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Cite as: [2004] UKSC SPC446, [2004] UKSC SPC00446

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Akkum & Anor v HM Inspector of Taxes [2004] UKSPC SPC00446 (25 November 2004)

SPC00446

INCOME TAX – purchase by a company of its own shares - whether purchase wholly or mainly for the purpose of benefiting the trade of the company – no – appeal on this issue dismissed – ICTA 1988 S219(1)(a)

INCOME TAX – voluntary payments made to Appellants one day after they ceased to be directors of company – whether taxable as emoluments from those offices – yes – whether taxable as benefits provided under a non-approved retirement benefit scheme – no – whether received in connection with the termination of employment – no – appeal on this issue dismissed – ICTA Ss 19, 148 and 596A.

THE SPECIAL COMMISSIONERS

JOHN WILLIAM ALLUM

First Appellant

NORMA EUNICE ALLUM

Second Appellant

- and -

BRUCE MARSH

(HM INSPECTOR OF TAXES)

Respondent

Special Commissioner: DR A N BRICE

Sitting in public in London on 11 October 2004

R C Wilson of Counsel, instructed by Messrs Gallagher & Brocklehurst, Chartered Accountants for the Appellant

Kamlesh Singhal, of the Inland Revenue Appeals Unit London, for the Respondent

© CROWN COPYRIGHT 2004

DECISION

The appeal

Mr John William Allum (Mr Allum) and his wife Mrs Norma Eunice Allum (Mrs Allum) appeal against amendments to their self-assessment returns for the tax year ending on 5 April 2001. The amendments resulted in tax due of £91,877.34 from Mr Allum and £87,848 from Mrs Allum.

The amendments were made because the Inland Revenue were of the view (1) that payments made to Mr and Mrs Allum by an unquoted trading company on the purchase of its own shares were distributions by the company because the purchase was not made wholly or mainly for the purpose of benefiting a trade carried on by the company and (2) that voluntary payments of £30,000 each made to Mr and Mrs Allum by the company after they ceased to be directors of the company were either taxable as emoluments or were taxable as benefits under a non-approved retirement benefit scheme.

Mr and Mrs Allum appealed because they were of the view (1) that the payments made to them by the company when it purchased its own shares were not distributions because the purchase was wholly or mainly for the purpose of benefiting the trade of the company and (2) that the voluntary payments were received in connection with the termination of their employment as directors of the company and so were not chargeable to tax as each payment did not exceed £30,000.

The legislation

The legislation which relates to the purchase by a company of its own shares is contained in section 219 of the Income and Corporation Taxes Act 1988 (the 1988 Act). The relevant part of section 219 provides:

"219 Purchase by unquoted trading company of its own shares

(1) References in the Corporation Taxes Acts to distributions of a company shall not include references to a payment made by a company upon the … purchase of its own shares if the company is an unquoted trading company .. and either-

(a) the … purchase is made wholly or mainly for the purpose of benefiting a trade carried on by the company …"

At the relevant time the legislation which related to the taxation of emoluments was contained in section 19 of the 1988 Act, the relevant part of which provided:

"19 Schedule E

The Schedule referred to as Schedule E is as follows-

SCHEDULE E

1. Tax under this Schedule shall be charged under any office or employment on emoluments therefrom which fall under one or more of the following Cases-

Case I any emoluments for any year of assessment in which the person holding the office or employment is resident and ordinarily resident in the United Kingdom … ".

At the relevant time the legislation which related to tax on benefits under a non-approved retirement benefit scheme was contained in section 596A. The relevant parts provided:

"596A Charge to tax: benefits under non-approved schemes

(1) Where in any year of assessment a person receives a benefit provided under a retirement benefit scheme which is not of a description mentioned in section 596(1)(a), (b) or (c), tax shall be charged in accordance with the provisions of this section."

At the relevant time the legislation which related to tax on payments received on the termination of employment was contained in section 148 of the 1988 Act the relevant part of which provided:

"148 Payments on retirement, sick pay, etc

(1) Payments and other benefits not otherwise chargeable to tax which are received in connection with-

(a) the termination of a person's employment, …

are chargeable to tax under this section if and to the extent that their amount exceeds £30,000."

The issues

On 23 March 2001 a company in which Mr and Mrs Allum held almost all the shares purchased their shares. On the same day Mr and Mrs Allum resigned as directors of the company having held those offices since 1966. One day later, on 24 March 2001, the company resolved to make voluntary payments of £30,000 each to Mr and Mrs Allum in appreciation of their services to the company over many years.

Thus the issues for determination in the appeal were:

(1) whether the purchase by the company of its own shares was made wholly or mainly for the purpose of benefiting a trade carried on by the company within the meaning of section 219(1)(a); and

(2) whether the voluntary payments were taxable either as emoluments under section 19 or as benefits provided under a non-approved retirement benefit scheme under section 596A (as argued by the Inland Revenue) or were payments made on the termination of the Appellants' employment as directors of the company and not chargeable to tax because the amount of each payment did not exceed £30,000 within the meaning of section 148(1)(a) (as argued by the Appellants).

The evidence

There was an agreed statement of facts. Oral evidence was given on behalf of the Appellants by Mr Allum, Mr Robert Allum and Mr Simon Enfield Brocklehurst, Chartered Accountant and a partner in the firm of Messes Gallagher & Brocklehurst, the tax advisers to the Appellants. A witness statement made by Mrs Allum was read as evidence at the hearing.

The facts

From the evidence before me I find the following facts.

The Appellants and the company

Mr Allum was born on 18 November 1931 and Mrs Allum was born on 7 February 1931. The company, the purchase of whose shares are at issue in the appeal, is called Highfield Garage (Winchmore Hill) Ltd (the company). It was incorporated on 15 March 1963 and has been an unquoted trading company since that date. It was not a member of any group. It carried on the business of the sale of new and used motor cars, the servicing of motor cars, the granting of MOT certificates, and the sale of petrol. Mr Allum was appointed as a director of the company on 20 April 1966 and Mrs Allum was appointed as a director on 11 November 1966. On the same date (11 November 1966) Mr and Mrs Allum together purchased one half of the shares of the company. On 5 May 1969 they purchased the other half of the shares of the company and became the only shareholders, Mr Allum holding fifty-one shares and Mrs Allum holding forty- nine.

From 1963 to 1984 the company traded from leased premises at Winchmore Hill, London. In 1981 it obtained the Suzuki franchise. In June 1983 Mr Robert Allum (the son of Mr and Mrs Allum) became a full-time employee of the company. He was then twenty-two years of age and was employed by the company as a car salesman. In 1984 the company purchased its own freehold premises at Westpole Avenue, Cockfosters, Barnet, Hertfordshire. In 1989 Mr Robert Allum was promoted to being car sales manager and on 23 October 1995 he became the company secretary. In 1996 the company ceased supplying petrol and terminated the Suzuki franchise both of which activities had lost their profitability. The petrol forecourt was converted into customer parking for the servicing and MOT business. In 1998 the company decided to concentrate on selling used vehicles. In the same year Mr and Mrs Allum stopped taking remuneration from the company because of its lack of profitability although at least in 2000 they received dividends.

The company's financial statements for the year ending on 31 March 2000 showed fixed assets of £516,121 (being mainly the property at Westpole Avenue) and current assets of £232,691 (being mainly stocks). The largest liability was that of creditors (£433,975) of which the main item was a directors' loan (£412,290). Turnover was £832,734; there was a profit for the year of £59,719; and dividends paid during the year amounted to £42,400.

February 2000 - discussions about the long term future of the company

Early in 2000 Mr Allum was approached by the agent of a property developer and was asked if he would sell the property at Westpole Avenue for redevelopment. He applied for planning permission and intended, if his application were successful, to retire from the business. Mr Brocklehurst was introduced to the Appellants in February or March 2000 and shortly thereafter his firm became the auditors and tax advisers to the company, to the Appellants and to Mr Robert Allum. On 23 March 2000 Mr Robert Allum was appointed a director of the company and on the same date one "A" non-voting redeemable share was allotted to him. He and Mr Allum viewed at least four possible premises for the company to move to when Westpole Avenue was sold but none was considered to be suitable.

On 11 April 2000 Mr Brocklehurst attended a meeting with the Appellants and Mr Robert Allum to discuss the long term future of the company. The working relationship between Mr Allum and Mr Robert Allum was uneasy and there were a number of disagreements. Mr Robert Allum thought that he had not been properly consulted about the cancellation of the Suzuki franchise and the cessation of petrol sales (although when these two events occurred in 1996 Mr Robert Allum was neither a director nor a shareholder of the company although he was the company secretary). In April 2000 the Appellants were almost seventy years of age and wished to take a less active role in the management of the business; their preference was that Mr Robert Allum should manage the company. However, because of the tension between Mr Allum and Mr Robert Allum the Appellants thought that it would not be possible for them to remain as shareholders if the management passed to Mr Robert Allum.

A number of options were discussed including the possibility of selling the whole business to a purchaser. However, Mr Robert Allum indicated that if this were done he would not continue to work for the company and it was thought that the loss of both Mr Allum and Mr Robert Allum would adversely affect the value of the goodwill. Also, the Appellants were reluctant to sell their shares to a third party in case that resulted in their employees losing their jobs. In the presence of Mr Robert Allum Mr Brocklehurst told them that an employer could make voluntary payments to ex-employees of which the first £30,000 would be free of tax.

At the conclusion of the meeting on 11 April 2000 Mr Brocklehurst was therefore asked to consider tax efficient ways to allow the Appellants to retire from the business and to dispose of their shares without selling them outside the family.

February 2001 – the identification of the options

During the 2000 discussions the intention was that the company would sell its property at Westpole Avenue to the property developer if planning permission were obtained and would look for replacement leasehold premises from where it would continue to sell used cars and undertake the servicing and MOT work. By January 2001 the matter had become urgent as planning permission for the re-development of Westpole Avenue was obtained.

Accordingly a further meeting took place in February 2001 when Mr Brocklehurst summarised the options. First, the surplus funds in the company could be paid to the Appellants as dividends or salaries. This option was rejected both because the income tax charge was likely to be higher than any capital gains tax charge and also because it would not solve the problems of the disagreements between Mr Allum and Mr Robert Allum. Secondly, the company could be liquidated and the value paid to the Appellants as shareholders subject to capital gains tax. This option had the disadvantage that the trading activities of the company would have to cease. Also, Mr Allum was reluctant to see the company end in this way. Thirdly, the company could be sold to an outside purchaser with the proceeds of sale being subject to capital gains tax. This option was not acceptable to Mr Robert Allum. Finally, the company could purchase the Appellants' shares. This was the option which was chosen. In evidence which I accept Mr Allum said that Mr Robert Allum had expressed a desire to continue running the company and carrying on the trade of the company. Mr Brocklehurst also advised the Appellants that they would lose a combined £100,000 of capital gains tax retirement relief if the sale of their shares occurred after 5 April 2001.

The events of March 2001

The events of March 2001 began on 28 February 2001 when the board of the company met. Mr Brocklehurst was in attendance. The company approved a draft contract for the sale of the property at Westpole Avenue for £1,120,000. It also considered a memorandum of a contract proposed to be entered into by the company in order to purchase the shares of Mr and Mrs Allum as soon as the contract for the sale of Westpole Avenue was completed. Mr Allum accepted that the company could not purchase its shares until the sale of Westpole Avenue had been completed.

On 19 March 2001 there was an extraordinary general meeting of the company at which Mr Brocklehurst was present. At the meeting the Articles of Association of the company were amended to enable the company to purchase its own shares. The meeting also voted to redeem Mr Robert Allum's A redeemable ordinary non-voting share and to issue him with an ordinary voting share in its place. As by then the sale of the property had not been completed the extraordinary general meeting was adjourned until 23 March 2001. Also on 19 March 2001 Mr Robert Allum told Mr Brocklehurst that he intended that voluntary payments of £30,000 should be made to each of the Appellants after they retired. Mr Brocklehurst was asked to ensure that these payments were budgeted for in future business plans and this he agreed to do. I accept the evidence of Mr Brocklehurst that he did not think that Mr Robert Allum had discussed these matters with the Appellants nor that there was any scheme or arrangement that the payments would be made.

The adjourned extraordinary general meeting was held on 23 March 2001 at 10.00 am when the sale of the property had been completed. The meeting voted to purchase the 100 shares held by Mr and Mrs Allum for £615,000 and resolved that the consideration for the shares should be paid out of the company's distributable profits. Later the same day, at 11.00 am, there was a meeting of the board of the company when Mr and Mrs Allum resigned as directors "as they wished to make way for new management". Mr Robert Allum was then the only director and he resigned as company secretary and Ms D N Allum was appointed company secretary in his place.

The next day, on 24 March 2001, there was a meeting of the board of the company attended by Mr Robert Allum and Ms D N Allum. The board agreed to make voluntary payments of £30,000 each to Mr and Mrs Allum and the relevant minute read:

"Following the resignation due to retirement of Mr J W Allum and Mrs N E Allum it was agreed that an ex gratia payment of £30,000 each be made in appreciation of their services to the company over many years."

At the same meeting (on 24 March 2001) the contract to purchase the shares of Mr and Mrs Allum was approved by the board and the following cheques were signed and then distributed:

(1) £313,650 to Mr Allum for his shares in the company

(2) £301,350 to Mrs Allum for her shares in the company;

(3) £30,000 to Mr Allum as an ex gratia payment;

(4) £30,000 to Mrs Allum as an ex gratia payment; and

(5) £412,290 to Mr Allum in repayment of his loan account with the company.

I accept the evidence of Mr Allum that neither he nor Mrs Allum had discussed the possibility of the company making the voluntary payments either with Mr Robert Allum nor with Mr Brocklehurst and that they were both surprised and gratified when the company decided to make these payments.

It will be seen that the total amount paid by the company to either Mr or Mr Allum on 24 March 2001 was £1,087,290.

The movement of the company's stock

The sale of the property was completed on 23 March 2001. The sale included the fixtures and fittings at Westpole Avenue which were sold for £105,750. These fixtures and fittings included ramps and a rolling road used for servicing and MOT work. The company's office furniture and computers were kept in store and have not been used since. By the date of the completion of the sale no permanent suitable replacement premises had been found. Meanwhile, Mr Robert Allum had been in touch with a friend, Mr Steve Bishop, who ran a business called Woodberry Motors in Palmer's Green, London. On 19 March 2001 Mr Robert Allum wrote to Mr Bishop and said that contracts for the sale of the Westpole Avenue property were to be exchanged on 23 March and during that day (23 March) he would bring over all the remaining cars that were in stock. The company then had nine used motor cars in stock.

On 2 April 2001 Mr Bishop and the company signed an agreement about the rent of two car selling spaces and the joint use of offices at Woodberry Motors in Palmers Green. The period of occupation by the company of the two selling spaces was to be for twelve months from 2 April 2001 and thereafter to continue weekly by mutual agreement. The agreed fee was £50 per week.

Thus before the events of March 2001 the position was that the company owned a valuable property but also owed Mr Allum the amount of £412,290. After the events of March 2001 the property had been sold and the company had been paid the purchase price of £1,120,000. Payments had been made to Mr and Mrs Allum amounting to £1,087.290.

The Directors' Report of the company as at 31 March 2001 was approved on 18 May 2001. The abbreviated financial statements indicated that fixed assets, including goodwill and tangible assets, were valued at nil, having been valued at £526,121 in 2000. Current assets consisted of stocks, debtors and cash at the bank. The value of stock had reduced from £190,086 in 2000 to £22,832. Debtors had reduced from £12,635 in 2000 to £4,905 but cash at the bank had increased from £29,970 in 2000 to £77,494. In 2001 creditors had reduced from £433,975 in 2000 to £105,228; (the directors' loan of £412,290 had been reduced to £21,219). The financial statements recorded that the A non-voting share was redeemed on 19 March 2001 and replaced by a voting share and that on 23 March 2001 the 100 shares jointly owned by Mr and Mrs Allum were purchased by the company for £615,000 on their retirement to make way for the new management under the control of Mr R J Allum.

The events after March 2001

After the events of March 2001 the Appellants went on holiday. They returned in April 2001 when they decided to give Mr Robert Allum the sum of £380,000. They realised that a significant amount of money had been taken out of the company and that Mr Robert Allum might require funds to purchase stock and to find new premises. They wanted the company to keep trading with Mr Robert Allum at the helm. Accordingly, on 19 April 2001, following their return from holiday, Mr and Mrs Allum gave a gift of £380,000 to Mr Robert Allum so as to enable him to inject capital into the company if he wished to do so.

During the year ending on 31 March 2002 the scale of the company's operations reduced significantly. The company did not find suitable premises from which to trade and only had the limited facility at Woodberry Motors. That did not include any facility to provide servicing or MOT work and these services had to be out sourced to other traders. Between 14 April 2001 and 21 March 2002 seven of the nine stock cars which were moved to Woodberry Motors in March 2001 and two other cars were sold by the company from the Woodberry Motors premises. One of the other stock cars was sold before 13 February 2003 at which date the ninth stock car remained unsold, The company retained its existing value added tax registration number, its British Car Auctions account, the same motor traders' insurance policy, the same motor trade plates and the same bank account and bank facilities.

Both Mr and Mrs Allum were at all relevant times resident and ordinarily resident in the United Kingdom for tax purposes.

Reasons for decision

Issue (1) – Was the purchase of the shares made wholly or mainly for the benefit of the trade?

The first issue for determination in the appeal is whether the purchase by the company of its own shares from the Appellants was made wholly or mainly for the purpose of benefiting a trade carried on by the company within the meaning of section 219(1)(a).

As argued this issue raised two separate questions, namely:

(a) was the purchase of the shares for the purpose of benefiting the trade? and

(b) was section 219 incapable of applying because the trade had ceased?

(a) – Was the purchase for the purpose of benefiting the trade?

For the Appellants Mr Wilson cited Vodafone Cellular and Others v Shaw [1997] STC 734 at 742 f-g for the principles that the test was: what was the purpose of the purchase? not: what was the effect? He argued that the purpose was the subjective intention of the directors of the company at the time of the payment. The evidence was that the Appellants wanted to retire; they received an approach to sell the company's premises; they applied for planning permission; and they instructed Mr Brocklehurst to advise them. Mr Brocklehurst proposed a number of options and the Appellants chose that the company should purchase the shares which they held so that the company could continue trading which it did; a liquidation would have meant the end of the company and the end of the trade. Thus the purchase of the shares benefited the trade by letting the trade continue whereas any of the other options would have meant that the trade ceased. Mr Wilson relied upon statement of practice SP 2/82 and the second example in paragraph 2 which stated that the purchase of the shares of a controlling shareholder who was retiring as a director and wished to make way for new management was normally a benefit to the trade.

For the Respondent Ms Singhal argued that the purchase of the shares was not made wholly or mainly for the purpose of benefiting the trade carried on by the company. The purchase of the shares had been funded by the sale of the company's assets and that had been done to facilitate the retirement of the Appellants in a tax efficient way and to leave Mr Robert Allum in control of the company. When the company's premises with its fixtures and fittings were sold on 21 March 2001 the goodwill was reduced to nil in the financial statements and the subsequent deterioration of the trade was both foreseeable and inevitable. The retirement of Mr and Mrs Allum as directors was not beneficial to the trade. Ms Singhal referred to statement of practice 2/82 and argued that it referred to the retirement of a shareholder to make way for new management. However, in this appeal the retirement of Mr and Mrs Allum had been claimed to have taken place because of the disagreements between Mr Allum and Mr Robert Allum but at the relevant time Mr Robert Allum had only been an employee. Further there was no new management because there was nothing to manage except the two rented spaces at Woodberry Motors.

In considering the arguments of the parties I start with the authority cited to me to see what principles it establishes. In Vodafone one of the issues was whether a payment made for the release from an onerous obligation was wholly and exclusively laid out for the purposes of a trade within the meaning of what is now section 74(1)(a) of the 1988 Act. That is not the same legislation which is at issue in this appeal as section 219(1)(a) refers to a purchase which is made "wholly or mainly for the purpose of benefiting a trade". Nevertheless, I have found the guidance given by the Court of Appeal in Vodafone, adapted to suit the different words of section 219(1)(a), most helpful in resolving this issue in this appeal.

At 742 f-g Millett LJ reviewed the previous authorities and derived a number of principles to apply when deciding whether a payment was made wholly and exclusively for the purposes of a trade or whether there was some element of personal advantage. First, the words "for the purposes of the trade" mean to serve the purposes of the trade and not the purposes of the company or for the benefit of the company. Secondly, to ascertain whether the payment was made for the purposes of the taxpayer's trade it is necessary to discover his object in making the payment. This involves an enquiry into the taxpayer's subjective intentions at the time of payment. Thirdly, the object of the taxpayer in making the payment must be distinguished from the effect of the payment. Fourthly, although the taxpayer's subjective intentions are determinative, these are not limited to the conscious motives which were in his mind at the time of the payment; some consequences are so inevitably and inextricably involved in the payment that unless merely incidental they must be taken to be a purpose for which the payment was made. Finally, the question does not involve an inquiry of the taxpayer whether he consciously intended to obtain a trade or personal advantage by the payment. The primary inquiry is to ascertain what was the particular object of the taxpayer in making the payment. Once that is ascertained, its characterisation as a trade or private purpose is a matter for the commissioners, not for the taxpayer.

Applying those principles to the facts of the present appeal I start with the principle that the words "for the purpose of benefiting a trade" in section 219 mean to benefit the trade and not to benefit the company. It is only benefit to the trade which has to be considered. Next I have to consider the object of the company in making the payment for the purchase of its own shares and that requires an inquiry into the subjective intentions of the company (acting through its directors); however, such an inquiry is not to be limited to conscious motives in the mind of the directors at the time of the payment but must also include consequences which are so inevitably and inextricably involved in the payment that, unless merely incidental, they must be taken to be a purpose for which the payment was made.

In approaching this task it is relevant that the purchase by the company of its shares was part of a number of transactions which began in early 2000 when Mr Allum was approached and asked if the company would sell its premises at Westpole Avenue. At that time Mr and Mrs Allum were approaching the age of seventy years and wished to retire. By January 2001 matters had become urgent as planning permission for the redevelopment of the premises had been obtained. A number of options were considered and it was argued by the Appellants that none of the other options would have benefited the trade. However, some of these arguments confuse benefit to the trade with benefit to the company. For example, the trade could have been sold and the company liquidated; that would not have benefited the company but could have benefited the trade if it had then received further investment and good management from the purchaser.

Further the decision taken by the company that it would purchase its own shares was inextricably linked to the fact that it needed the proceeds of the sale of the premises in order to do so. The arrangements were such that Mr and Mrs Allum were paid by the company (for their shares, together with the voluntary payments and the repayment of their loan) approximately the same amount as the company received for the sale of the premises. This did not benefit the trade in any way. The trade was left without permanent premises from which it could be carried on; without the financing previously provided by the substantial loan from Mr Allum; and without the services of Mr and Mrs Allum as directors. These were considerable disadvantages to the trade and there was no immediate intention to remedy these difficulties. Although about three weeks later £380,000 was paid to Mr Robert Allum there was no evidence that any of those funds were used to benefit the trade. It seems to me that all these consequences were so inevitably and inextricably involved in the payment for the purchase of the shares that they must be taken to be a purpose for which the payment was made. From that I conclude that the purchase of the shares was not made wholly or mainly for the purpose of benefiting the trade but to facilitate the retirement of Mr and Mrs Allum. In reaching this conclusion I have borne in mind that the purpose of making the payment is to be distinguished from the effect of the payment. I have considered only the factors surrounding the company's decision to purchase its shares and not the deterioration in the trade which followed later.

Mr Wilson argued that the purchase of the shares benefited the trade by letting the trade continue whereas any of the other options would have meant that the trade ceased. I do not agree. The surplus funds in the company could have been paid to Mr and Mrs Allum as dividends and the trade continued. That would not have solved the problem of the disagreements with Mr Robert Allum but he was very much a minority shareholder and one director out of three. The trade could have been sold to a purchaser; that might not have been acceptable to Mr Robert Allum (who was in the minority) but it might well have benefited the trade.

Mr Wilson also referred to statement of practice SP 2/82 The relevant parts of that statement read:

"Where a company makes a purchase of its own shares which involves a payment in excess of the capital originally subscribed for the shares, the excess constitutes a distribution. However, such a payment is treated as not giving rise to a distribution if, among other conditions, the purchase is made wholly or mainly to benefit a trade carried on by the company … . This statement indicates how this test is applied by the Revenue. …

The company's sole or main purpose in making the payment must be to benefit a trade carried on by it … .The condition is not satisfied where, for example, the transaction is designed to serve the personal or wider commercial interests of the vending shareholder (although usually he will benefit from it) or where the intended benefit for the company is to some non-trading activity which it also carries on.

If there is a disagreement between the shareholders over the management of the company and that disagreement is having or is expected to have an adverse effect on the company's trade then the purchase will be regarded as satisfying the trade benefit test provided the effect of the transaction is to remove the dissenting shareholder entirely. Similarly, if the purpose is to ensure that an unwilling shareholder who wishes to end his association with the company does not sell his shares to someone who might not be acceptable to the other shareholders, the purchase will normally be regarded as benefiting the company's trade.

Examples of unwilling shareholders are: …

- …

- a controlling shareholder who is retiring as a director and wishes to make way for new management … ."

Statements of practice, of course, represent the views of the Inland Revenue and are not binding on the Special Commissioners. However, in my view the statement does not assist the Appellants. Paragraph 1 states that the condition in section 219(1)(a) is not satisfied where the transaction is designed to serve the personal or wider commercial interests of the vending shareholder. In my view the whole series of transactions which included the purchase of the shares was designed to serve the personal interests of the vending shareholders (the Appellants) who wanted to retire from the company. Paragraph 2 of the statement refers to the removal of the dissenting shareholder and so does not apply to the facts of this appeal where the dissenting shareholder (Mr Robert Allum) remained. If the only purpose of the purchase of the shares had been to ensure that the Appellants (who were the controlling shareholders) did not sell their shares to someone who might not be acceptable to Mr Robert Allum (the remaining shareholder) then it would have been easier for the Appellants to satisfy the test in section 219(1)(a). However, on the facts of this appeal I have already concluded that the whole, or at least the main, purpose of the purchase of the shares and the other transactions which took palce at the same time, was to facilitate the retirement of the Appellants.

My conclusion on this question, therefore, is that the purchase by the company of its own shares from the Appellants was not made wholly or mainly for the purposes of benefiting a trade carried on by the company. That means that the appeal on this issue must be dismissed and I do not have to consider the second question raised by the arguments of the parties. However, as arguments were put to me I very briefly express my views.

(b) – Had the trade ceased?

The second question arising out of this issue was whether section 219 was incapable of applying because the trade had ceased. The argument for the Inland Revenue was that section 219 could only apply to the purchase of its shares by a trading company and so if, at the time of the purchase, the company was no longer trading then section 219(1)(a) could not apply. Logically, this question arises before the question whether the purchase of the shares was for the purpose of benefiting the trade of the company because, if section 219 cannot apply at all, that question would not need answering. However, this second question was treated as subsidiary at the hearing and I have treated it likewise.

Mr Wilson for the Appellants argued that the trade of the company did not cease on the purchase of the shares. He cited Merchiston Steamship Company v Turner [1910] 2 KB 923; Aviation and Shipping Company v Murray [1961] 2 All ER 805; Gordon & Blair Limited v Commissioners of Inland Revenue (1962) 40 TC 358 at 362A; Ingram v Callaghan (1968) 45 TC 151 at 165G-H; and Rolls Royce Motors v Bamford (1976) 51 TC 319 at 344B-G and 345A and E. He distinguished J & R O' Kane & Co v The Commissioners of Inland Revenue (1922) 12 TC 30, arguing that the test for section 219 was the test of purpose or intention and not of effect

For the Respondent Ms Singhal argued that the trade of the company had ceased when it purchased its own shares. She relied upon O'Kane and distinguished Aviation Shipping and Merchiston.

All the authorities make it clear that the question whether a trade continues or is discontinued is a question of fact for the Special or General Commissioners which will not be changed unless the findings of the Commissioners are based on a misapprehension. Also, none of the authorities address the exact question under consideration in this appeal which is whether, at the time of the purchase of its shares, the company was a trading company.

In Merchiston (1910) the issue was whether, for income tax purposes, there had been a continuing trade or the cessation of one trade and the commencement of a new one. The memorandum of association of the company provided that the company was formed to purchase and trade with a named ship and, if it were lost, to acquire another ship. The company traded with the named ship until April 1906 when she was lost at sea. In May 1906 a second ship was purchased and in October 1906 trade with the second ship commenced. Bray J held that there had been one trade throughout with the two ships in succession; the appellants had carried on a continuous business. Mr Wilson relied upon Merchiston for the principle that a gap in trading did not amount to a cessation. Ms Singhal distinguished Merchiston where it was clear that a new vessel was to be purchased to enable the trade to continue and that there was to be a continuous business.

In my view in the present appeal there was no gap in trading. After the events of March 2001 the trading stock was immediately moved to Woodberry Motors and sales of used cars continued from there. Although the volume of trade was severely diminished, as a result of the disadvantages I have outlined above, nevertheless the trade did continue albeit at a very much reduced level.

In O'Kane (1922) the issue was whether the appellants were trading as wine and spirit merchants in the year 1917. They announced their decision to retire in 1916 and circulated lists of spirits for sale. Some sales were made in 1916 and in 1917 practically the whole stock was sold although earlier that year some purchases were made. Lord Buckmaster at 347 held that it was quite plain that right up to the end of 1917 the appellants were engaged in trading. Lord Akinson at 349 held that a trader who wished to retire from business could continue to carry on his business in the usual way but not replenish his stock. He would still be trading until he retired.

This authority supports my view that the sale by the company of its existing stock after the move to Woodberry Motors was the continuation of the trade of the company.

In Aviation and Shipping (1961) the issue was whether there had been a discontinuance of the trade where a company managed and chartered ships. In 1955 it sold three old ships and bought three modern ones. It was held that there had been no discontinuance of the trade but only the replacement of the stock-in-trade; the trade was the seeking after profits by the use of ships and that trade had not been discontinued. Mr Wilson relied upon Aviation and Shipping for the principle that the temporary lack of a large asset used for a trade, like the premises in this appeal, did not mean that the trade discontinued nor that the cessation of the trade was inevitable. Ms Singhal distinguished Aviation Shipping at 809F where the sale of the assets was by way of replacement of the stock in trade. In this appeal the sale had been not of the stock in trade but of the premises of the trade without the acquisition of premises elsewhere and the value of the fixed assets had been reduced to nil.

In my view the trade in this appeal was the seeking after profits by the sale of used cars and the servicing and MOT business. After the events of March 2001 the sale of the used cars continued, albeit at a much reduced level. It is true that the premises had been sold but replacement arrangements had been made at Woodberry Motors and cars continued to be sold.

Thus the first three authorities support the conclusion that the trade did not cease. The later authorities upheld decisions on their own facts that a trade was discontinued.

In Gordon & Blair (1962) the appellant company carried on business as brewers. In 1953 it ceased brewing and then bottled and sold beer supplied by another brewery. It argued that its trade had not ceased and so it could set off losses incurred prior to the change against profits made after it. It was held that the company had ceased trading as brewers and had begun a new trade. In Ingram v Callaghan (1968) the company carried on a trade of manufacturing rubber goods. It made heavy losses and in 1961 it manufactured plastic goods. It was held that in 1961 the appellant had commenced a new trade and that the previous trade was permanently discontinued. In Rolls Royce (1976) the business of a company was organised into six divisions. On 23 May 1971 four divisions were transferred to a new government owned company and on 19 June 1971 the assets of the two remaining divisions were transferred to the appellant. The original company then went into liquidation. The appellant sought to carry forward the losses of the original company and set them against its profits. It was held that the appellant did not carry on the same trade as that in which the losses has been incurred. Mr Wilson for the Appellants argued that in Rolls Royce the change was qualitative and the essence of the trade changed; in this appeal the change was quantitative and the same trade (of car sales) continued although servicing and MOT ceased. Here there had been no violent change to the business.

In all three cases there had been a substantial change in the nature of the business which was not the case in this appeal. In this appeal the nature of the business remained much the same although its volume and profitability were severely reduced. The company did not cease trading. It is also relevant that in this appeal the legislation at issue only requires the company to be a trading company; there is no question about whether one trade has ceased and another commenced so long as the company was trading.

My conclusion on the second question is that the company did not cease trading in March 2001 although thereafter there was a severe diminution in the trade. The company remained a trading company when it purchased its own shares and so section 219 was capable of being applied. However, as I have already decided that section 219(1)(a) did not apply that conclusion cannot assist the Appellants.

(2) Were the voluntary payments taxable?

The second issue for determination in the appeal is whether the voluntary payments were taxable under either section 19 or section 596A (as argued by the Inland Revenue) or were within section 148 (as argued by the Appellants). Accordingly, three questions arise out of this issue, namely:

(a) Were the payments emoluments? or

(b) Were the payments benefits under a retirement benefit scheme? or

(c) Were the payments received in connection with the termination of employment?

(a) - Were the payments emoluments?

Mr Wilson for the Appellants argued that the voluntary payments were not emoluments of the offices of directors held by Mr and Mrs Allum because on the date that the payments were voted by the company Mr and Mrs Allum had resigned as directors and had therefore ceased to hold those offices. The payments, therefore, were not "from" the employment. He cited Hochstrasser v Mayes [1960] AC 376 at 387 to 389 and Moore v Griffiths [1972] 3 All ER 399 at 400A to support his argument that the payments were more in the nature of testimonials, tokens of appreciation or marks of esteem. He referred to paragraph 53 in McBride v Blackburn Spc 356 and argued that the payments were bounty for reasons personal to the donees; there was no link by quantum to services rendered; they were not remuneration for services; and there could be no element of recurrence. He distinguished Weston v Hearn (1943) 25 TC 425 at 426 where the employment continued.

For the Respondent Ms Singhal argued that the payments were emoluments from the office of director held by each Appellant. She referred to Moore v Griffiths and also relied upon paragraph 53 of the decision in McBride v Blackburn.

The authorities cited by the parties, and some other authorities, were considered by the Special Commissioners in McBride v Blackburn. The principles derived from the authorities were summarised at paragraph 53 in the following way:

"A voluntary payment is taxable if it is received in respect of the discharge of the duties of an office; or if it accrues by virtue of the office; or if it is in return for acting in the office. However, a gift is not taxable if it retains its characteristic as a gift (which we would describe as an exercise of bounty intended to benefit the donee for reasons personal to him or her), even though it is given in recognition of services rendered, or if it is "peculiarly due" to personal qualities, or if it is to mark participation in an exceptional event. Relevant factors are: whether the payment is made by the employer; whether the office is at an end; whether other remuneration is paid; whether the payment is exceptional; whether there is an element of recurrence; and whether the recipient is entitled to the payment."

In applying these principles to the facts of the present appeal I first consider the minute of the meeting on 24 March 2001 which made it clear that the payments were made "in appreciation of the services [of the Appellants] to the company over many years". It seems to me that the minute supports the conclusion that the payments were made in respect of the discharge of the duties of the offices of directors held by the Appellants. They were voluntary payments made in recognition of services rendered. The payments accrued to the Appellants by virtue of their offices as directors. They were not testimonials, nor were they peculiarly due to the personal qualities of the Appellants, nor were they a mere present, nor were they made irrespective of and without regard to the services rendered. The payments were made by the company of which the Appellants had, for very many years, been directors. They were made in return for the Appellants acting as and being the directors. They were, therefore emoluments and taxable under section 19.

In reaching this conclusion I have borne in mind that the payments were voted by the company one day after the Appellants had resigned as directors but that the intention of Mr Robert Allum to make the payments had been formed before that date. I have also borne in mind that the Appellants had no expectation that the payments would be made. However, in my view, these factors do not alter the conclusion that the payments were emoluments.

My conclusion on this question is that the payments were emoluments taxable under section 19.

(b) Were the payments retirement benefits?

The second question is whether the payments were retirement benefits taxable under section 596A. Before turning to consider the arguments of the parties I set out the terms of the section and of the definition sections.

The relevant part of section 596A provides:

"596A Charge to tax: benefits under non-approved schemes

(1) Where in any year of assessment a person receives a benefit provided under a retirement benefit scheme which is not of a description mentioned in section 596(1)(a), (b) or (c), tax shall be charged in accordance with the provisions of this section."

Definitions are contained in sections 611 and 612 of which the relevant parts provide:

"611 Definition of "retirement benefits scheme"

(1) In this chapter "retirement benefits scheme" means …a scheme for the provision of benefits consisting of or including relevant benefits …

(2) References in this Chapter to a scheme include references to a deed, agreement, series of agreements, or other arrangements providing for relevant benefits notwithstanding that it relates or they relate only to -

(a) a small number of employees , or to a single employee, or

(b) the payment of a pension starting immediately on the making of the arrangements

612 Other interpretative provisions

(1) … "relevant benefits" means any pension, lump sum, gratuity or other like benefit given or to be given on retirement or on death, or in anticipation of retirement, or in connection with past service after retirement or death … "

For the Appellants Mr Wilson argued that the voluntary payments were not benefits provided under a non-approved retirement benefit scheme because there was no scheme. He referred to the definition in section 611(2) and argued that none of the matters mentioned in section 611(2) were present in this case. He also referred to the definition of "scheme" in the Compact Edition of the Oxford English Dictionary 1971 of "a plan or design or a plan of action devised in order to attain some end" and argued that the decision to make the payments was made by Mr Robert Allum at a director's meeting and there had been no pre-arranged agreement. There was no organised structure; the payments were spontaneous, and they were made to commemorate the retirement of Mr and Mrs Allum. Finally, Mr Wilson argued that statement of practice SP 13/91 did not accurately reflect the legislation. If section 596A meant what the Inland Revenue claimed it meant then section 148 would be redundant.

For the Respondent Ms Singhal argued that the Appellant accepted that "relevant benefits" as defined in section 612 could include voluntary payments of the type made in this appeal. The issue therefore was whether they were made pursuant to a retirement benefits scheme. Section 611(2) provided that a scheme included arrangements. She argued that when Mr Allum asked Mr Brocklehurst to budget for the payments that constituted a prior arrangement and it was not a single spontaneous decision taken by Mr Robert Allum as sole director.

Section 596A brings within the charge to tax a benefit provided under a retirement benefit scheme. A retirement benefit scheme is defined as a scheme for the provision of benefits consisting of or including relevant benefits (section 611(1)). A gratuity is a relevant benefit (section 612(1)). Thus the provision of a gratuity would be a benefit provided under a retirement benefit scheme if there were a scheme. Scheme includes references to a deed, agreement, series of agreements or other arrangements providing for relevant benefits notwithstanding that they relate only to a small number of employees or a single employee (section 611(2)). So the question is whether in this appeal there was an arrangement providing for the voluntary payments.

I find as a fact that there was no scheme or arrangement that these payments should be made. The matter was not been previously discussed with either Appellant and they were both surprised and gratified when the company decided to make the payments. There was no expectation of reward. I do not agree that when Mr Allum asked Mr Brocklehurst to budget for the payments that constituted a prior arrangement within the meaning of section 596A. That was not the establishment of a scheme or arrangement but merely a means of ensuring that the decision taken by Mr Robert Allum, as sole director, to make the payments could be implemented.

Mr Wilson referred to statement of practice 13/91 which, he argued, did not accurately reflect the legislation. The relevant parts of that statement of practice provide:

"2. An ex gratia payment is made under a retirement benefits scheme if the decision to make the payment involves an arrangement. Self-evidently there will be an "arrangement" if the payment flows from any prior formal or informal understanding with the employee. But the term "arrangement" in this context goes wider and includes any system, plan, pattern or policy connected with the payment of a gratuity. Some examples are-

(a) a decision at a meeting to make an ex gratia payment on an employee's retirement; or

(b) where, say, a personnel manager makes an ex gratia payment under a delegated authority or on the basis of some outline structure or policy; or

(c) where it is a common practice for an employee to make an ex gratia payment to a particular class of employee.

There may be some exceptional situations where a gratuity is not paid under an "arrangement". The position in individual cases can be determined only on their facts."

As mentioned above, statements of practice represent the views of the Inland Revenue and are not binding on the Special Commissioners. However, in my view a finding that the voluntary payments in this appeal were not made under a retirement benefits scheme would not be inconsistent with the statement. I find as a fact that in this appeal there was no prior formal or informal understanding with the Appellants that the payments would be made. There was no expectation of reward. The Appellants were both surprised and gratified when the company decided to make the payments. I also find that there was no system, plan, pattern or policy connected with the payments. In my view the facts in this appeal bring the payments within paragraph 3 of the statement and, in these exceptional circumstances, the gratuities were not paid under any arrangement.

I therefore conclude that the payments were not retirement benefits taxable under section 596A.

(c) Were the payments in connection with the termination of employment?

As I have already concluded that the voluntary payments were taxable under section 19. as emoluments they could not be charged to tax under section 148 which only applies to payments and benefits not otherwise chargeable to tax.

The conclusion that the payments were chargeable to tax under section 19 means that the appeal on this issue is dismissed.

Decision

My decisions on the issues for determination in the appeal are:

(1) that the purchase by the company of its own shares was not made wholly or mainly for the purpose of benefiting a trade carried on by the company within the meaning of section 219(1)(a); and

(2) that the voluntary payments were taxable as emoluments under section 19 .

That means that the appeal is dismissed.

DR A N BRICE

SPECIAL COMMISSIONER

RELEASE DATE: 25 November 2004

SC 3075/2004

SC 3076/2004

11.04