The High Court held that a company was entitled to small companies’ relief since, on the facts, the special commissioner was entitled to conclude that an associated company was not carrying on a trade or business when it ceased trading although it continued to receive rent from its former business premises.

Facts

The taxpayer and three other companies were under the control of R within the meaning of ICTA 1988, s. 416 and were treated as associated with one another for the purposes of small companies’ relief from corporation tax under ICTA 1988, s. 13 and for the purposes of the payment of corporation tax by instalments.

The taxpayer and two of the other companies were private limited companies registered in England and Wales. The fourth company (‘MML’) was a private limited company registered in Scotland. All were resident, for tax purposes, in the UK.

In determining for a company the profit limits for small companies’ relief and payment of corporation tax by instalments, the number of companies which were associated with one another was material; but a given company was to be excluded from the number of companies which were associated with one another in any accounting period if the relevant company had not carried on any trade or business at any time in that period (ICTA 1988, s. 13(4)).

For many years until 1966, MML carried on the trade of making personal loans from its premises in Glasgow. MML owned the Scottish equivalent of the freehold of those premises and its trade of making personal loans was licensed under the Consumer Credit legislation. In 1966, MML vacated the premises and let them to a tenant. At the same time, MML moved to new premises (which it leased) and continued to carry on its trade from those new premises. MML shared those premises with the taxpayer. MML carried on its trade of making personal loans until 30 November 1995 when it ceased trading.

In the year ended 31 July 1996 MML surrendered its licence under the Consumer Credit Act, and MML and the taxpayer vacated the new premises. MML continued to own its old premises from which it received a net rental income twice a year.

The taxpayer appealed against the refusal of a claim for small companies’ relief from corporation tax on the basis that MML, as an associated company, carried on a trade or business in the years ended 31 July 1998 to 2001. The special commissioner allowed the appeal in principle. He concluded that the issue was one of fact and in all the circumstances, in each of the relevant years MML did not carry on an investment (or any other) business. The letting was the continuation of the letting of former trading premises, a state of affairs that had continued for nearly 30 years while MML was trading, and which merely continued after the cessation of trading (American Leaf Blending Co Sdn Bhd v Director General of Inland Revenue [1979] AC 676, Jowett (HMIT) v O'Neill & Brennan Construction Ltd [1998] BTC 133 and Land Management Ltd v Fox (2002) Sp C 306 considered) ((2005) Sp C 504). The Revenue appealed to the High Court contending that s. 13 contained a targeted anti-avoidance provision in that it sought to prevent abuse of the small companies’ relief provisions, which would otherwise be effected by spreading income between more than one company. Accordingly, s. 13 should be construed so as to give effect to the anti-avoidance purpose. The taxpayer argued that s. 13 was neither an anti-avoidance provision nor a targeted anti-avoidance rule. The section contained a scheme for charging companies which were ‘small’ in terms of profits to a lower rate of corporation tax: it was a relieving provision which operated by providing for reduced rates of corporation tax. Section 13(4) was itself a relieving provision designed to exclude from the division of relief a company which, though associated and possibly in receipt of income, did not carry on any trade or business.

Issue

Whether the special commissioner had acted without any evidence or upon a view of the facts which could not reasonably be entertained, or found facts such that no person acting judicially and properly instructed as to the law could have come.

Decision

Lawrence Collins J (dismissing the appeal) said that the question of whether MML carried on any business was a question of fact and the duty of the court was no more than to examine the facts found by the commissioners with a decent respect for the tribunal appealed from and, if the court thought that the only reasonable conclusion on the facts was inconsistent with the determination, to say so without more ado. The question was not whether the court would have come to the same conclusion on the facts.

Applying those tests, it was clear that the special commissioner had taken into account a number of factors which might have supported a conclusion that MML had carried on a business, including the fact that MML filed active accounts, the accounts described its principal activity as being ‘property investment’ and corporation tax returns showing profits chargeable under Sch. A were submitted by MML for each year.

There were no special rules of construction which would affect the result. ‘Rents’ might constitute income from a source consisting of a business; and would do if they were received in the course of carrying on a business of putting the taxpayer's property to profitable use by letting it out for rent. The special commissioner was entitled to come to the decision of fact that the rents did not come from a source which amounted to a business in this case (American Leaf Blending [1979] AC 683 referred to). It was clear from the decision in American Leaf that not every act of a kind which was authorised by the memorandum of association necessarily constituted the carrying on of a business. The fact that MML's memorandum permitted the letting of property did not, therefore, necessarily lead to the conclusion that MML had carried on a business. The special commissioner had properly considered the effect of MML's memorandum of association and correctly concluded that it was a relevant but not a determinative factor. Further the commissioner was entitled to take into account that the lettings of the premises took place in 1966 (over 30 years before the years under consideration) and, since cessation of the money lending trade in 1995, there had been nothing indicative of business in MML. The circumstance that MML's income derived from land rather than bank deposits did not inevitably mean that MML carried on business.

Schedule A.1(2) in ICTA 1988, s. 15(2) deemed transactions which led to the receipt of income from land in the UK to constitute a business for the purpose of the Sch. A charging provisions and related computational provisions. The deeming provisions of Sch. A had no bearing on the meaning of business in s. 13.

In all the circumstances, the special commissioner was entitled to come to the view on the facts that MML did not carry on an investment (or any other business). This was a case of a company left with former trading premises which it let out without any active participation or management. It was not in any sense an artificial arrangement to take advantage of the small companies’ rate.

Chancery Division. Judgment delivered 7 April 2006.