, 202. The onus is on the taxpayer to show that the property was acquired as trading stock: ibid. at 199.(2) Fiscal motive (even if it is the sole or paramount motive) will not de-nature what would otherwise be a commercial transaction: especially Ensign Tankers (Leasing) Ltd v Stokes [1992] 1 AC 655, at 676-7; Reed v Nova Securities Ltd. at 197, 202.(3) But if the essence of the transaction is explicable only on fiscal grounds, then the mere presence of trading elements will not turn it into a trading transaction: Lupton (Inspector of Taxes) v F A & A B Ltd [1972] AC 634. Some transactions may be so affected or inspired by fiscal considerations that the shape and character of the transaction is no longer that of a trading transaction: ibid; Coates v. Arndale Properties Ltd. [1984] 1 WLR 1328 at 1333.(4) For this purpose, it is necessary to look at the transaction as a whole: Coates v. Arndale Properties Ltd at 1332-3; Overseas Containers (Finance) Ltd v Stoker [1989] 1 WLR 606 at 614-5.(5) The transaction, to qualify, must have some commercial justification or conceivable reason: Coates v Arndale Properties Ltd at 1332-3; Reed v Nova Securities Ltd at 202; Ensign Tankers (Leasing) Ltd v Stokes at 679.(6) The asset must not only be of a kind which is sold in the ordinary course of the company’s trade but must also be acquired for the purposes of that trade with a view to resale at a genuine profit: Coates v. Arndale Properties Ltd at 1332-3; Reed v Nova Securities Ltd at 200, 202; Ensign Tankers (Leasing) Ltd v Stokes at 679.(7) Whether the circumstances of the transaction are normal is relevant, and in cases of doubt the taxpayer should be required to prove its case by evidence: Reed v Nova Securities Ltd. at 195, 199.(8) Whether there is a profit in the transaction, or whether it has a commercial justification, are important elements in determining whether the transaction is a commercial one. If there is no profit or no commercial justification, then the acquisition will not normally be of trading stock. But the fact that there is a profit, or the fact that there may be some "conceivable reason" for the transaction does not necessarily mean that it was acquired as trading stock.(9) What is trading, or what is trading stock, is a matter of fact for the General or Special Commissioners, and their conclusion is only subject to review in accordance with the principles in Edwards v Bairstow [1956] AC 14 (itself a case on whether a transaction was an adventure in the nature of trade).

VIII Conclusions

[98]The question is whether the Special Commissioners correctly directed themselves in law, and whether their findings of fact can be interfered with in accordance with familiar principles.[99]I am satisfied that the Special Commissioners directed themselves correctly in law. Their starting point was that the Revenue could not complain if the taxpayer made use of an opportunity given by Parliament, or that its purpose was to save tax or whether it acquired the Properties for tax reasons. The issue was simply whether the Appellant acquired the Properties as trading stock.[100]In deciding that question, it was entitled to look at the group as a whole. It came to the conclusion on the facts that nothing happened except the Appellant’s acquisition of the Properties, and they were "unable to detect any change." The Appellant continued to realise the Properties held by the vendor companies as capital assets in exactly the same way as the vendor companies had done, and the Appellant was merely a vehicle through which the existing investment companies sold the Properties as investments. The Appellant did not have any independent purpose in disposing of the Properties. A commercial person knowing all the facts would not say that the Appellant had acquired the Properties as trading stock. He would say that nothing had really changed and they continued to be held as investment properties.[101]In my judgment these findings have to be read in the light of the very important findings to which I refer in paragraphs 26-30. The first was that not only was the transaction driven by tax considerations but that it was deliberately dressed up as a commercial transaction by documents which were designed to indicate (contrary to the facts)(a) that the Ladbroke group had just decided to wind down its property investments (when in fact the decision had been taken in 1994);(b) that the Appellant had decided to expand its dealing activity;(c) that the Appellant had approached the vendors to buy the Properties; and(d) that the Appellant had special property dealing expertise. The second matter which the Special Commissioners were entitled to take into account was the fact that the claimed commercial justification was to transfer the risk of holding the properties to the Appellant. On this they found that Mr Taljaard was prevaricating and they rejected his evidence that that was a purpose. There is no reason to disturb any of their findings of fact (despite some suggestion to that effect on behalf of the Appellant). There was evidence to justify their conclusion that the acquisition was not of trading stock, even though the transaction was designed to provide, and did provide, some profit for the Appellant. In substance they decided that, on the facts of this case, nothing happened except that the name of the Appellant was lent to the sales of the Properties, and that the Ladbroke group created a paper trail to give the impression that it had entered into a genuine transaction to purchase the Properties.[102]I therefore dismiss the appeal.