Beacon Estates (Chepstow) Ltd v Revenue & Customs [2014] UKFTT 686 (TC)

FTT-Tax
Beacon Estates (Chepstow) Ltd v Revenue & Customs
[2014] UKFTT 686 (TC) · 2014-07-16
[66]“66. … it was argued by HMRC that the appeals ought to be dismissed because there was no reasonable expectation of gain in the trade carried on by GFC at any relevant time, that is, at the end of GFC’s February 2008 Period and in GFC’s September 2008 Period and GFC’s 2009 Period.[67]That argument addresses the test set out in section 393A(4)(a) ICTA, where it is stated that, for the purposes of section 393A(3), where at any time a trade is carried on so as to afford a reasonable expectation of gain, it shall be treated as being carried on at that time with a view to the realisation of gain.[68]The argument does not however address the question directly posed by section 393A(3) – if it is a different question – namely, whether the trade was being carried on with a view to the realisation of gain in the trade.[69]That would be a different question if the view was taken – as a matter of interpretation – that section 393A(4)(a) added a further test for the relief of losses to that provided by section 393A(3), namely that even if a trade was not being carried on with a view to the realisation of gain in the trade, losses could be relieved if it was being carried on so as to afford a reasonable expectation of gain.[70]Considering only the statutory language, we regard this as a tenable interpretation, so that there would be two routes to the relief of losses, the first being that a company’s trade was actually being carried on with a view to the realisation of gain – which would be a matter of establishing the subjective intentions of the directors, and the second being that the trade was being carried on so as to afford a reasonable expectation of gain – which would be a matter of establishing the objective circumstances in which the trade was being carried on.[71]However, the result of such an interpretation would be that losses would be relieved if a trade was not (objectively) being carried on so as to afford a reasonable expectation of gain, provided that it was (subjectively) being carried on with a view to the realisation of gain in the trade. On the whole, we regard this as being a perverse result and probably not in accordance with the intention of Parliament when the legislation was enacted. Construing the legislation purposively, we disregard it.[72]We prefer the interpretation, effectively that addressed by HMRC’s submissions, that section 393A(4)(a) applies to clarify the test in section 393A(3)(b), so that the test there stated – ‘carried on with a view to the realisation of gain in the trade’ – means ‘carried on so as to afford a reasonable expectation of gain in the trade’.[73]….[74]Another point which occurs to us on the statutory language, which was not addressed at any length by the parties in submissions, is the evident requirement that a gain of which there is, for the purposes of section 393A(4)(a) ICTA, a reasonable expectation, must be a gain in the same trade as the trade in which the losses, which are sought to be relieved, have been incurred. ” 15. In MacDonald (Inspector of Taxes) v Dextra Accessories Ltd and others [2005] STC 1111 , the House Lords considered the interpretation of s 43(11)(a) Finance Act 1989 which extended the rule on non-deductibility to “potential emoluments” which were defined as “amounts or benefits … held … with a view to their becoming relevant emoluments”. Lord Hoffman (with whom Lords Nicholls, Hope, Scott and Walker agreed) said, in relation to “with a view”:[13]“13. “The Special Commissioners (Dr John F Avery Jones and Edward Sadler) [2002] STC (SCD) 413 rejected the Revenue's argument. They said that funds were held "with a view to becoming relevant emoluments" only if the purpose of the contributing company was that they should be used to pay emoluments. In this case, the terms of the trust deed showed that the contributing companies had other purposes as well.[14]On appeal, Neuberger J [2003] EWHC 872 (Ch); [2003] STC 749 upheld the Special Commissioners. He did not agree that the purpose for which the companies made the payments was decisive. The question was whether they were held by the intermediary, the trustee, with a view to becoming relevant emoluments. That depended primarily upon the terms of the trust, read against the surrounding circumstances, rather than the purposes of the contributors. Nor did he agree that the exclusive purpose had to be the payment of emoluments. But he said that it had to be the principal or dominant intention of the trust. On the facts, the trust deed did not demonstrate such an intention.[15]The Court of Appeal (Potter and Jonathan Parker LJJ and Charles J) [2004] EWCA Civ 22 ; [2004] STC 339 accepted the submissions of the Revenue and allowed the appeal. Jonathan Parker LJ said, first, that if Parliament had intended that the funds should be held, as the Special Commissioners thought, for the sole purpose of paying emoluments, or as Neuberger J thought, with the principal or dominant intention of paying emoluments, Parliament would no doubt have used such expressions, which are by no means unfamiliar in tax legislation. Furthermore, the notion of the trustees having an intention, dominant or otherwise, in respect of the use of the fund in advance of an occasion to exercise their discretionary powers would be artificial and possibly unlawful. Their only intention would be to act (if at all) within the powers conferred by the deed. So the question must be answered solely by reference to the terms of the deed, construed no doubt in the light of any relevant background.[16]Secondly, Jonathan Parker LJ pointed out that the subsection is concerned with what may happen in the future, rather than (as in some other statutes which used the expression "with a view to") an examination of the reasons, motives or purposes with which some action was done in the past. That element of futurity, combined with the statutory label "potential" emoluments, suggested that Parliament was concerned simply with what might realistically happen.[17]The Court of Appeal therefore decided that the funds were held with a view to becoming relevant emoluments if they were held on terms which allowed a realistic possibility that they would become relevant emoluments.[18]I agree with the Court of Appeal, largely for the reasons given by Jonathan Parker LJ. …” 16. Following the tax law re-write project, legislation relating to corporation tax was consolidated in the Corporation Tax Act 2010 (“CTA”) albeit with the replacement of what was perceived to be archaic language and impenetrable terminology with its modern equivalents. However, despite the different language, as consolidating legislation, the CTA does not change to law. 17. Section 44 CTA, which applies for accounting periods ended after 1 April 2010, provides:(1) Relief under section 37 [relief for trade losses against total profits] is not available for a loss made in a trade unless for the loss-making period (see section 37(3)( a )) the trade is carried on— (a) on a commercial basis, and (b) with a view to the making of a profit in the trade or so as to afford a reasonable expectation of making such a profit. 18. In the present case s 393A ICTA applies to the accounting periods ended 31 March 2009 and 2010 and s 44 CTA to the accounting periods ended 31 March 2011 and 2012. Issue 19. HMRC accept that in this case the Company did carry on the yacht chartering business on a commercial basis between 1 April 2008 and 31 March 2012. 20. Therefore, the issue for us to determine is whether this business was undertaken with a view to making a profit or so as to afford a reasonable expectation of making such a profit so that any loss arising as a result of the chartering activities will be available for relief against profits arising from the other trading activities of the Company during this period. Submissions 21. Mr Whiscombe, for the Company, submitted that the legislation envisaged a two part test, namely that the trade must either subjectively be carried on with a view to making a profit or objectively carried on so as to afford the reasonable expectation of making a profit. 22. Although such an approach had been described by the Tribunal in Glapwell as a “tenable interpretation” of s 393A ICTA it went on to reject such an interpretation, at [71], as “perverse”. However, Mr Whiscombe contended that by conflating these alternative tests the Tribunal in Glapwell had wrongly interpreted the legislation and, as such should not be followed. He submitted that this was clear from s 44 of the CTA which, as a consolidating Act, did not change the law but provides for relief of losses where the trade is carried on “with a view to the making of a profit in the trade or so as to afford a reasonable expectation of making such a profit” (emphasis added) which clearly envisaged two tests, if this were not the case he submitted “and” rather than “or” would have been used in the section. 23. Given that the legislation before the House of Lords in Dextra , like that before us in the present case, concerned what may happen in the future Mr Whiscombe suggested that it was appropriate for us to adopt the same approach and interpret “with a view” to mean “allow a realistic possibility” or “what might realistically happen”. If so he contended that, despite its earlier losses which could be explained by the engine failure, the time taken for repairs, the ongoing litigation with the engine manufacturers not to mention the economic crisis of 2008 and subsequent global recession, the Company did have a realistic possibility of making a profit in the yacht chartering trade. Alternatively it had a reasonable expectation of making such a profit and emphasised that the legislation did not impose a time limit by which the Company was required to make the trade profitable. 24. Mr Foxwell, for HMRC, accepted that there was no time limit for the trade to return a profit but, applying the interpretation of the legislation as in in Glapwell which he submitted was correct, contended that in the present case the Company did not carry out its chartering activities so as to afford a reasonable expectation of the realisation of a gain or profit in the trade. 25. In support of his submission Mr Foxwell emphasised the losses suffered by the Company as a result of its chartering activities and submitted that had this not been supported by the Company’s other business interests but been operated as a stand-alone business it would have failed. In the circumstances he submitted that the Company could only have a reasonable expectation of the realisation of a gain or profit in the trade if it relied on the following unreasonable assumptions: (1) That Supertoy would require no further maintenance or upgrading;(2) That there would be a large increase in customers willing to charter the yacht in the busy market given the age of the vessel; and(3) That there would be no further unexpected economic shocks such as the 2008 banking crisis and subsequent global recession. Discussion and Conclusion 26. Like the Tribunal in Glapwell we first consider the interpretation of the legislation before analysing the evidence facts of the case and, as in Glapwell find the two part construction advanced by Mr Whiscombe to be a “tenable interpretation” of the statutory language. However, we share the concerns expressed at [71] of Glapwell that:
“… the result of such an interpretation would be that losses would be relieved if a trade was not (objectively) being carried on so as to afford a reasonable expectation of gain, provided that it was (subjectively) being carried on with a view to the realisation of gain in the trade.”
Although the Tribunal rejected this interpretation of s 393A(3) ICTA as “perverse result”, the observations of the House of Lords in relation to the expression “with a view” in Dextra , or indeed any other authority, were not brought to its attention. 27. As Mr Whiscombe submitted the legislation considered by the House of Lords in Dextra , s 43(11)(a) Finance Act 1989, like s 393A(3) ICTA and s 44 CTA is concerned with something that may happen in the future and we agree with him that it is appropriate for same approach to be applied in the present case so that “with a view” should be interpreted to mean “allow a realistic possibility” or “what might realistically happen.” In our judgment such an approach imports an objective element into whether the trade was carried on “with a view” to the realisation of gain or making a profit in the trade, something recognised by Mr Whiscombe who accepted that the “view” in question must be a reasonable one. 28. Therefore, although we consider that carried on “with a view” in the legislation should be construed as meaning “with a realistic possibility” to the realisation of gain (s 393A(3)(b) ICTA) or making a profit (s 44(1)(b) CTA) in the trade the result is similar to the “objective test” interpretation of s 393A(3)(b) ICTA by the Tribunal in Glapwell , at [72] (see above). 29. Before applying this test to the facts of the present case we note that the legislation does not impose any time limit for a profit to be achieved by the trade. Neither does the legislation require any profit to be sufficient to recover the losses made, only that there is a realistic possibility or reasonable expectation of a profit or gain being made. 30. In the present case the Company engaged agents, YBI to find a suitable vessel for chartering and, once Supertoy had been acquired and upgraded to full commercial charter status in compliance with French regulations, market and manage her for chartering. When YBI failed new agents, CSO Yachts, were engaged for this purpose. Given the need to comply with French regulations and the requirement to be always available and near at hand in relation to any issues that may arise as a result of a charter we consider the appointment of Mediterranean charter agents, rather than a hands-on approach by the Company, to make commercial sense. Clearly, as HMRC accept, this is a business carried on a commercial basis. 31. While there is no doubt that the chartering activities of the Company did incur significant losses both before and during the periods with which we are concerned, which may have caused a stand-alone yacht chartering business to fail, we find that there are reasonable explanations for these losses which include the re-fitting of the yacht to bring her up to the requisite standard for commercial chartering, the “catastrophic” engine failure and subsequent problems arising as a result including the ongoing litigation and the effect of the banking crisis of 2008 and worldwide recession on the Mediterranean yacht chartering market. 32. However, the issue posed by the legislation does not require us to consider previous losses but whether there is a realistic possibility or reasonable expectation of the Company making a profit or gain from its chartering activities in the future. After careful consideration, we have come to the conclusion that there is. Charters have been agreed for 2014 and the yacht, which meets the regulations for commercial motor yachts, is marketed and managed through professional charter agents. 33. For these reasons the appeal is allowed Right to Apply for Permission to Appeal 34. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. JOHN BROOKS TRIBUNAL JUDGE RELEASE DATE: 16 July 2014