Simmons (as liquidator of Lionel Simmons Properties Ltd) v Inland Revenue Commissioners
[1980] 2 All ER 798(Judgment by: Lord Wilberforce)
Between: Simmons (as liquidator of Lionel Simmons Properties Ltd)
And: Inland Revenue Commissioners
Judges:
Lord WilberforceViscount Dilhorne
Lord Salmon
Lord Scarman
Lord Roskill
Subject References:
Income tax
Profits
Trading receipts
Land
Disposal
Taxpayer acquiring land for development
Acquisition for building up a portfolio of investments sufficient for the flotation of a public company
Sale of land in view of deterioration of business prospects
Whether surplus on sale taxable as taxpayer's trading receipts
Case References:
Cunliffe v Goodman - [1950] 1 All ER 720; [1950] 2 KB 237, CA; 31(2) Digest (Reissue) 641, 5217
Edwards (Inspector of Taxes) v Bairstow - [1955] 3 All ER 48; [1956] AC 14; [1955] 3 WLR 410; 36 Tax Cas 207; 34 ATC 198; [1955] TR 209; 48 R & IT 534, HL; 28(1) Digest (Reissue) 566, 2089
Sharkey (Inspector of Taxes) v Wernher - [1955] 3 All ER 493; [1956] AC 58; [1955] 3 WLR 671; 36 Tax Cas 275; 34 ATC 263; [1955] TR 277; 48 R & IT 739, HL; 28(1) Digest (Reissue) 123, 363
Judgment date: 19 June 1980
Judgment by:
Lord Wilberforce
My Lords, Lionel Simmons Properties Ltd ('LSP'), whose liquidator, Mr Lionel Simmons, is the appellant, is one of seven companies formed between 1957 and 1964 which constituted the Lionel Simmons group of companies. Assessments having been made of profits and gains to corporation tax (under Case 1 of Sch D) and 'shortfall' in distribution, five appeals were brought to the Special Commissioners on behalf of LSP and other companies in the group, namely Polewin Properties Investments Ltd ('Polewin'), Richhouse Properties Investments Ltd ('Richhouse'), Centre Town Development (Twickenham) Ltd ('Twickenham') and Centre Town Developments (Barnet) Ltd ('Barnet'). In 1967-69 these companies and two others sold nine blocks of offices and flats. As to two, no question arises, but as to the other seven the question was whether the transactions should be treated as sales of trading stock or as the sales of permanent investments giving rise to a surplus on capital account. Before the Special Commissioners the arguments seem to have been on the basis that all these transactions should be treated in the same way so that the surpluses should all be regarded as trading receipts or all as capital receipts. The Special Commissioners, however, decided that three (by Polewin and Richhouse) should be treated as sales of investments, and four (namely two involving LSP and one each of Twickenham and Barnet) as sales of trading stock. The liquidator appealed to the High Court by way of case stated in respect of the latter and his appeals were allowed by Goulding J ([1978] STC 344). But the judge's decision was reversed by the Court of Appeal ([1979] STC 471). The liquidator further appeals to this House and the present is his appeal as liquidator of Lionel Simmons Properties Ltd. Appeals in respect of Twickenham and Barnet have been held over.
The facts as regards the whole of the Lionel Simmons group are set out in full detail in the cases stated (see [1978] STC 344 at 345-354). There is no question here of overruling, or disregarding, the Special Commissioners' findings of the primary facts. These, which involve the formation and history of each of the companies, the purchase, development and sale of the properties, are accurately and clearly stated. Nor is this, in my opinion, a case in which it is possible to say that the commissioners have reached a decision which no reasonable body of commissioners could have reached, and so have erred in law (cf Edwards (Inspector of Taxes) v Bairstow [1955] 3 All ER 48, [1956] AC 14, a case itself concerned with 'trading'). Nor I think is this a case which calls for discussion whether the conclusions which the commissioners have reached are themselves findings of secondary facts, or inferences from primary facts: many cases involving the question whether or not there is a trade do so and often there are difficult lines to be drawn.
What I think has to be considered here is, rather, precisely what the commissioners have found as to the companies' intentions, and whether their findings are consistent or intelligible. I do this with, I hope, a proper appreciation of the commissioners' presentation, and a disposition to uphold any decision of theirs on factual matters if I can properly do so.
One must ask, first, what the commissioners were required or entitled to find. Trading requires an intention to trade; normally the question to be asked is whether this intention existed at the time of the acquisition of the asset. Was it acquired with the intention of disposing of it at a profit, or was it acquired as a permanent investment? Often it is necessary to ask further questions: a permanent investment may be sold in order to acquire another investment thought to be more satisfactory; that does not involve an operation of trade, whether the first investment is sold at a profit or at a loss. Intentions may be changed. What was first an investment may be put into the trading stock, and, I suppose, vice versa. If findings of this kind are to be made precision is required, since a shift of an asset from one category to another will involve changes in the company's accounts, and, possibly, a liability to tax (cf Sharkey (Inspector of Taxes) v Wernher [1955] 3 All ER 493, [1956] AC 58). What I think is not possible is for an asset to be both trading stock and permanent investment at the same time, nor for it to possess an indeterminate status, neither trading stock nor permanent asset. It must be one or the other, even though, and this seems to me legitimate and intelligible, the company, in whatever character it acquires the asset, may reserve an intention to change its character. To do so would, in fact, amount to little more than making explicit what is necessarily implicit in all commercial operations, namely that situations are open to review.
I now approach the critical findings of the commissioners. It must be borne in mind that these were preceded by a very complete description of the history of the group which, summarily, amounted to this. Mr Simmons, a quantity surveyor, started his property operations in a very small way in the 1950s. About 1955 he came into contact with four brothers, Chung, wealthy Malayans, who were in London. With their participation he formed the seven companies from 1957 to 1964 and through them set about acquiring properties for development. All the companies, except one which was a trading company, were formed as property investment companies. In 1962 an association was formed with a publicly quoted company, Bishopsgate Property and General Investments Ltd ('Bishopsgate'), a company associated with Hambros Bank which specialised in bringing investment (but not trading) companies to the market, and by 1964 the association with the brothers Chung had virtually terminated. In 1965 adverse factors developed with the passing of the Rent Act 1965 and the Finance Act 1965 (introducing the capital gains tax), and the economic climate became unfavourable. On 27 October 1966 the decision in principle was taken to liquidate the group and to dispose of the properties. At this point, LSP, which had been incorporated in 1963 as a vehicle for going public with Bishopsgate's backing, had two properties. 153-155 East Barnet Road, Barnet, had been acquired in February 1964 and by April 1966 had been let as a whole for 21 years. 27 Greville Street had been acquired in May 1964 and building was completed in June 1965 but lettings had not been arranged. As regards the other two companies (their position is relevant for an understanding of the decision) Barnet had one property (Kingmaker House) which it was formed to and did acquire in October 1963 and completed, but not let, in March 1965, and Twickenham had one property (2 Holly Road, Twickenham) which it was formed to and did acquire in April 1963, completed in April 1964 and let by 24 June 1966. None of these companies had at any time acquired or sold any property other than those mentioned. All of these properties were acquired after the association with Bishopsgate had been arranged, and Bishopsgate, directly, or through LSP, had an interest in each company. By an agreement dated 4 October 1963 (inter alia) Mr Simmons agreed with Bishopsgate not to alter the memorandum or articles of association of LSP, Twickenham or Barnet, or to alter their business from that of property holding.
In the light of this situation, the commissioners came to their decision. I must reproduce the relevant passages ([1978] STC 344 at 355-356):
'We accept the evidence of Mr Simmons, Mr Phillips and Mr Spink, to the effect that the acquisitions with which they were respectively concerned were initially entered into primarily for the purposes of creating and retaining investments, and not primarily for the purposes of immediate sales after development. We also accept that the overall and eventual ambition or purpose of Mr Simmons personally was the flotation of a public company when sufficient and suitable investments had been gathered together. However, we do not think acceptance of that evidence is an end of the matter and automatically puts the eventual disposals into the category of non-trading.
'The pattern of Mr Simmons and his associates was to acquire and develop sites with a view to creating permanent investments, relying on short and long term loans for the various stages. From the early transactions of Polewin and Richhouse, and also from the latter transaction of Hampstead, it is evident that Mr Simmons was or had to be prepared to realise one development or part thereof before it became a completed investment, in order to find or conserve funds for another development which he thought had better prospects. It was not until at a late stage in the process, or until after completion of lettings, that he could be in a position to decide finally whether to retain or not. We find that the composite intention to be attributed to the group was to aim at building up a suitable portfolio of investments but to allow the final decision whether to retain to await on events.
'It was of the essence of [Mr Simmons'] case that the Minutes of LSP dated 27 October 1966 incorporating the decision to liquidate gave effect to change of intention, due to reversal of expectations which until then had been favourable. By that date the difficulties and problems facing the group were such that it had for some time appeared unlikely that the group could become suitable for public flotation, and the more advantageous course was to sell the group's properties. The decision to liquidate was in our view not inconsistent with the original aim-to create investments for retention where possible, or where not possible for turning to account by way of trade.
'On the above view of the facts it seems to us that the decision to liquidate only saves surpluses on properties which were retained, or likely to be retained, as investment before the liquidation was contemplated: It follows in our view that so far as the uncompleted investments are concerned the appeals of Barnet and LSP (in respect of 27 Greville Street) must fail, and we hold that the respective surpluses of £516,994 and £32,576 were trading profits.
'With regard to the appeals of Twickenham and LSP (in respect of East Barnet Road) the final lettings of the properties were completed approximately only one month and seven months before the formal decision to liquidate. That decision had been under consideration for some time previously, making the retention of the properties, which had not begun to produce any surpluses on income accounts, unlikely. In all the circumstances we regard the respective surpluses of £180,047 and £183,047 as trading profits, and we so hold.'
The Crown, naturally, relies strongly on the final sentence of the third paragraph. This they say is a finding of fact which ought not to be disturbed. If that is right, the appeal can be simply disposed of. But is it right? I must say that I cannot so read it. It does not profess, in itself, to be a finding as to the 'original aim'. Rather it assumes, as was the case, that the original aim has been established already, and is concerned merely to state that the decision to liquidate was not inconsistent with it. Had they, then, already found that the original aim was, as stated, to invest for retention where possible, or, where not, to trade? I cannot find this. The initial intention is stated as 'primarily for the purposes of creating and retaining investments' and 'not primarily for the purposes of immediate sales after development'. This is clear finding of an investment purpose, confirmed by the opening of the next paragraph. Mr Simmons, the commissioners proceed, 'was or had to be prepared to realise one development [meaning I think any one development] to find ... funds for another development', still quite clearly in the area of investment. In the latter part of the same paragraph it is said that, with the aim of building up an investment portfolio, the final decision might have to wait on events; very true, but far from a finding of an intention to trade. And again, as to the decision to liquidate, there is no finding that this involved a decision to trade; that would be a very odd finding indeed, and I find it neither expressed nor implied. So, when one reads this whole passage, and couples it with the record of each company formed as an investment company, in two cases to acquire a single property, associated with Bishopsgate, a company only interested in property investment and having an agreement that the investment status of each company would not be altered, acquiring one property only, in two cases, and in LSP's two properties, under what is called a primary intention to create and build up a portfolio, I can only ask where is the finding, or evidence, of a trading intention? If there was such an intention, when was it formed? On the decision to liquidate? But this did nothing more than put an end to Mr Simmons's investment plans. So I cannot avoid the conclusion that the reference to 'turning to account by way of trade' is inconsistent with the whole history and with the previous finding, and involves an assumption, per saltum, as to what had been found, not supported by the latter, and in any case not itself a finding of fact.
That this reference is illogical and ill-founded appears very clearly from what follows. This draws a line (not contended for by either side) between properties retained, or likely to be retained, as investments before the liquidation was contemplated, which are investments, and those which had not reached that stage, which are trading stock. But on what principle, or rationale, can this be based? It seems to presuppose that the properties remained, as it were, in the air, or in limbo, until development and letting was completed, and that if the portcullis of liquidation came down while they were in this state they became trading stock. This I find, with respect, incomprehensible. Before liquidation they must either have been investments or trading stock. If the latter, cadit quaestio, but that is not what is found. If the former, how was their status changed? Frustration of a plan for investment, which compels realisation, even if foreseen as a possibility, surely cannot give rise to an intention to trade. Finally, the distinction, as drawn, does not even fit the facts. For in the case of Twickenham and LSP (East Barnet Road) development and letting had been completed before the liquidation (see above). But they are found to have been trading, because retention was 'unlikely', a further gloss on a strange rationale.
My Lords, I regret to have to subject the reasoning of the Special Commissioners, over which they evidently took much trouble, to what may appear to be excessive analysis. I am less reluctant to differ from them because their solution was not contended for, or it seems, tested by argument. If it had been, some of the anomaly in it might well have appeared and suffered reduction. For myself, having read the whole of the case stated, and having, as they did, followed the history of the group, I find the position, though complicated, reasonably plain. Mr Simmons wanted to build up an investment portfolio: he formed investment companies, allied himself with an investment trust, caused each (relevant) company to acquire one property, or at most two properties, to develop and let it, and was forced into a realisation of these completed investments. This was simply a realisation of capital.
Finally as to the decision of the Court of Appeal, the judgment, delivered by Orr LJ contains a clear account of the facts, and, in my respectful opinion, a generally correct statement of the law. In particular, it is rightly recognised that a sale of an investment does not render its disposal a sale in the course of trade unless there has been a change of intention. They based their decision largely on a passage from the judgment of Asquith LJ in Cunliffe v Goodman [1950] 1 All ER 720, [1950] KB 237, which was concerned with the making by a landlord of a provisional, as contrasted with a conditional, decision. This they sought to apply to a very different situation, for there is no basis, either in fact or in finding, for holding Mr Simmons's intention to be provisional in the sense of that word in the judgment. This led to the court's critical conclusion ([1979] STC 471 at 477):
'The legal position was that until a decision was taken to treat a property as an investment it necessarily followed that the surplus realised on its sale was assessable as a trading profit ....'
This must mean that it was trading stock. But this was contrary to the whole history of the matter and goes even further than the commissioners' findings. I regret that I cannot agree with it.
I would allow the appeal.