England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT
CHANCERY DIVISION (Mr Justice Lawrence Collins)
CH 2003 APP 0053

		Royal Courts of Justice Strand, London, WC2A 2LL
		16 March 2004

Lord Justice Jonathan Parker :

INTRODUCTION

1. This is an appeal by the taxpayer, New Angel Court Ltd ("NAC"), against an order made by Lawrence Collins J on 25 July 2003 dismissing its appeal against a Decision of the Special Commissioners (Dr John F. Avery Jones CBE and Mr John Clark) dated 13 January 2003 ("the Decision"). By the Decision, the Special Commissioners dismissed NAC's appeal against a Notice of Determination of loss for the period ended 31 December 1996.
2. NAC is a member of the Hilton Group ("the Group"). It has at all material times carried on the business of developing and dealing in property. The single issue before the Special Commissioners was whether nine commercial properties ("the Properties") which NAC acquired on 13 November 1996 from other companies in the Group were acquired by NAC 'as trading stock' within the meaning of section 173(1) of the Taxation of Chargeable Gains Act 1992 ("the 1992 Act").
3. As at 13 November 1996 the Properties were pregnant with loss. Had the vendor companies sold the Properties outside the Group on that date they would have sustained capital losses for corporation tax purposes totalling some £68M. However, if the Properties were acquired by NAC 'as trading stock' within the meaning of section 173(1), it is common ground that for corporation tax purposes on its acquisition of the Properties NAC sustained a trading loss of some £68M which it could surrender to other companies in the Group. That is the result for which NAC contends.
4. By the Decision, the Special Commissioners held that the Properties were not acquired by NAC 'as trading stock' within the meaning of section 173(1). The judge agreed with the Special Commissioners, and dismissed NAC's appeal.
5. NAC now appeals to this court. Permission for a second appeal was granted by Peter Gibson LJ on the papers on 22 October 2003.

THE FACTUAL BACKGROUND

6. NAC has carried on the business of developing and dealing in property since 1986. As its name indicates, it was originally formed to develop and market a site at the Angel, in Islington. In 1987 it entered into a joint venture with Gable House Estates Ltd, a company in the Group (then called the Ladbroke Group). In 1993 it became a wholly-owned subsidiary of Gable House Estates Ltd. Since 1996 it has been a direct subsidiary of Hilton Group plc, the parent company of the Group.
7. In 1994 the Group owned a number of commercial properties in London and elsewhere. Some were held as investments; others as trading stock. In the course of 1994, following a strategic review, it was decided that the Group should sell off its commercial properties in an orderly manner. The Group's 1994 accounts stated that the Group would "continue to dispose of its property portfolio at acceptable prices".
8. During 1994, 1995 and 1996 a number of sales were made. In about October 1996 it was decided to accelerate the disposal programme. By then, the best properties had been sold; only difficult or complicated properties remained (among them, the Properties).
9. The Properties did not form part of the trading stock of any trade carried on by the subsidiaries which owned them.
10. In about October 1996 it was decided that the Properties should be transferred to NAC, with a view to NAC selling them on the open market. Had the Properties been sold on the open market at that time they would have realised some £68M less than they had cost.
11. On 13 November 1996 contracts were exchanged for the sale of the Properties to NAC for a total purchase price of some £18.7M. Two of the Properties (one in Northampton and the other at Langham Place in London) were sold to NAC as separate parcels; the remaining seven were sold to NAC together as a portfolio.
12. As at 13 November 1996 the Northampton property was almost sold (contracts were exchanged five days later), and negotiations for the sale of the property at Langham Place were already on foot (although no offer had as yet been received). Some interest had been expressed in the portfolio of the remaining seven properties, although the ultimate purchaser had not as yet made an offer.
13. On 18 November 1996 a number of other properties owned by companies in the Group were sold to NAC (I will refer to them as "Additional Properties"). NAC paid the purchase price in cash, with funds provided by its parent company. In contrast to the Properties, the Additional Properties were trading stock in the hands of the vendor companies. The Revenue accepts that the Additional Properties were acquired by NAC 'as trading stock' within the meaning of section 173(1).
14. On 10 December 1996 it was decided to discontinue the Group's property division and to dispose of all the remaining properties. This marked the last stage of the process which had begun in about October 1994.
15. On 3 March 1997 NAC sold thirteen properties to Minerva plc. The thirteen properties consisted of six of the Properties (at an apportioned purchase price of £15.1M) and seven Additional Properties. Following that sale, only one of the Properties remained unsold.
16. In January 1998 NAC submitted a corporation tax return for the period ended 31 December 1996. The return was prepared on the basis that NAC had acquired the Properties 'as trading stock' for the purposes of section 173(1). Thus, in computing its profits for that period for corporation tax purposes, NAC brought into account a trading loss of some £68M which (it contended) it had sustained for corporation tax purposes on its acquisition of the Properties.
17. In due course, however, the Revenue issued a Notice of Determination of loss which excluded that loss from the computation of NAC's profits for the period for corporation tax purposes.
18. NAC appealed against the Notice. By the Decision, the Special Commissioners dismissed NAC's appeal. NAC's appeal against the Decision was dismissed by the judge.

THE RELEVANT STATUTORY PROVISIONS

19. The relevant provisions of the 1992 Act are as follows:

"161 Appropriations from stock

(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.

(2) ….

(3) …. subsection (1) 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 1 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 the 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.

….

173 Transfers within a group: trading stock

(1) Where a member of a group of companies acquires an asset as trading stock from any other 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.

(2) ….

288 Interpretation

(1) ….

'trading stock' has the meaning given by section 100(2) of the [Income and Corporation Taxes Act 1988]

….

20. Section 100(2) of the Income and Corporation Taxes Act 1988 ("the 1988 Act") provides as follows (so far as material):

"(2) …. 'trading stock', in relation to any trade –

(a) means property of any description, whether real or personal, being either –

(i) property such as is sold in the ordinary course of the trade …."

21. Finally, for present purposes, section 832 of the 1988 Act defines 'trade' as including 'every trade, manufacture, adventure or concern in the nature of trade'.
22. The effect of the above provisions, so far as they are material in the instant case, is broadly as follows. Section 161 of the 1992 Act is directed at the case where an individual trader appropriates as trading stock of a trade which he carries on an asset which was not originally acquired by him as trading stock. Section 161(1) deems the trader to have disposed of the asset at market value at the date of appropriation, thereby giving rise to a chargeable gain or allowable loss for capital gains tax (or, in the case of companies, corporation tax) purposes. Section 161(3) enables the trader to convert a deemed allowable loss arising under section 161(1) into a trading loss by bringing the asset in question into account at cost (i.e. adding back the deemed allowable loss) in computing the profits of his trade for tax purposes.
23. Section 173(1) of the 1992 Act places transfers of assets within a group on essentially the same footing for corporation tax purposes as appropriations by an individual trader under section 161. In the case of intra-group transfers, an appropriation is deemed to take place for the purposes of section 161 when a member of the group acquires from another member of the group an asset which was not trading stock of the transferor, and acquires it 'as trading stock'. Thus, for example, where a subsidiary which owns a valuable painting hanging on the wall of its boardroom transfers the painting to another subsidiary which carries on the business of dealing in works of art and which acquires the painting as trading stock of that trade, the transferee company will be treated for corporation tax purposes as having appropriated the painting as trading stock pursuant to section 161.
24. In Reed v. Nova Securities Ltd [1985] 1 WLR 193 (to which further reference will be made below) the issue was whether certain shares and book debts which had been transferred to the taxpayer company by another company in the same group had been acquired by the taxpayer company 'as trading stock' for the purposes of section 274(1) of the Income and Corporation Taxes Act 1970 (the precursor of section 173(1) of the 1992 Act) and paragraph 1 of Schedule 7 to the Finance Act 1965 (the precursor of section 161 of the 1992 Act). It is common ground in the instant case that for present purposes the legislative provisions under consideration in Reed v. Nova Securities – and in Coates v. Arndale [1984] 1 WLR 1328 (to which further reference will also be made below) – were to the same effect as those under consideration on this appeal. In the course of his speech in Reed v. Nova Securities, Lord Templeman explained the scheme of the legislation as follows (at p.201H):

"My Lords, the theoretical independent existence of every corporation enables a group of companies to escape liability at common law for the losses of an individual member of the group: see In re Southard & Co Ltd [1979] 1 WLR 1198, 1208. The theoretical independent existence of every corporation inspired a tax avoidance industry which has only partly been brought under control by the principles summarised by my noble and learned friend, Lord Brightman, in Furniss v. Dawson [1984] AC 474, 527. Nevertheless, the legislature recognising for the purposes of inflicting tax that group companies do not lead an independent existence has invented group relief which enables a group of companies to shuffle its losses between members of the group to obtain a tax advantage. The legislature has not extended group relief to allowable losses, but has conferred on a group of companies power to convert an allowable loss into a trading loss which can then be shuffled to secure a tax advantage. The Inland Revenue cannot complain that [the group has] secured a fiscal advantage by the statutory method presented by section 274 of the [Income and Corporation Taxes Act 1970] and paragraph 1 of Schedule 7 to the [Finance Act 1965]. The only requirement in these circumstances is that, apart from section 274 considerations, there must be an acquisition by a trading company 'as trading stock'."

THE ISSUE

25. Since it is common ground in the instant case that the vendor companies and NAC are and have at all material times been members of the Group, and that NAC has at all material times carried on a trade which included dealing in property, the only issue for decision is whether NAC acquired the Properties 'as trading stock' within the meaning of section 173(1).

THE AUTHORITIES

26. The starting-point in reviewing the relevant authorities is the decision of the House of Lords in Coates v. Arndale.
27. In Coates v. Arndale a property developer, SPI, had developed a leasehold property at a total cost of £5.3M. The market value of the property was only £3.1M. On 30 March 1973 SPI assigned the lease to Arndale, another company in the same group, which carried on business as a property dealer, for an expressed consideration of £3.09M By an assignment of the same date, Arndale assigned the lease to another company in the group, APTL, an investment company, for £3.1M. Arndale claimed to have acquired the lease 'as trading stock' within section 274(1) of the 1970 Act (the precursor of section 173(1) of the 1992 Act, as noted earlier), and surrendered relief for the alleged trading loss of £2.2M to other members of the group. The Inspector concluded that the purpose of the acquisition by Arndale had been purely fiscal, and that that prevented the lease from having been acquired 'as trading stock'. He made an assessment accordingly. The general commissioners allowed Arndale's appeal and discharged the assessment. Their decision was upheld at first instance, but the Court of Appeal allowed the Revenue's appeal. The Court of Appeal's decision was upheld by the House of Lords, which found that Arndale had never had any intention of trading, and had not traded, with the lease; that the object of the transfer to Arndale was to enable APTL to retain the lease within the group as an investment; that Arndale's apparent profit of £10,000 was no more than a book entry to conceal the fact that the lease was not being traded; and that accordingly Arndale had not acquired the lease 'as trading stock' within the meaning of section 274(1).
28. The leading speech was delivered by Lord Templeman, with whom the remainder of their Lordships agreed. After considering the relevant legislation, Lord Templeman said this (at p.1332H):

"The conversion of a potential capital loss into a trading loss for corporation tax purposes and the distribution of the benefit of that loss by way of group relief cannot however by 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 the calculation of corporation tax could be largely eliminated by including at least one trading company in a group. The extent to which such a 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….

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 £2.2M 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 £3M. 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 less than the market value assessed by the group. The profit of £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 no material effect on the overall financial position of the group.

I conclude therefore that, while Arndale acquired the lease, it did not acquire the lease as "trading stock" within section 274(1) of the Act of 1970 and therefore was never in a position to exercise the election provided by paragraph 1(3) of Schedule 7 to the Act of 1965. In these circumstances it is unnecessary to consider the application of the principles enunciated by your Lordships' House in IRC v. Burmah Oil Co Ltd [1982] STC 30 and Furniss v. Dawson [1984] AC 474 to a case where the legislature has made express provision for the mitigation of tax by the conversion of a capital loss into a trading loss provided certain conditions are fulfilled. It is also unnecessary to consider whether the dividend-stripping cases since 1963 have finally stripped the decision in Griffiths v. J P Harrison (Watford) Ltd [1963] AC 1 of its value to the tax-avoider. 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. The lease never became part of the trading assets of any company in the group. The Court of Appeal reached the same conclusion and the appeal must be dismissed."

29. In the course of his speech in Ensign Tankers (Leasing) Ltd v. Stokes [1991] 1 WLR 341 (which is considered further below), Lord Templeman summarised the decision in Coates v. Arndale in the following terms (at p.679D):

"The assignments of the lease 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 of the group in order to convert group capital into income temporarily; on a true analysis the taxpayer did not trade at all."

30. I turn next to the decision of the House of Lords in Reed v. Nova Securities, the facts of which I summarised earlier. The case was bedevilled by the fact that before the general commissioners the Revenue had unwisely agreed a short statement of facts, with the consequence that one of the issues before the House of Lords was the extent to which it was open to their Lordships to interfere with findings of fact made by the commissioners based on that agreed statement. In the result, the House of Lords concluded that whilst the acquisition of the book debts could have had some commercial justification, the acquisition of the shares, which were worthless, could not. Accordingly, the House of Lords held that the shares had not been acquired as trading stock.
31. The leading speech was once again delivered by Lord Templeman, with whom the remainder of their Lordships agreed. In addressing the facts, Lord Templeman was content to assume (at p.197A-B) that the object of the acquisition of the book debts and the shares by the taxpayer was to convert allowable losses into a trading loss available for group relief.
32. Later in his speech, Lord Templeman said this (at p.200E):

"The Court of Appeal …. by a majority affirmed the order of Walton J. The members of the Court of Appeal were, however, unanimously of the view that the property could only be acquired "as trading stock" if it was acquired for the purpose of being used in the course of trade.

I agree. If a company is to acquire an asset as trading stock, 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, in my opinion, acquire the asset as trading stock even though the company habitually traded in similar assets. Thus, in Arndale's case, the Arndale company traded in property and acquired a lease. By a contemporaneous and pre-arranged sale, the Arndale company transferred the lease to another company in the same group. The object of these manoeuvres was to obtain the benefit of section 274, which applies to property acquired as trading stock, while ensuring at the same time that the lease was never in fact traded. …."

33. Lord Templeman went on to consider the decision of the House of Lords in Lupton v. F A and A B Ltd [1972] AC 634, a dividend-stripping case, on which the majority in the Court of Appeal (Fox and Kerr LJ) had relied. After quoting passages from the speeches of Viscount Dilhorne and Lord Simon of Glaisdale in Lupton, Lord Templeman continued:

"In a dividend-stripping case, such as Lupton's case, an artificial loss is artificially created and the artificial transaction does not constitute trading but constitutes the manufacture of a tax advantage. In the present case [the group] sustained a real loss."

34. Lord Templeman then went on to explain the scheme of the legislation, in the passage quoted in paragraph 24 above.
35. Turning to the book debts, Lord Templeman agreed with a passage in the judgment of Fox LJ in the Court of Appeal ([1984] 1 WLR 537, 554) that the court cannot:

"…. conclude that no reasonable tribunal, properly instructed, could have decided, on the evidence, that the property was acquired by Nova 'as trading stock'. …. Nova was a trading company. It bought property of a kind in which it was authorised to deal. …. Before deciding to buy the board of Nova considered what, in ordinary commercial terms, was the profit which Nova was likely to make on the transaction."

36. As to the shares, Lord Templeman said this (at p.202E):

"Different considerations apply, however, to the Medaillon shares. …. 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. ….

The shares were not commercially saleable at any price. Nova only acquired the right to share certificates which represented nothing in view of the insolvency of Medaillon and the right to be the latest and last entry in the register of a defunct company."

37. In the course of his speech in Ensign Tankers, Lord Templeman referred to the decision in Reed v. Nova Securities in the following terms (at p.679E):

"In Reed v. Nova Securities … the taxpayer claimed to have acquired certain shares and book debts as trading stock and to have made deductible losses for corporation tax purposes. The taxpayer was a trading company and there was some commercial justification for the acquisition of the book debts at the price paid by the company. The commissioners held that the company had acquired the book debts as trading stock. This House refused to interfere with that finding. The shares were however worthless and there was no commercial justification for their purchase. The shares were therefore not trading stock and the decision of the commissioners was therefore reversed. There was a tax avoidance motive in both transactions. This did not prevent the taxpayer from claiming and proving that the book debts had been acquired and disposed of as trading stock."

38. In Overseas Containers (Finance) Ltd v. Stoker [1989] 1 WLR 606 CA the Court of Appeal held that for a transaction to constitute a trading transaction it had to be undertaken for a commercial purpose, and if it was, the existence of a collateral purpose of obtaining a tax advantage would not "denature" it; but that if the sole purpose of the transaction was to obtain a tax advantage then it could not as a matter of law have been undertaken for a trading purpose. The leading judgment was given by Sir Nicolas Browne-Wilkinson V-C, with whom Parker and Russell LJJ agreed. In the section of his judgment headed 'Is fiscal purpose relevant?', the Vice-Chancellor said this (at p.613E):

"Once it is accepted, as [counsel for the taxpayer] did accept, that for a transaction to constitute trading it is necessary for there to be a commercial purpose, it necessarily follows that it is relevant to consider whether the transaction had some purpose other than commerce. If, essentially, the transaction is of a commercial nature and there is a genuine commercial purpose, the presence of a collateral purpose to obtain a tax advantage does not "denature" what is essentially a commercial transaction…. If, on the other hand, the sole (and I emphasis sole) purpose of the transaction is to obtain a fiscal advantage, it is logically impossible to postulate the existence of any commercial purpose.

In my judgment, that is the explanation of the House of Lords' decisions in Lupton and Coates v. Arndale …. In both cases the sole objective was to obtain a fiscal advantage and that is not a commercial purpose. So in Reed v. Nova Securities …. the House of Lords drew a distinction between two types of transaction. In the case of one, the bank debts, 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 undoubted fact that the transaction also had the purpose of obtaining a fiscal advantage. The other transaction, the shares, had no possible commercial purpose therefore the House of Lords held that the only possible conclusion was that they had not been acquired as trading stock."

39. Later in his judgment, the Vice-Chancellor said this (at p.614E):

"On my reading of the authorities the purpose with which transactions are carried out is always relevant in order to determine whether the transactions have a commercial purpose. If there is a genuine commercial purpose in carrying out the transactions but also an ulterior purpose it will be a question of fact and degree for the commissioners to determine whether essentially they were or were not commercial transactions. In such a case it is not correct, as a matter of law, to conclude that the existence of the ulterior purpose whether fiscal or not, requires a finding that the transactions were not commercial. Only where the commissioners find that the sole purpose of the transaction is ulterior and not commercial can it rightly be said that, as a matter of law, the transaction cannot be [sic] a trading purpose. …."

40. Later in his judgment, under the heading "The relevance of a group purpose", the Vice-Chancellor said this:

"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? The point is of significance in the present case since [counsel for the taxpayer] submitted that, so far as the taxpayer company alone was concerned, there was no fiscal advantage to it in the loan transaction and the taxpayer company undoubtedly received the interest differential which was a benefit to it. The tax advantage aimed for only accrued to the group as a whole by enabling the taxpayer company's losses on currency to be set against group profits. 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 …. 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 …. 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. …."

41. In Ensign Tankers the taxpayer company entered into a limited partnership which was set up to finance and exploit films. Its purpose in doing so was to claim first-year allowances which could be applied for the benefit of the group of which it was a member. The Inspector refused to allow relief based on its claim to first year allowances, on the ground (among other things) that the partnership had not carried on a trade. The Special Commissioners dismissed the taxpayer's appeal, holding that the composite transaction entered into by the partnership had a fiscal motive as its paramount object and as such was not a trading transaction, with the consequence that the partnership could not be said to be trading. Millett J allowed the taxpayer's appeal, holding that the Special Commissioners had misdirected themselves, and that the only true and reasonable conclusion on the facts was that the partnership was trading. The Court of Appeal allowed the Revenue's appeal, holding that where (as in that case) the circumstances were equivocal the Commissioners had to look at the subjective intention of the partnership to determine the true purpose of the transaction. The Court of Appeal accordingly remitted the matter to the Special Commissioners for their reconsideration.
42. The leading judgment in the Court of Appeal was again given by Sir Nicolas Browne-Wilkinson, V-C, with whom Stuart-Smith and Leggatt LJJ agreed.
43. In the course of his judgment, the Vice-Chancellor said this (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. Since a fiscal advantage was the sole purpose there is no place for there being a commercial purpose; …. if the commissioners find as a fact only that the paramount intention was fiscal advantage, as a matter of law that is not decisive since it postulates the existence of some other purpose, albeit not paramount, which may be commercial. In such a case, 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."

44. At the conclusion of his judgment, the Vice-Chancellor summarised his views as to the relevant legal principles, as follows (at p.357B):

"To summarise my views on the law in this case the position, in my judgment, is as follows. (1) Whether a transaction is to be classified as commercial normally falls to be determined objectively by reference to the nature of the transaction itself, i.e. is it a transaction of a kind similar to transactions of the same nature in the commercial world and carried out in a similar way. (2) In addition to the outward badges of trade, in order to be a trading transaction its purpose must be commercial. (3) Then question "was it trading" is a question of fact for the commissioners. (4) In deciding that question the commissioners must look at the transactions as a whole including the steps taken for its implementation. (5) The commissioners must decide whether the transaction was in reality merely a device to secure a fiscal advantage or a genuine trading activity. (6) The ultimate question always remains "what was the purpose of the transaction?" That question will normally be answered by an objective analysis of the transactions viewed as a whole. (7) If the appearance of the matter, as shown by an objective analysis of the transactions, is equivocal, the subjective intention of the taxpayer is relevant in determining the purpose of the transaction and will generally be decisive. (8) A transaction can be equivocal and therefore evidence of subjective intention relevant even if there was a possibility of the transaction producing a commercial profit – as opposed to a tax benefit – to the taxpayer. (9) Although the purpose of the other party or parties to the transactions, being part of the circumstances, is relevant, the question in each case is whether the taxpayer was trading. …. (10) If the sole purpose of the transaction is to gain a fiscal advantage, in law that cannot amount to trade. (11) If the transaction has some commercial features but also an element of fiscal advantage, it is for the commissioners to weigh the conflicting elements to decide whether the transaction was entered into by the taxpayer for essentially commercial purposes but in a fiscally advantageous form or essentially for the purpose of obtaining a fiscal advantage under the guise of a commercial transaction. In the former case, the transaction would constitute trading; in the latter it will not."

45. The House of Lords allowed the taxpayer's appeal in part, holding that in so far as it contributed its own funds to the venture (its contribution amounted to £3.25M), the composite transaction was a trading transaction. The leading speech was again given by Lord Templeman, with whom the remainder of their Lordships agreed. In the course of his speech, Lord Templeman said this (at 676H):

"In the present case the commissioners felt bound to ignore all the fiscal consequences which are beneficial to the taxpayer 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 is entered into 'essentially for the purpose of obtaining a fiscal advantage under the guise of a commercial transaction'."

46. After quoting the passage from the Vice-Chancellor's judgment quoted in paragraph 43 above, Lord Templeman continued:

"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. The task of the commissioners is to find the facts and to apply the law, subject to correction by the courts if they misapply the law. …. The section [section 41(1) of the Finance Act 1971] is not concerned with the purpose of the transaction but with the purpose of the expenditure. It is true that Victory Partnership only engaged in the film trade for the fiscal purpose of obtaining a first year allowance but that does not alter the purpose of the expenditure. The principles of Ramsay and subsequent authorities do not apply to the expenditure of £3.25M because that was real and not magical expenditure by Victory Partnership.

The Vice-Chancellor referred to authorities in which intentions sometimes illuminated and sometimes obscured the identification of a trading purpose. But in every case actions speak louder than words and the law must be applied to the facts."

47. Later in his speech, Lord Templeman said this about Overseas Containers v. Stoker (at p.679G):

"In Overseas Containers v. Stoker …. 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 …. and the Court of Appeal held that the acquisition of the loans by the financing company was not a trading transaction. Vinelott J said …. :

'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.'

In the present case the legal effect of the transaction, whatever its design, was a trading transaction whereby Victory Partnership had a 25 per cent interest." (Emphasis supplied)

THE DECISION

48. Having set out the agreed facts and the relevant statutory provisions, and having summarised the rival contentions, the Special Commissioners considered the factual background in more detail.
49. As to the transaction itself, the Special Commissioners noted that the vendor companies and NAC shared common directors. They went on to characterise as "window-dressing" a memorandum dated 26 October 1996 from the Group's tax department to the Group finance director which suggested that a purpose of transferring the Properties to NAC was to make use of NAC's "dealing expertise". They made the same finding in relation to a reference to NAC's "dealing expertise" in the minutes of a meeting of the finance committee of the board of NAC. On the other hand, in paragraph 14 of the Decision they accepted that the prices paid for 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 [NAC]."

50. In paragraph 20 of the Decision, the Special Commissioners, having completed their review of the facts, said this:

"The recital of events shows that the property market at the time was volatile, with people making and withdrawing offers in quick succession. Clearly nothing was certain until contracts were exchanged. But the procedure for selling all the [Properties] was well in hand with at least one offer already made for each of them. [NAC] continued a process of selling that the vendor companies had started."

51. Paragraph 20 of the Decision also contains a table showing, in relation to each of the Properties, the price which NAC paid for it, the costs which were attributable to it, and, if sold, its sale price. The table shows that NAC's profit on the sales of the eight Properties which it sold (after taking into account costs) amounted in total to some £1.2M.
52. In paragraph 21 of the Decision the Special Commissioners turned to the law, saying this:

"The legislation with which we are concerned has the obvious purpose of converting a capital loss into a trading loss that is available for group relief. As Lord Templeman pointed out in Reed v. Nova Securities …. the Revenue cannot complain if the taxpayer makes use of an opportunity given by Parliament. The issue is simply whether the Appellant acquired the Properties as trading stock, not whether its purpose was to save tax. The legal principle which we apply is the same as the one applied in Ensign Tankers …. on the question whether the partnership was trading. Lord Jauncey said at 248d:

"I do not consider that …. Lupton requires that the trading transaction be de-natured because the taxpayer has incorporated it within a tax avoidance scheme which seeks to obtain for him greater fiscal advantages than the trading transaction if standing alone would produce. When Parliament has provided that a taxpayer shall be entitled to certain allowances in certain circumstances I can see no reason in principle why when those circumstances exist he should be deprived of those allowances simply because he has sought and failed to engineer a situation in which he obtained allowances greater than those to which the circumstances entitled him."

The question whether the Appellant acquired the Properties as trading stock is not to be decided by whether it acquired the Properties for tax reasons. The issue is one of construction of the legislation."

53. In paragraph 22 of the Decision, the Special Commissioners directed themselves as to the correct approach to be adopted in considering the facts, as follows:

"We agree with Mr Jones's contention on Macniven v. Westmoreland Investments Ltd [2001] 2 WLR 377 that whether property is acquired as "trading stock" is a commercial concept, recognised in accountancy. As Lord Hoffmann said of the Ramsay principle in paragraph 32 on page 388b "the court was required to take a view of the facts which transcended the juristic individuality of the various parts of the preplanned series of transactions." However, as in Ensign Tankers, and as Lord Hoffmann said in Macniven at paragraph 59 on page 396a "Even if a statutory expression refers to a business or economic concept, one cannot disregard a transaction which comes within the statutory language, construed in the correct commercial sense, simply on the ground that it was entered into solely for tax reasons. Business concepts have their boundaries no less than legal ones." We approach the facts on this basis."

54. The Special Commissioners then asked themselves the following question (in paragraph 23 of the Decision):

"…. what was the purpose of the change on 13 November 1996, and what really changed on that date?"

55. After referring to the evidence of Mr Desmond Taljaard (the Chief Executive of the Group's UK Property Division), the Special Commissioners continued as follows:

"25. While we accept that the effect of the contract for the acquisition by [NAC] was to put all the risk relating to the holding of the Properties into one company instead of six group companies, we do not accept that this was a purpose. Purpose was something that the companies were trying to achieve. The holding company had made a decision to dispose of the Properties whichever company owned them, and the directors of the vending companies and [NAC] were the same. It is not clear that there was any benefit to the holding company or the separate property-owning companies in the risk being in one company; it was not the case that the liability could exceed the value of the asset. Even the convenience of one company being able to sell is not very significant when all the companies had the same directors. The sale of the Properties by the existing property-owning companies was already well in hand. Accounting considerations made it essential for the properties to be disposed of by early March 1997.

26. What difference did it make whether between 13 November 1996 and March 1997 an unsold property was owned by [NAC] or by the vendor companies? While we also accept Mr Taljaard's answer that the transfers of properties had been made on many occasions in the past within the group, the question related to these particular Properties at the particular time of transfer. We think his answers were prevaricating and we find that there was no purpose other than tax for the transfer. This absence of non-tax purposes does not prevent the acquisition of the Properties by [NAC] from being as trading stock but it makes us approach the question more critically and look at the facts in the wider context of the group, rather than looking at [NAC]'s transactions on their own.

27. If we start with the purpose of the directors of the vendor companies immediately before 13 November 1996 it is clear that it was to realise the Properties. This was a purpose common to all property investment companies in the group and derived from a decision of the group to dispose of all its commercial properties. The directors of each company were group employees. As we have said the stage this process had reached was that Northampton was almost sold, contracts being exchanged five days later, Langham Place was the subject of three offers and negotiations had been opened with 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. If the vendor companies had continued to carry out that purpose, although Mr Peacock QC [counsel for NAC] did not concede it, there is in our view no doubt that they would merely have realised their capital assets. When [NAC] took over the properties and completed the process of selling we ask ourselves whether the same directors, now in their capacity as directors of [NAC], had a different purpose. We do not think they did. We cannot point to anything that they did that was different afterwards from what it was before. It remained the group's purpose to dispose of the Properties whichever company owned them. Accordingly we find that the same purpose of realising the assets continued as before.

28. We now consider what [NAC] actually did and ask ourselves whether it acquired the Properties as trading stock. Looking at [NAC] 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 a classic case of trading. If we were to look at [NAC] in isolation we would have no hesitation in saying that it acquired the Properties as trading stock, whatever the purpose of the Appellant. …… "

56. However, the Special Commissioners went on (in paragraph 28) to conclude that to look at NAC in isolation from the Group would be "to take an unrealistic and blinkered view of the facts".
57. Adopting a broader approach, therefore, the Special Commissioners reached the following conclusions:

"29. First, we are applying a section which deals with intra-group transfers where the two companies hold the assets in different capacities. In order for us to decide that [NAC] acquired the Properties as trading stock when they were not trading stock of the vendor companies we must be able to point to some difference which occurred other than the mere fact of [NAC] acquiring the Properties. We are unable to detect any such change. [NAC] 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.

[NAC] was merely a vehicle through which the existing investment companies sold the Properties as investments (and presumably through which the dealing properties acquired on 18 November 1996 were sold as trading properties).

30. Secondly, the transactions were driven by the group's purpose in realising all the commercial properties wherever held within the group. We have not found that [NAC] 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 sock. In terms of Macniven …. would a commercial person knowing all the facts say that [NAC] 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."

58. The Special Commissioners accordingly found that the Properties were not acquired by NAC as trading stock, and dismissed NAC's appeal.

THE JUDGE'S JUDGMENT

59. In the course of his summary of the findings and conclusions of the Special Commissioners, the judge recorded (in paragraph 28 of his judgment) that the Special Commissioners had found that the minutes of a meeting of NAC's finance committee were window-dressing. This was to overstate the position, since the Special Commissioners' finding of window-dressing related only to the reference in the minutes to NAC's "dealing expertise".
60. In Sections V and VI of his judgment the judge summarised the rival contentions (contentions which have been repeated on this appeal, and which will be considered further below).
61. In Section VII of his judgment the judge turned to the applicable legal principles.
62. He began by identifying the question for decision as being whether the Special Commissioners had 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. After referring to observations of Lord Hoffmann in Macniven, he turned to the question of the relevance of 'fiscal motive', and to the authorities to which he had been referred touching on this question. He turned first to the dividend-stripping cases, and in particular Lupton. He cited a passage from the speech of Lord Morris in Lupton to the effect that (as Megarry J put it at first instance in Lupton, in a passage in his judgment quoted by Lord Morris) a transaction which can fairly be regarded as a trading transaction will not be "denatured" merely because it was entered into with a fiscal motive. He also cited a passage from the speech of Lord Simon of Glaisdale in that case, in which Lord Simon observed that 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".
63. Finally, in relation to fiscal motive, the judge referred to Ensign Tankers, citing passages in the speech of Lord Templeman, including the passage (quoted in paragraph 46 above) in which Lord Templeman (disagreeing with the judgment of the Vice-Chancellor in the Court of Appeal in that case) concluded that neither the Special Commissioners nor 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".
64. Then, under the heading 'Groups of companies', the judge commented that although the mere fact that an asset is acquired from another member of the same group of companies cannot serve to "denature" the transaction, that does not mean it should be ignored. The judge then referred to Overseas Containers v. Stoker, citing a passage from the judgment of Sir Nicolas Browne-Wilkinson V-C in that case to the effect that where a number of associated companies are involved the transaction must be looked at as a whole.
65. The judge then turned to Coates v. Arndale and Reed v. Nova Securities, and to Lord Templeman's references to those authorities in Ensign Tankers.
66. In paragraph 96 of his judgment, the judge said this:

"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."

67. As will become apparent in due course, the above paragraph, and in particular the first and last sentences of it, has been the focus of NAC's primary challenge on this appeal, in that it is contended on behalf of NAC that the factors referred to by the judge are not merely sufficient but determinative of the question whether an asset was acquired as trading stock.
68. The judge summarised what he considered to be the applicable legal principles in paragraph 97 of his judgment, as follows:

"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 …. at 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 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 ….. 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 …. at 1333.

(4) For this purpose, it is necessary to look at the transaction as a whole: Coates v. Arndale …. at 1332-3; Overseas Containers (Finance) Ltd v Stoker …. at 614-5.

(5) The transaction, to qualify, must have some commercial justification or conceivable reason: Coates v Arndale …. at 1332-3; Reed v Nova Securities …. at 202; Ensign Tankers …. 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 …. at 1332-3; Reed v Nova Securities …. at 200, 202; Ensign Tankers …. 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 …. 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 …. (itself a case on whether a transaction was an adventure in the nature of trade)."

69. In Section VIII of his judgment the judge set out his conclusions, as follows:

"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 [NAC] 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 [NAC]'s acquisition of the Properties, and they were "unable to detect any change." [NAC] 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 [NAC] was merely a vehicle through which the existing investment companies sold the Properties as investments. [NAC] did not have any independent purpose in disposing of the Properties. A commercial person knowing all the facts would not say that [NAC] 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 [NAC] had decided to expand its dealing activity; (c) that [NAC] had approached the vendors to buy the Properties; and (d) that [NAC] 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 [NAC]. 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 [NAC]). 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 [NAC]. In substance they decided that, on the facts of this case, nothing happened except that the name of [NAC] 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."

70. The judge accordingly dismissed NAC's appeal.

THE ARGUMENTS ON THIS APPEAL

71. Mr Jonathan Peacock QC (for NAC) points out that Parliament has given corporate taxpayers the opportunity to convert capital losses into trading losses for corporation tax purposes. That being so, the fact that a taxpayer decides to take that opportunity is not (he submits) to be regarded as tax avoidance.
72. Turning to the facts of the instant case, Mr Peacock reminds us that on 18 November 1996, some five days after NAC's acquisition of the Properties, Additional Properties were (as the Revenue accepts) acquired by NAC from other companies in the Group as trading stock; and that the sale by NAC to Minerva in March 1997 included six of the Properties and seven Additional Properties.
73. He submits that the Revenue is seeking to rely on the Special Commissioners' finding that the only purpose of the transfer of the Properties to NAC was a fiscal purpose as a factor tending to show that NAC did not acquire the Properties as trading stock. He submits, relying on Coates v. Arndale, Reed v. Nova Securities and Ensign Tankers, that such an approach to the question whether the Properties were acquired as trading stock is contrary to authority.
74. Mr Peacock submits that in the instant case, in contrast to Coates v. Arndale and Reed v. Nova Securities, there was commercial justification for the transaction, in that the requirements identified by Lord Templeman in Reed v. Nova Securities (in the passage quoted in paragraph 32 above) are met. The Properties were assets of the kind in which NAC traded; and they were acquired by NAC for the purposes of its trade, with a view to resale at a profit. That, he submits, is enough to lead to the conclusion that they were acquired by NAC 'as trading stock' for the purposes of section 173(1). He accordingly submits that the judge was in error when (in paragraph 96 of his judgment) he concluded that, on the authorities, these factors were not necessarily sufficient factors; and, by the same token, that the only true and reasonable conclusion open to the Special Commissioners on the facts as found was that the Properties were acquired by NAC 'as trading stock'.
75. Mr Peacock further submits that the judge was in error in accepting the reasoning of the Special Commissioners in paragraphs 28 to 31 of the Decision. He submits that, having concluded that, looking at NAC in isolation, they would have no hesitation in saying that it acquired the Properties as trading stock, the Special Commissioners needed to look no further; and that they erred in concluding that, looking at the transaction in the context of the Group as a whole, a different conclusion followed. He relies once again on the fact that Parliament has expressly enabled a group of companies to obtain a tax advantage in the manner provided by section 173(1). He submits that there was no factual basis for the Special Commissioners' conclusion (in paragraph 29 of the Decision) that NAC was "merely a vehicle through which [the vendor companies] sold the Properties as investments". As to the view which a hypothetical commercial person knowing all the facts might take of the transaction, he submits that such a person would take the view that the Properties were trading stock in the hands of NAC, and that the Special Commissioners were in error when, in paragraph 31 of the Decision, they reached the opposite conclusion.
76. The third error made by the judge, as Mr Peacock submits, was his reliance on the "two very important findings" made by the Special Commissioners which he identified in paragraph 101 of his judgment. (The first of these was the Special Commissioners' finding of window-dressing – a finding which, as noted earlier, related only to references in the contemporary documentation to NAC's "dealing expertise". The second of these findings was the Special Commissioners' rejection of Mr Talgaard's evidence to the effect that one of the purposes of the transaction was to transfer the risk of holding the Properties to NAC. )
77. As to the first finding, Mr Peacock submits that the judge's error in overstating the extent of the finding led him to the erroneous conclusion that had the transaction not been "dressed up" it would have been revealed as having no commercial justification. As to the second finding, the fact that the transaction had no purpose other than that of obtaining a tax advantage does not, he submits (returning to his earlier submissions), lead to the conclusion that that Properties were not acquired 'as trading stock'.
78. For the Revenue, Mr Philip Jones submits that the bare facts of the transaction will not provide an answer to the question whether the Properties were acquired by NAC 'as trading stock'. He submits that the judge was right (in paragraph 96 of his judgment) to conclude that the factors which he there identified did not necessarily lead to the conclusion that they were so acquired. He submits that the intention behind the transaction has to be examined. He accepts that the fact that a property dealing company acquires a property with the intention of selling it in the short term is usually an indication that the property has been acquired for the purposes of the company's trade, but he submits that this is not necessarily so. He gives the example of a company which requires a head office for a short period whilst its existing head office is refurbished.
79. Relying on Simmons v. IRC [1980] 1 WLR 1196, Mr Jones points out that, as Viscount Dilhorne said in that case (at p.1203):

"An investment does not turn into trading stock because it is sold."

80. Similarly, as Robert Walker LJ pointed out when giving the judgment of the court in Trustees of BT Pension Schemes v. Clark [2001] EWCA Civ 55, an investor may change his investments frequently without the investments losing their character as investments.
81. Mr Jones points out that it is not necessary for a company to be already carrying on a trade for it to appropriate an asset as trading stock, since section 161(1) expressly contemplates that a new company may be formed to acquire the asset. What is required in every case, he submits, is a genuine appropriation 'as trading stock'.
82. As to the relevance of fiscal motive, Mr Jones submits that if there has been a genuine acquisition or appropriation of property as trading stock, the mere fact that the acquisition, or appropriation, has taken place for the sole purpose of obtaining a tax benefit does not denature the transaction in any way. If, however, a transaction has been undertaken, or property acquired, which, if undertaken or acquired for trade purposes, has beneficial tax consequences, one needs to look critically at the constituent elements of the transaction to ascertain whether in truth it is a genuine trading transaction or whether it merely has the veneer or pretence of a trading transaction which disguises something which on a proper analysis is not a transaction by way of trade at all.
83. As to the relevance of 'group purpose', Mr Jones relies on the passage in the judgment of the Vice-Chancellor in Overseas Containers v. Stoker referred to in paragraph 64 above.
84. As to paragraph 96 of the judge's judgment, Mr Jones submits that, for reasons already given, the judge was right to conclude that the bare facts of the acquisition do not necessarily lead to the conclusion that the Properties were acquired 'as trading stock'.
85. Mr Jones accepts that the judge overstated the extent of the Special Commissioners' finding of 'window-dressing', but submits that that does not vitiate his conclusion that the transaction was not a trading transaction.
86. As to paragraph 28 of the Decision, Mr Jones submits that the Special Commissioners were right to look beyond the bare facts of the transaction, and to view it in the context of the group as a whole; and that, viewing the transaction in that way, they reached the right conclusion.

CONCLUSIONS

87. By enacting section 173(1), Parliament has placed groups of companies on the same footing as an individual trader in relation to appropriations of assets as trading stock. It has thereby provided groups of companies with an opportunity to secure an advantage for corporation tax purposes by appropriating an asset as trading stock and thereby converting a capital loss of one company in the group into a trading loss available for group relief. It has, in other words, made express provision for the kind of 'fiscal alchemy' to which Vinelott J referred in the passage in his judgment in Overseas Containers v. Stoker quoted by Lord Templeman in Ensign Tankers (see paragraph 47 above). Accordingly, as Lord Templeman observed in Reed v. Nova Securities at 202B (in the passage quoted in paragraph 24 above), the Revenue cannot complain that a taxpayer has obtained a tax advantage by availing itself of the opportunity which the legislation itself offers.
88. It is in that context and against that background that the significance of the Special Commissioners' findings as to the purposes or purposes behind the transfer of the Properties to NAC, and in particular their finding (in paragraph 26 of the Decision) that "there was no purpose other than tax for the transfer", fall to be considered.
89. However, before turning to the Special Commissioners' findings I would make the following general points. First, in the light of Lord Templeman's speech in Ensign Tankers (and in particular the passage quoted in paragraph 46 above), the observations of Sir Nicolas Browne-Wilkinson V-C in that case relating to the relevance of fiscal purpose, and in particular the distinction which he sought to draw between sole purpose and paramount purpose, are no longer good law. The same must also apply, in my judgment, to the Vice-Chancellor's explanation of Coates v. Arndale in the passage in his judgment in Overseas Containers (Finance) Ltd v. Stoker quoted in paragraph 38 above.
90. Second, it is in my judgment clear from both Coates v. Arndale and Reed v. Nova Securities, and confirmed by Lord Templeman in Ensign Tankers, that in determining whether an asset has been acquired 'as trading stock' for the purposes of section 173(1) fiscal considerations are to be ignored. As Lord Templeman said in Coates v. Arndale at p.1330D:

"There were therefore sound commercial reasons for converting the potential capital loss of SPI into a trading loss suffered by Arndale and there is express statutory provision which enables this to be done for corporation tax purposes."

91. Similarly, in Reed v. Nova Securities (at p.197A-B) Lord Templeman was content to assume that the group's object was to obtain a tax advantage. As he put it in Ensign Tankers, when referring to Reed v. Nova Securities (in the passage from his speech quoted in paragraph 37 above):

"There was a tax avoidance motive in both transactions. This did not prevent the taxpayer from claiming and proving that the book debts had been acquired and disposed of as trading stock."

92. It is also to be noted that in Ensign Tankers Lord Templeman was able to conclude (at p.680A, in the passage quoted in paragraph 47 above) that the composite transaction in that case was (at least in part) a trading transaction, "whatever its design".
93. In my judgment, therefore, the mere fact that a group of companies sets out to avail itself of the opportunity of obtaining a fiscal advantage which Parliament has itself provided says nothing as to whether the requirement which Parliament has imposed as the condition of obtaining that fiscal advantage – that is to say that the asset in question must be acquired 'as trading stock' – has been fulfilled. It would, as it seems to me, be strange if it were otherwise. Indeed, I find it hard to conceive of a situation in which an asset is acquired under an intra-group transfer 'as trading stock', and an election made to convert the capital loss into a trading loss, where fiscal considerations have not played some part in the thinking of those concerned in planning or executing the transaction.
94. So in my judgment fiscal considerations (whether they be described in terms of motive, purpose, or object) must be put entirely on one side in considering whether an asset was acquired 'as trading stock' for the purposes of section 173(1).
95. That is not to say, however, that an investigation into the purpose of the acquisition is not required. It is plain from Coates v. Arndale and Reed v. Nova Securities that such an investigation is required. As Lord Templeman made clear in Reed v. Nova Securities (in the passage from his speech quoted in paragraph 32 above), not only must the asset which has been transferred be 'of a kind which is sold in the ordinary course of the company's trade' but it must have been acquired by the taxpayer 'for the purposes of that sale with a view to resale at a profit'. It is therefore necessary to consider the purpose of the transfer. Was it for the purposes of the taxpayer's trade? Or, to put it another way, did acquisition of the asset have a trading purpose?
96. In Coates v. Arndale the acquisition of the lease by Arndale had no trading purpose, since (for the reasons given by Lord Templeman in the passage from his speech quoted in paragraph 28 above) the transaction had no commercial justification. Its object, as Lord Templeman concluded, was not to enable Arndale to trade with the lease but to achieve a tax advantage whilst at the same time retaining the lease within the group as a capital asset. It was not the object of obtaining a tax advantage which was fatal to the taxpayer's case in Coates v. Arndale; rather, it was the fact that Arndale did not acquire the lease for a trading purpose. It did not acquire the lease for a trading purpose because it was always intended that the lease should be immediately assigned on to APTL, which would retain it as a capital asset (see Lord Templeman's reference to 'a contemporaneous and pre-arranged sale' in the passage in his speech in Reed v. Nova Securities quoted in paragraph 32 above). Lord Templeman described the so-called £10,000 profit to Arndale as a 'timid veil designed to conceal the fact that the lease was not being traded'. If it was timid, it was certainly transparent.
97. Similarly, in Reed v. Nova Securities, the House of Lords had to consider the question whether it could be said that no reasonable tribunal properly directed could have concluded that the transactions in question were trading transactions. In the result, the House of Lords concluded that whereas that could be said in relation to the shares, which were worthless, it could not be said in relation to the book debts, for the acquisition of which there could have been some commercial justification. As Fox LJ said in the Court of Appeal, in a passage quoted by Lord Templeman (see paragraph 35 above), the taxpayer in that case bought 'property of a kind in which it was authorised to deal', and before deciding to buy it the board of the taxpayer 'considered what, in ordinary commercial terms, was the profit which [the taxpayer] was likely to make on the transaction'. Hence, the acquisition of the shares by the taxpayer had no trading purpose.
98. In my judgment, therefore, section 173(1) does not require the absence of fiscal considerations as elements in the acquisition of the asset in question: rather, it requires the presence of a trading purpose. As Coates v. Arndale and Reed v. Nova Securities demonstrate, a trading purpose is not negatived by the presence of fiscal considerations: to use Megarry J's word (in Lupton) the existence of fiscal considerations will not "denature" a trading purpose, just as the existence of fiscal considerations will not prevent what would otherwise be a trading transaction from being regarded as such for the purposes of section 173(1).
99. At the heart of the matter, as it seems to me, is the need to recognise that in the context and for the purposes of section 173(1) a trading transaction may be dictated entirely by fiscal considerations, without losing its character as a trading transaction (see, in particular, Lord Templeman's reference to 'sound commercial reasons' in the passage from his speech in Coates v. Arndale quoted in paragraph 90 above).
100. I turn now to the Decision. It follows from what I have said above that in my judgment the Special Commissioners directed themselves entirely correctly when, in paragraph 21 of the Decision (quoted in paragraph 52 above), they identified the issue for decision as being 'simply whether [NAC] acquired the Properties as trading stock, not whether its purpose was to save tax' (emphasis supplied), and when, later in the same paragraph, they said:

"The question whether [NAC] acquired the Properties as trading stock is not to be decided by whether it acquired the Properties for tax reasons."

101. However, having directed themselves correctly, the Special Commissioners in my judgment failed to follow their own directions. In paragraph 23 of the Decision they posed a different question, viz. What was the purpose of the change on 13 November 1996 and what really changed on that date? They then went on to find that, in substance, nothing had changed. They made that finding, as I understand it, by reference to 'the group's purpose to dispose of the Properties whichever company owned them' (see paragraph 27 of the Decision, quoted in paragraph 55 above), and notwithstanding that, looking at NAC in isolation, they would have had no hesitation in concluding that it had acquired the Properties as trading stock (see paragraph 28 of the Decision, quoted in paragraph 55 above).
102. In my judgment the Special Commissioners erred in principle in so far as they found that the Group's purpose of disposing of the Properties, whichever company owned them, somehow negatived the existence of the trading purpose which (implicitly) they would have found to exist 'looking at [NAC] in isolation'. In the case of an intra-group transfer there will almost invariably be an element of 'group purpose', but this cannot negative the trading purpose which (as the Special Commissioners found) would have existed but for such 'group purpose'. As pointed out earlier, by section 173(1) Parliament has given groups of companies the opportunity to secure a tax advantage. The fact that a group, as a group, has decided to avail itself of that opportunity is not to any degree inconsistent with the fulfilment of the condition which Parliament has imposed, viz. that the asset must be acquired 'as trading stock'. A fortiori, as it seems to me, the fact that the Group in the instant case had adopted a policy of selling off its commercial properties says nothing as to whether NAC acquired the Properties 'as trading stock'.
103. In my judgment Mr Peacock was right when he submitted that having reached the conclusion that, looked at in isolation, NAC acquired the Properties as trading stock the Special Commissioners need have gone no further, and that they erred in making their further findings by reference to 'group purpose'.
104. Nor, with respect to the Special Commissioners, can I discern any evidential basis for their findings (in paragraph 29 of the Decision, quoted in paragraph 57 above) that NAC '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 that NAC was 'merely a vehicle through which the existing investment companies sold the Properties as investments'. It seems to me that these findings merely beg the question which the Special Commissioners had to answer (viz. did NAC acquire the Properties 'as trading stock').
105. Finally, so far as the Decision is concerned, I respectfully disagree with the Special Commissioners' conclusion (in paragraph 31 of the Decision, quoted in paragraph 57 above) that 'a commercial person knowing all the facts' would not conclude that NAC acquired the Properties as trading stock. For what it may be worth, on the assumption that the 'commercial person' knew that NAC was a property dealer, and that following its acquisition of the Properties NAC in fact traded with them and succeeded in selling all but one of them, I would be surprised if he did not reach the opposite conclusion.
106. I turn now to the judge's judgment. With two qualifications, I would accept the judge's summary of the applicable legal principles in paragraph 97 of his judgment (quoted in paragraph 68 of his judgment). The first qualification is the general one that the summary should be read subject to my conclusions as expressed in paragraphs 87 to 99 above.
107. The second qualification is more specific. In the final sentence of subparagraph (8) the judge says this:

"But the fact that there is 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."

108. In my judgment, the true test is that adumbrated by Lord Templeman in Reed v. Nova Securities (see paragraph 95 above). If that test is met, the conclusion follows that the asset in question was acquired 'as trading stock' within the meaning of section 173(1).
109. As to the judge's conclusions, as set out in Section VIII of his judgment (quoted in paragraph 69 above), in my judgment he erred in regarding the 'window-dressing' which the Special Commissioners found to have occurred (albeit to a significantly more limited extent than the judge recognised) as pointing to the conclusion that the acquisition of the Properties was not an acquisition 'as trading stock'.
110. For my part, I have no hesitation in concluding that NAC acquired the Properties 'as trading stock' within the meaning of section 173(1). The Properties were assets of a kind which were sold in the ordinary course of NAC's trade; and they were acquired by NAC for the purposes of that trade, with a view to resale at a profit. As Lord Templeman said in Ensign Tankers (in the passage from his speech quoted in paragraph 46 above) 'actions speak louder than words, and in every case the law must be applied to the facts'. The facts in the instant case were that (as the Special Commissioners found) the price at which NAC acquired the Properties was a proper market price; that following its acquisition of the Properties NAC set about selling them and succeeded in selling all but one of them; and that in so doing NAC made a real profit (contrast the 'timid veil' in Coates v. Arndale). The conclusion follows that NAC's acquisition of the Properties was a trading transaction entered into for a trading purpose; and that NAC accordingly acquired the Properties 'as trading stock' within the meaning of section 173(1).
111. The correctness of this conclusion is in my judgment confirmed by the Revenue's acceptance that NAC acquired the Additional Properties 'as trading stock'. The transaction under which NAC acquired the Properties and the transaction under which it acquired the Additional Properties appear to have been in all material respects identical, and following those acquisitions NAC dealt with the Properties and the Additional Properties in exactly the same way. Indeed, the sale to Minerva plc included six of the Properties and seven Additional Properties (see paragraph 15 above). In the circumstances it seems to me impossible to draw any relevant distinction between NAC's acquisition of the Properties and its acquisition of the Additional Properties. To my mind, the Revenue's acceptance that the Additional Properties were acquired by NAC 'as trading stock' demonstrates the absurdity of its contention that the Properties were not similarly acquired.
112. It follows that in my judgment the only true and reasonable conclusion contradicts that which the Special Commissioners and the judge reached.

RESULT

113. I would allow this appeal.

Lord Justice May:

114. I agree.

Master of the Rolls:

115. I also agree.
Order: Appeal allowed with costs of the appeal and in the court below to be subject to detailed assessment if not agreed. Leave to appeal to the House of Lords refused. (Order does not form part of the approved judgment)