The Executors of Lord Howard of Henderskelfe (deceased) v Revenue & Customs [2011] UKFTT 493 (TC) (22 July 2011)
DECISION
1. This
is an appeal by the Appellants against the amendment of the Appellants’ trust
& estate tax return for the tax year 5 April 2002 made by a closure notice issued by the HMRC dated 30 April 2010.
2. In
the closure notice HMRC stated that their conclusions in making the amendment included
that the gain accruing on the disposal by the Appellants of a painting entitled
“Omai” by Sir Joshua Reynolds (“the Painting”) was chargeable to capital gains
tax.
3. The
principal issue for determination in this appeal was whether the Appellants
were entitled to relief under Section 45 Taxation of the Chargeable Gains Act
1992 (“TCGA 1992”) in relation to the gain that accrued on the disposal of the
Painting on the basis that the Painting was “plant” in relation to the
Appellants and, therefore, a wasting asset.
4. If
it is held that the Appellants are not entitled to relief under Section 45 TCGA
1992, there is a secondary issue as to the amount of the chargeable gain. The
parties have agreed that the Tribunal does not need to determine the secondary
issue at this stage of the proceedings. In the event that the parties cannot
subsequently resolve the secondary issue they will seek to restore the hearing
in order for the Tribunal to determine quantum.
5. Evidence
was given by Mr Simon Howard, one of the executors of the estate.
Background and facts
6. Lord
Howard died on 27 November 1984.
7. He
resided until his death at Castle Howard (“the House”) in North Yorkshire. The House
has been owned by Castle Howard Estate Limited ("the Company") since
1950.
8. Since
1952, the Company’s principal activity as stated in its accounts has been the
carrying on of activities relating to land ownership. Specifically it has,
inter alia, carried on the trade of opening the greater part of the House (“the
Public Part”) and the surrounding grounds, and the exhibiting of the works of
art within the Public Part to members of the public, in consideration of
admission fees (“the House-opening Trade”).
9. The
Public Part of the House is open all year round apart from certain off-season
periods
10. Lord Howard
owned a number of works of art. During his life Lord Howard permitted the
Company to use a large number of these, including the Painting, for exhibition
in the Public Part in the House-opening Trade. The agreement or arrangement was
that the Company would bear the costs of the insurance, maintenance,
restoration and security of the works exhibited.
11. During Lord
Howard’s lifetime there was no formal lease, hire or loan in relation to the
use of the Painting by the Company. There was no provision for the Company to
pay any hire or rental fee to Lord Howard.
12. This arrangement
continued after Lord Howard's death between the Appellants and the Company in
relation to the works of art previously owned by Lord Howard and exhibited by
the Company.
13. HMRC were told
that the Appellants considered that formal loan/hire/lease arrangements were unnecessary
given that the directors of the Company and the executors of Lord Howard’s Will
(the Appellants) were the same individuals.
14. The Appellants
continued the longstanding arrangement whereby the Company was responsible for
the insurance, maintenance, restoration and security of the Painting.
15. The Painting was
conditionally exempted from inheritance tax on the death of Lord Howard on the
basis of certain undertakings. In the event that the Painting was sold the
exemption would be lost. The undertaking meant that the Painting had to be kept
in the UK and seen by the public.
16. The Painting was
displayed by the Company throughout the Executors’ period of ownership
(November 1984 to November 2001) except for 3 periods totalling approximately 7
months in all when it was exhibited at three galleries in Paris, London and York respectively.
17. During the tax
year 2001-02 the Executors sold the Painting at auction at Sotheby’s on 29
November 2001 to an unconnected purchaser for a hammer price of £9.4 million
from which commission and VAT totalling £220,900 was deducted.
18. The Appellants’
trust & estate tax return for the tax year 5 April 2002 was submitted on 29 January 2003 and included the gain accruing on the disposal of the Painting
as a chargeable gain.
19. By letter dated
10 June 2003 the Appellants sought to amend the return on the basis that the
gain accruing on the sale of the Painting was exempt from capital gains tax by
virtue of Section 45 of the TCGA as a gain accruing on the disposal of a
tangible movable property which was “plant” and therefore, by virtue of Section
44(1)(c) of the TCGA, a wasting asset.
20. On 12 January 2004, HMRC opened an enquiry into the Appellants’ trust & estate tax return.
On 30 April 2010 after some lengthy correspondence HMRC issued a closure notice
stating the conclusion that the gain accruing on the disposal of the Painting
was a chargeable gain not exempted by Section 45 of the TCGA because the
Painting was not “plant”.
21. The Appellants
appealed the closure notice on 28 May 2010. They also notified HMRC that they
required a statutory review of the matter in question.
22. On 5 August 2010 the Reviewing Officer informed the Appellants of his conclusion which upheld
the closure notice issued by HMRC on 30 April 2010 in full.
23. Mr Simon Howard
gave evidence that the executors had power under the will to license the
Company to use any of the chattels forming part of the estate. There was
however no formal agreement.
24. A focal point of
the rooms on display was the room in which the Painting was hung.
25. He was required
to live at the House in order to look after it and he has a lease with the
Company.
26. On cross
examination he confirmed that given that the works of art were essential to the
House-opening Trade. They were on a perpetual loan to the Company but there was
nothing to stop the Appellants moving items away from the exhibits and they
were at liberty to move them around from time to time. Items might be taken out
of use and vice versa. This was arbitrary and there was nothing formal.
27. However Mr
Howard said that in order to justify the admission fees the items were vital to
the House-opening Trade. If you took away the number of visitors who came to
see the works of art the Company would no longer have a viable business.
28. He believed that the reasons why members of the public visited the House were to
appreciate its architectural qualities, to admire its historic contents, and to
understand the range of historical narratives underpinning the history of the
house. He believed that the art collections at the House were and had been, in
his experience, central to bringing to life the house and the history
surrounding it in the eyes of its visitors and for that reason proved a very
considerable draw to the visiting public.
29. The Painting was
sold because he needed the money for his divorce settlement. The proceeds went
into the estate. There was no benefit to the Company and the proceeds were
split equally between the beneficiaries.
The Legislation
30. Section 45(1) of
the Taxation of Capital Gains Act 1992 (“TCGA”) relevant to the 2001/02 tax
year states:
(1) Subject to the provisions
of this section, no chargeable gain shall accrue on the disposal of, or of an
interest in, an asset which is tangible movable property and which is a wasting
asset.
(2) Subsection
(1) above shall not apply to a disposal of, or of an interest in, an asset—
(a) if, from
the beginning of the period of ownership of the person making the disposal to
the time when the disposal is made, the asset has been used and used solely for
the purposes of a trade, profession or vocation and if that person has claimed
or could have claimed any capital allowance in respect of any expenditure
attributable to the asset or interest under paragraph (a) or paragraph (b)
of section 38(1); or
(b) if the
person making the disposal has incurred any expenditure on the asset or
interest which has otherwise qualified in full for any capital allowance.
(3) In the case of the disposal of, or of an interest in, an asset
which, in the period of ownership of the person making the disposal, has been
used partly for the purposes of a trade, profession or vocation and partly for
other purposes, or has been used for the purposes of a trade, profession or
vocation for part of that period, or which has otherwise qualified in part only
for capital allowances—
(a) the
consideration for the disposal, and any expenditure attributable to the asset
or interest by virtue of section 38(1)(a) and (b), shall be
apportioned by reference to the extent to which that expenditure qualified for
capital allowances, and
(b)
the computation of the gain shall be made separately in relation to the
apportioned parts of the expenditure and consideration, and
(c)
subsection (1) above shall not apply to any gain accruing by reference to the
computation in relation to the part of the consideration apportioned to use for the
purposes of the trade, profession or vocation, or to the expenditure qualifying
for capital allowances”.
31. Section 44 of
the TCGA defines a wasting asset as :
(1) In this Chapter “wasting asset” means
an asset with a predictable life not exceeding 50 years but so that—
(a) freehold land shall not be a wasting
asset whatever its nature, and whatever the nature of the buildings or works on
it;
(b) life”, in relation to any tangible
movable property, means useful life, having regard to the purpose for which the
tangible assets were acquired or provided by the person making the disposal;
(c) plant and machinery shall in every case
be regarded as having a predictable life of less than 50 years, and in
estimating that life it shall be assumed that its life will end when it is
finally put out of use as being unfit for further use, and that it is going to
be used in the normal manner and to the normal extent and is going to be so
used throughout its life as so estimated;
(d) a life interest in settled property
shall not be a wasting asset until the predictable expectation of life of the
life tenant is 50 years or less, and the predictable life of life interests in
settled property and of annuities shall be ascertained from actuarial tables
approved by the Board.
(2) In this Chapter “the residual or scrap
value”, in relation to a wasting asset, means the predictable value, if any,
which the wasting asset will have at the end of its predictable life as
estimated in accordance with this section.
(3) The question what is the predictable
life of an asset, and the question what is its predictable residual or scrap
value at the end of that life, if any, shall, so far as those questions are not
immediately answered by the nature of the asset, be taken, in relation to any
disposal of the asset, as they were known or ascertainable at the time when the
asset was acquired or provided by the person making the disposal.”
32. Section 15 TCGA states
(1)The
amount of the gains accruing on the disposal of assets shall be computed in
accordance with this Part, subject to the other provisions of this Act.
(2)Every
gain shall, except as otherwise expressly provided, be a chargeable gain.”
Appellant’s Submissions
33. Mr Massey submitted that the Painting was a significant asset in the
hands of the Company’s House-opening Trade. Sotheby’s record that the
Painting was “exhibited at the Royal Academy in 1776 to great acclaim” and that
Reynolds exhibited 12 other portraits that year, “being at the height of his
powers at this period, responding to the arrival in London two years earlier of
Thomas Gainsborough. Sotheby’s go on to state: “Omai has always been considered
to be one Reynolds’s greatest works.”
34. Mr Massey
submitted on behalf of the Appellants that it was common
ground that the Painting had, in fact, a predictable life of more than 50
years. However if it was “plant” in the context of the statutory expression
“plant and machinery”, it would be regarded for CGT purposes by Section.44
(1)(c) TCGA as having a predictable life of less than 50 years, and therefore
as being a wasting asset.
35. He submitted
that Sections 45 (2) and (3) TCGA, where they apply, had the
effect of removing (Section 45 (2)) or restricting (Section 45 (3)) the
exemption under Section 45 (1), in circumstances where capital allowances were
available in whole or in part to the disponor on any expenditure attributable
to the asset under s.38 (1)(a) or (b) TCGA. These sub-sections were not in
issue. Capital allowances were never available in principle to the Appellants.
36. Mr. Massey submitted that there was no statutory definition of the
phrase “plant and machinery” for the purposes of Section 44 (1)(c)TCGA. There
was equally no statutory definition of the phrase in other taxing statutes. He
said that the Capital Allowances Act 1990 was amended by s.117 Finance Act 1994
by the inclusion of a Schedule AA1 to the Capital Allowances Act 1990 which
qualified the availability of capital allowances in relation to plant and
machinery incorporated into buildings but this had no effect for other
statutes.
37. He contended
that the meaning of the word “plant” in the context of the
phrase “plant and machinery” had been considered extensively by the courts in
other tax contexts, particularly the statutes relating to capital allowances,
where again the word “plant” in the wider phrase “plant and machinery” was not
statutorily defined.
38. The Appellants submitted that on the facts the Painting functioned
as, and therefore was “plant” in the context of the phrase “plant and
machinery” in s.44 (1)(c) TCGA 1992, as that word has been interpreted by the
courts and tribunals in previous cases.
39. Mr Massey
contended that the two issues were whether the Painting
functioned as “plant” at all in the trade of the Company and; was it necessary, as contended by HMRC, in order for an item to be “plant” in the
phrase “plant and machinery” within Section 44 (1)(c) TCGA to which the
exemption under s.45 TCGA applied, for the trade, in which the item is used, to
be owned or carried on by the owner of the item, or was it sufficient, as
contended by the Appellants, that the item functioned as plant in a trade, in
this instance the House-opening Trade carried on by the Company.
40. The function of the Painting and indeed of the other exhibits in the
Public Part of the House was to attract visitors to the House in order to
produce trading income for the Company from the House-opening Trade.
41. As to the use to which the works of art were put, the Appellants relied,
inter alia, on the copies of the Guide Books to the House (1958 edition), (1972
edition), (1988 edition), and (1997 edition)) and the evidence from Mr. Simon
Howard, one of the executors and the chairman of the Company, which demonstrated
the function of the works of art on display, both those owned by the Company,
and those licensed to the Company by the executors, including the Painting.
42. He submitted that plant in its ordinary sense included whatever
apparatus was used by a businessman for carrying on his business, not his stock
in trade, but all goods and chattels, fixed or moveable, live or dead, which he
kept for permanent employment in his business.
43. Mr. Massey cited the case of Yarmouth v France (1887) 19 QBD 647 in which it was decided that a horse could be considered a workman’s “plant”
within Section 1(1) of the Employers’ Liability Act 1880.
44. He submitted that the House-opening Trade could not have functioned
without the art. If instead of inheriting the art the Appellants had bought art
in the market in 1984 and hired it to the Company for use in its trade then he
submitted that this would have satisfied the plant test. The works of art
exhibited in the public area of Castle Howard, including the Painting, were
clearly chattels used by the Company for the purpose of the House-opening
Trade.
45. The item need not be essential to the business in order to be plant.
It was enough that the item is used for carrying on the business. He submitted
that in Yarmouth v France the statement made by Lord Esher MR
clearly implied that other items less material, but nevertheless used for the
purposes of the business, were still part of the plant:
“Horses and carts, wagons and drays” seem
to me the most material part of the plant: they are the materials or
instruments which the employer must use for the purpose of carrying on his
business”
46. Mr. Massey submitted that in order to determine whether or not an
item is plant, it is necessary first to determine the nature of the business
and thereby to assess the role that the asset plays within it and he cited Andrew
v RCC [2011] SFTD.
47. He contended that the trade here was that of opening the Public Part
and the surrounding grounds, and the exhibiting of the works of art within the
Public Part to members of the public, in consideration of admission fees.
48. The works of art were items used in that trade. Without such items,
the trade could not have functioned.
49. Mr. Massey cited the case of IRC v Scottish & Newcastle
Breweries Ltd 55 TC 252. There the primary purpose of the taxpayer was to
provide hotel accommodation, a part of which, on the facts found, involved the
provision of ambience or atmosphere. In that context the items were held to
have the function of providing or contributing to that ambience or atmosphere.
50. The House-opening Trade carried on by the Company involved the
display of the House and the display of the historic works of art within it for
the viewing, enjoyment and appreciation of the paying visitors.
51. Mr. Massey said that HMRC had contended that the Painting should be
denied the status of plant on the ground that, even it was plant “in the hands
of the Company”, that was not determinative of the character of the Painting in
the Appellants’ hands.
52. The Appellants submitted however that an item which functioned as
plant in the context of the phrase “plant and machinery” in Section 44 (1)(c)
TCGA is “plant”, whether or not it belongs to the trader himself or
alternatively to the person who makes it available to the trader for use in his
trade.
53. Mr. Massey submitted that to restrict the phrase “plant and
machinery” to “plant which is used in a trade of the disponor and machinery” is
to put a non-statutory gloss on the unqualified words of Section 44(1)(c).He
said that Section 44 (1)(c) imposed no such restriction.
54. He submitted that there was no policy reason to infer such a
restriction. To do so would result in an illogical distinction in CGT treatment
between “plant” and “machinery” in the phrase “plant and machinery” for which
there is no justification. For an item to qualify as “machinery” in the context
of Section 44 (1)(c), the item clearly need not function as machinery which is
used in a trade of the disponor.
55. If machinery is used by the disponor’s family company in the course
of that company’s business, it is clearly machinery nonetheless and eligible
for exemption. For example, a motor-boat owned by the shareholder but licensed
to the company and used in the company’s business would be “machinery” within
the meaning of the phrase “plant and machinery” even though not used as such by
the owner, and would undoubtedly be exempt under Section 45(1) TCGA.
56. There is no policy reason to treat “plant” in that phrase any
differently. Just as an item which functions as machinery is machinery in the
context of the phrase “plant and machinery”, regardless of whether or not it
functions as such in the trade of the disponor, there is no reason to construe
“plant” in the context of the phrase “plant and machinery” any differently, and
to impose a non-statutory restriction to require it to function as plant in the
trade of the disponor.
57. Mr. Massey submitted that it would be odd if, in the above example,
the gain on disposal of the motor-boat owned by a shareholder and licensed to
the company and used in its trade was exempt as “plant and machinery” but the
gain on disposal of the sailing ship (or other non-mechanical item) similarly
licensed and used was not exempt.
58. He submitted that the case of Macsaga
Investment Co. Ltd v Lupton (1967) 44 TC
659 illustrated the point, in the context of a case where the taxpayer company
claimed allowances under s. 298 Income Tax Act 1952 on capital expenditure
incurred by it on the installation of items of equipment into a building leased
by the Appellant and sub-let by it to the Ministry of Works. Neither the lessor
taxpayer nor the lessee Ministry carried on a trade. He said that the Court
of Appeal were clear that the term “plant” in the expression “machinery or
plant” was apt to mean items used in a trade, not necessarily the trade carried
on by the owner of the “machinery or plant”.
59. He said that his submissions all tended to support the
Appellants’ proposition that items will be “plant and machinery” or “machinery
or plant” if their function is to be used as such in a trade, and that the
items will be “plant and machinery” whether testing the tax position of the
owner, or testing the tax position of the trader in whose trade the items are
used.
HMRC’s Submissions
60. Ms Nathan submitted that there was a charge to capital gains tax on
any capital gain made by the person who disposed of an asset. The Painting was
an asset and therefore the gain should be charged to tax.
61. This basic proposition was however modified if the asset was a
wasting asset. A wasting asset was defined as an asset with a predictable life
not exceeding fifty years but Section 44(1)(c) provided that plant and
machinery was always treated as having a predictable life of less than fifty
years.
62. She accepted that if the Painting was plant then its sale was exempt
for the purposes of capital gains tax.
63. HMRC did not
accept that “the Painting would be “plant” if owned by the Company” or that a
painting on display in a house open to the paying public was “plant”.
64. HMRC questioned
whether the Painting was a business asset of the Company. The Painting remained
in private ownership throughout the relevant period, so that it never became a
business asset of the Company’s House opening Trade.
65. HMRC also
questioned whether, even assuming that the Painting were to be owned by and
placed on display by the Company, it was appropriate to regard the Painting as
“plant”.
66. Ms Nathan contended that just because the asset could be a wasting
asset it did not mean that it was so in the hands of someone other than its
owner. The starting point was whether the Painting was a wasting asset in the
hands of the person disposing of it.
67. Ms Nathan cited the case of Munby v Furlong 50 TC 491 for HMRC. The case concerned the question of whether the
legal books of a barrister constituted plant. The Court of Appeal held that
they did. Lord Denning MR stated at p 503:
“the statements by the
majority of the House of Lords in the dry dock case of Commissioners of
Inland Revenue v Barclay, Curle & Co. Ltd. 45 TC 221, show quite
conclusively that in this Taxing Statute the Courts do not apply the meaning to
the word "plant" as the ordinary Englishman understands it. It has
acquired by the course of decisions a special meaning in tax cases. It has
acquired a special meaning, it seems to me, in the interests of fairness, that "plant"
extends virtually to a man's tools of trade - that is the phrase which Cross J.
used. It extends to the things which he uses day by day in the exercise of his
profession. Mr. Medd, in his excellent argument before us, would confine a
professional man's "plant" to things used physically like a dentist's
chair or an architect's table, or, I suppose, the typewriter in a barrister's
chambers, but, for myself, I do not think "plant" should be confined
to things which are used physically. It seems to me that on principle it
extends to the intellectual storehouse which a barrister or a solicitor or any
other professional man has in the course of carrying on his profession. The
difficulty has arisen because the Legislature, when it extended this provision
to professions, did not make clear the scope of the word "plant" in
that context. It seems to me, in the context of a profession, the provision of
"plant" should be so interpreted that a lawyer's books - his set of
law reports and his textbooks - are "plant".”
68. Further she
cited the case of IRC v Barclay, Curle & Co Ltd 45 TC 221 in which
the House of Lords needed to consider whether a shipbuilding dry dock was
“plant” for capital allowances purposes. Lord Guest stated at page 244
“To qualify for the
allowance of three-tenths under Chapter II the expenditure must be incurred on
the provision of plant. There is no definition of the word "plant" in
the Act. The locus classicus for the definition of "plant" is
in the words of Lindley L.J. in Yarmouth v France (1887) 19
Q.B.D. 647, at page 658:
". in its ordinary
sense, it includes whatever apparatus is used by a business man for carrying on
his business, - not his stock-in-trade which he buys or makes for sale; but all
goods and chattels, fixed or moveable, live or dead, which he keeps for
permanent employment in his business".
This definition has been
accepted as accurate for income tax purposes as recently as 1959 by Lord Reid
in Hinton v Maden & Ireland Ltd. 38 TC 391. In Yarmouth v France it was held that a horse was "plant" in a question under the
Employers' Liability Act 1880. It has been suggested that for that reason the
definition is not apposite when considering "plant" in its present
context. But without attempting to elaborate the definition it appears to me
satisfactory. The emphasis is on "an apparatus used for carrying on
business”. I agree that in that case there was no contradistinction between a
structure and plant, as in Part X of the Income Tax Act 1952. But the question
under Part X of the Act is not whether it is a structure or plant. It may be
both. Section 276 makes it plain that Chapters I and II are not mutually exclusive.
The question, therefore, is whether, notwithstanding that it may be also a
structure, the dry dock is "plant" within the terms of s. 279. The
conjunction of "machinery" and "plant" suggests to me that
they both must perform some active function. In order to decide whether a
particular subject is an "apparatus" it seems obvious that an inquiry
has to be made as to what operation it performs.”
69. She submitted
that in CIR v Scottish & Newcastle Breweries 55 TC 252 the House of
Lords applied the principles enunciated in Yarmouth v France when seeking to determine whether items of decor in hotels and licensed premises
were “plant”. In holding that such items were “plant”, the Lord Wilberforce in
the House of Lords made the following observation:
In the end each case
must be resolved, in my opinion, by considering carefully the nature of the
particular trade being carried on, and the relation of the expenditure to the
promotion of the trade. I do not think that the courts should shrink, as a
backstop, from asking whether it can really be supposed that Parliament desired
to encourage a particular expenditure out of, in effect, taxpayers’ money, and
perhaps ultimately, in extreme cases, to say that this is too much to stomach.
It seems to me, on the Commissioners’ findings, which are clear and emphatic,
that the Respondents’ trade includes, and is intended to be furthered by, the
provision of what may be called “atmosphere” or ‘”ambience”, which (rightly or
wrongly) they think may attract customers... The amenities and decoration in
such a case as the present are not, by contrast with Lyons case, the
setting in which the trader carries on his business, but the setting which he
offers to his customers for them to resort to and enjoy...[the items claimed]
can be regarded as apparatus of the trade and so as plant.”
And Lord Lowry quoted with approval Lord Cameron’s speech
in the Court of Sessions:
“In my opinion the
Commissioners have not been shown to have misdirected themselves nor `is the conclusion at which they arrived in any sense
unreasonable. The problem which the Commissioners were called upon to solve was
one concerned with a 'service industry': I think this factor is important,
because the question of what is properly to be regarded as 'plant' can only be
answered in the context of the particular industry concerned and possibly, in
light also of the particular circumstances of the individual taxpayers'
own trade... I think that much difficulty is caused by seeking to place
limitative interpretations on the simple word 'plant': I do not think that the
classic definition propounded in Yarmouth v France suggests that it is a
word which is other than of comprehensive meaning - 'whatever apparatus is used
by a business man for carrying on his business' - whatever
the business may be... It is difficult to see that the provision of conditions
of comfort or even luxury lies outside the legitimate operations of an hotel
keeper or by consequence that he should not be entitled in his business to make
use of articles designed to subserve that purpose... To do this may, in one
sense of the word, no doubt be regarded as providing or enhancing the 'setting'
in which the services are themselves provided - but at the same time the
'setting' (as opposed to the structure or place within which the businessman
conducts his business)... is something the use of which is itself one of the
services which the hotel owner makes available to his customer. I do not think
that the fact that certain objects of furnishing or even of decorative quality
alone can be characterised as serving only an amenity purpose is in any way to
be regarded as a prima facie ground for rejecting a claim to have expenditure
on them held to be expenditure on plant.”
Lord Lowry also quoted from the speech of Lord Stott in
the Court of Sessions
“In the present case the
fallacy in the Crown's contention, as it seems to me, comes from a failure to
recognise the true character of a hotelier's trade. The chair and table which
provide the bodily comfort of the guests, and the lighting and decor which
provide for his visual or mental enjoyment, are alike material by the use of
which the hotelier may provide the service which it is part of his function to
provide, and accordingly in my opinion may alike be held to fall within the
definition of "plant" as the word has been construed in the relevant
authorities.”
70. She submitted
therefore that the courts have consistently, therefore, taken into account the
function performed by a particular item in determining whether that item is
“plant” in relation to a particular taxpayer.
71. HMRC submitted
that the Appellants were not entitled to the capital gains tax exemption given
by Section 45(1) TCGA 1992 because the Painting disposed of by the Appellants
was not “plant” in their hands and consequently not a “wasting asset”. It was
common ground that the Painting was an asset and a chattel.
72. However, HMRC
submitted that that not every asset which is a chattel is “plant”. For example,
a horse could be an asset bought for the purposes of pleasure or it may, as in Yarmouth v France, be apparatus used in the carrying on of the business.
73. Ms Nathan
submitted further that a chattel was not automatically “plant” from the moment
that it was created nor was its character immutable. For example, the items of
decor that qualified as “plant” in CIR v Scottish & Newcastle Breweries
were stock in trade in the hands of the persons supplying them to the taxpayer
but were “plant” in the taxpayer’s hands.
74. She submitted
that the Appellants’ approach of creating a two limbed test was misguided and
unsupported by authority. The cases indicated that the concept of “plant” does
not exist in a vacuum. Instead, what is required when determining whether an
asset is “plant”, is to consider the factual context and the use to which the
purported “plant” as per Lord Guest in IRC v Barclay, Curle & Co Ltd.
75. By way of
illustration, legal books which could be regarded simply as investments (of a
collector) or as stock in trade (of a bookseller) were regarded in Munby v
Furlong as “plant” in the hands of a barrister because in his hands the
books were the apparatus with which he carried on his profession.
76. Further HMRC
submitted that the character of the Painting when employed in the trade of the
Company was not conclusive of the character of the Painting in the Appellants’
hands. In other words, it may be the case that the Painting was apparatus with
which the Company conducts its trade, so that the Painting is fulfilling the
function of “plant” in relation to the Company. However, whether the Painting
is “plant” in relation to the Appellants must be determined by looking at the
use to which the Painting is put by the Appellants.
77. HMRC submitted
that the judicial approach to determining the meaning of “plant” is to consider
what “plant” means “in its ordinary sense” (per Lindley LJ in Yarmouth v
France at p 658) and then to see if it bears any other meaning in the
context of the specific statutory provision that the courts are considering.
78. Ms Nathan
submitted that following that approach the courts have determined that plant is
something used in the trade of the person who claims that the asset is plant.
79. She submitted
that held in the private hands of the Appellants the Painting was an asset. The
Appellants could not therefore get the exemption because the Painting was not
plant in their hands.
80. She contended
that a chattel did not automatically become plant on its creation; it remained
a chattel until used in a certain way that caused it to be treated as plant.
Even if a chattel was plant in relation to one person it did not become plant
in someone else’s hands.
81. Ms Nathan
contended that in considering whether a chattel can be considered plant it is
necessary to consider the factual context and the use to which it is put.
82. It was necessary
to consider whether the taxpayer was in business and if so what business and
what services were provided as part of that business.
83. It was necessary
to consider to what use the chattel was put in the business and whether it was
used with a degree of permanence or could be taken away at any time as the
Painting was when put on exhibition and eventually sold.
84. Plant was any
asset which acquired its colour from the context in which it was used. A horse
for instance might be a horse dealer’s stock but plant in the hands of a riding
school and an investment in the hands of a race horse owner.
85. Ms Nathan
contended that the cases showed that the courts constantly looked at the use to
which the asset was put in the hands of the owner and unless it was exempt in
the owner’s hands it was chargeable when the owner disposed of it.
86. In the case of Stokes(H.M.Inspector
of Taxes) v Costain Property Investments Ltd which was an appeal against a
decision that the taxpayer was not entitled to capital allowances Fox L.J. said
that
“Put
very shortly, the issue arises in this way. The allowances are not available if
the plant and machinery did not belong to the taxpayer at the relevant time. At
that time the plant and machinery were landlord’s fixtures in buildings leased
to the taxpayer on long leases. The question is whether it can be said that the
items did “belong to the taxpayer at the time.
The
only ground for saying that it did is that the taxpayer held a lease of the
property…….I do not think that it is an apt use of language to say that
landlord’s fixtures belong to the leaseholder. He cannot remove them from the
building. He cannot dispose of them….”
87. HMRC submitted
that Stokes v Costain and Melluish v BMI (No3) Ltd did not assist
the Appellants. In those cases it was accepted by the parties that the
requirements of s41(1)(a) Finance Act 1971 and s44(1)(a) (respectively) were
met: on the facts the taxpayer companies had incurred capital expenditure on
the provision of machinery or plant for the purposes of their respective trade
or business. Those cases, therefore, do not provide any useful guidance on the
meaning of “plant” or the principles to be applied in determining whether a
particular asset is “plant”.
88. Ms Nathan
distinguished the case of Macsaga Investment Co. Ltd v Lupton which had
been referred to by the Appellants on the basis that the case involved
machinery. She said that“machinery” however is easily recognised and has an
intrinsic character and quality that identifies it. “Plant” has no such innate
quality: it is merely an asset that is put to a particular use in a particular
context and acquires its colour from the context in which it is used.
89. Ms Nathan
questioned the business of the Company. Was it displaying pieces of art or
displaying the House or displaying the history, wealth and position of the
Howard family through the ages? HMRC contended that it was the latter and the
objects of art were part of the setting rather than having any functional use.
The art embellished the House and hence the Painting did not serve a particular
business purpose.
90. She submitted that
on looking at the visitor numbers to the House the sale of the Painting had not
resulted in any falling away of visitors to the House and therefore in any
event it was not essential to the Company’s business.
91. Although the
Appellants had contended that lessors could get capital allowances even
although they were not owners of the assets, in all those cases the owner of
the asset was using it for a business purpose, that is the leasing of the
asset.
92. None of the
cases referred to by the Appellants had provided any authority for the
proposition that a privately owned asset, not used as a business asset by the
owner could qualify as plant purely because it was loaned on an informal basis
for no charge to a trader.
93. The Appellants
were not engaged in any business activity in relation to the Painting and so it
was not apparatus used in the business of its owner.
94. The proposition
that a privately owned asset not used as a business asset by the owner could
qualify as plant purely because it was loaned on an informal basis for no
charge to a trader would open up substantial tax avoidance possibilities. The
owner of an asset would just need a third party to use a valuable asset in
their business and then could rely on that third party’s exemption when he
decided to sell the asset. It could certainly, Ms Nathan submitted, not have
been Parliaments’ intention for the provision to be used in this way.
95. The Painting
was an asset; certainly not the type of item intended to be a wasting asset.
Rather it was an investment. The Appellants did not carry on a business and
when the family needed funds the Painting was reclaimed by them.
Findings
96. We find that whilst
the Painting owned by the Appellants and loaned to the Company was no doubt
greatly admired by the visitors its sale did not cause any reduction in the
visitor numbers. In fact visitor numbers went up by ten per cent from 2001 when
the painting was sold.
97. We find that the
Painting was loaned to the Company on an informal basis and could be removed by
the Appellants at any time. It lacked therefore any degree of permanence with
the Company as described by Lord Reid in the case of Hinton (Inspector
of Taxes) v Maden and Ireland Ltd [1959] 1 W.L.R.
98. We considered Mr
Massey’s example at paragraph 44 above but the painting was not hired to the
Company. Its use by the Company was on an informal basis.
99. We find no
reason to describe it as a wasting asset in the hands of the Appellants. We
find that the Appellant executors did not have a business and in order to be
“plant” and fall within the exemption provided by Section 44 (1)(c) TCGA it is
necessary for the asset to be owned by the business or at the very least leased
formally to it.
100.We find no
reason for the Painting to be capital gains tax exempt in the Appellant’s hands
just because it might have a different character in someone else’s hands. As
stated by Vinelott J in the case of Melluish (HM Inspector of Taxes) v
BMI (No 3) Ltd and Others:
“It
is not in question that the taxpayers are all persons carrying on a trade and
that they incurred capital expenditure on the provisions of plant for the
purpose of that trade. The only question is whether in consequence of the
incurring of that expenditure the plant could be said to belong or have
belonged to them”.
101. We find Mr
Massey’s submission that there was no policy reason to restrict the phrase
“plant and machinery” found in Section 44(1)(c) to “plant which is used in the
trade of the disponor and machinery” to be difficult to accept on the basis
that not to do so would open up all sorts of tax avoidance possibilities as
described at paragraph 94 above.
102.As submitted
by Ms Nathan machinery is easily recognised and has an intrinsic character and
quality that identifies it. However, “plant” has no such innate quality: it is merely an asset that is put to a particular use in a particular context and acquires its
colour from the context in which it is used.
Decision
103.The appeal is
dismissed.
104.This document
contains full findings of fact and reasons for the decision. Any party
dissatisfied with this decision has a right to apply for permission to appeal
against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal)
(Tax Chamber) Rules 2009. The application must be received by this Tribunal
not later than 56 days after this decision is sent to that party. The parties
are referred to “Guidance to accompany a Decision from the First-tier Tribunal
(Tax Chamber)” which accompanies and forms part of this decision notice.
TRIBUNAL JUDGE
RELEASE DATE: 22 July 2011
