United Kingdom Special Commissioners of Income Tax Decisions

Foxton v Revenue and Customs [2005] UKSPC SPC00485 (22 June 2005)

SPC00485

MILK QUOTA – whether quota disposed of by tenant as agent for the landlord – no – whether disposal of quota a part disposal of land – no – penalty awarded for non-compliance with the Tribunal's directions

THE SPECIAL COMMISSIONERS

PATRICK GEOFFREY STANLEY FOXTON Appellant

- and -

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Special Commissioner: DR JOHN F AVERY JONES CBE

Sitting in public in London on 13 June 2005

Gordon Apsion, counsel, instructed by Philip Burley & Co, chartered accountants, for the Appellant

Launcelot Henderson QC, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1. Mr P G S Foxton appeals against an assessment to capital gains tax for 1988-89 on gains of £80,811. The Appellant was represented by Mr Gordon Apsion; the Revenue were represented by Mr Launcelot Henderson QC.
2. The issues in the appeal are whether milk quota was disposed of by the Appellant for himself or as agent for his landlord, and whether quota is land for capital gains tax purposes with the consequence that disposal of the quota is a part disposal of the land.

Procedural

3. Directions for the conduct of this appeal were issued on 16 February 2005 following a hearing on 9 February 2005 at which Mr Apsion represented the Appellant, requiring that (1) by 9 March 2005 the Appellant disclose all documents relating to the appeal including any documentary material relating to a payment of £27,798.85 (and if any documents were unavailable to make a witness statement stating what was unavailable, why, and what steps had been taken to produce them); (2) by 23 March 2005 the Appellant to serve his statement of case; (3) by 23 March 2005 the Appellant to use his best endeavours to produce a draft agreed statement of facts; (4) by 13 April 2005 the Respondent to serve a statement of case; (5) by 13 April 2005 to exchange witness statements; (6) the Appellant to serve any reply to the Respondent's statement of case; (7) two weeks before the hearing [i.e 30 May 2005] to serve a bundle of documents; (8) seven days before the hearing [i.e. 6 June 2005] to exchange skeleton arguments.
4. The Appellant did none of these things and accordingly the Respondent was unable to comply either. By the day of the hearing the office of the Special Commissioners had received the following letters from the Appellant's accountants, Philip Burley & Co: dated 19 May 2005 saying that witness statements and a statement of facts had largely been prepared by the Appellant who was waiting to review them with Mr Apsion; dated 27 May 2005 saying that a statement of facts had been passed to Mr Apsion; dated 6 June 2005 saying that there was no significant additional material to disclose and that it had not been possible to locate any of the documents set out in the directions, and that no payment of £27,798.85 was actually made; and dated 8 June 2005 that they could not guarantee that a skeleton argument would be forwarded but that Mr Apsion would confirm this the following day (which, as far as I know, he did not). The office received a bundle of documents from the Appellant received on 10 June 2005 (one page of which was a statement of facts running to two paragraphs by the Appellant). No witness statement was ever provided in accordance with (1); no statement of case was provided in accordance with (2); the only statement of facts was that received with the bundle on 10 June 2005 without any attempt to agree it with the Revenue; no witness statements were ever provided in accordance with (5) (although there is mention of them in the letter of 19 May 2005); the bundle of documents was received on the Friday before a hearing on the following Monday; and no skeleton argument was ever received from the Appellant in accordance with (8). A skeleton argument was received from Mr Henderson on 9 June 2005 dealing not only with his arguments but also with the lack of progress on the procedural matters and expressing reluctance to see the appeal adjourned again.
5. I heard evidence from the Appellant and his accountant, Mr Philip Burley FCA, that on previous occasions the Revenue had asked for documents already in their possession. No explanation was given for the reason for the other failures to comply with the directions, although Mr Apsion said that he had made it clear at the directions hearing that his arguments were based on a document that was available at that hearing.
6. I regard this total non-compliance with the directions as unsatisfactory. Directions are issued to facilitate a fair hearing and to avoid the other side being taken by surprise. They are expected to be complied with. It is clear from the dates of the letters from Philip Burley & Co that everything was left to the last minute. Because of this the facts were unclear to me from the papers in my possession and only explained at the hearing and in a way that was contrary to the short statement of facts by the Appellant in the bundle. Mr Henderson had to cross-examine the Appellant to elicit the basic facts. He invited me to award a penalty under reg 24(1) of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994. I agree that this is a case in which I should do so. I determine that the Appellant pay a penalty of £500.

Substance

7. I find the following facts:

(1) The Appellant was tenant of the Duchy of Lancaster ("the Duchy") of North Farm, Silpho, Scarborough under agreements made in 1977 and 1979 although copies were not produced.

(2) When milk quota was introduced in 1984 he was originally allocated quota of 154,000 litres but this was increased on appeal to 247,500 litres. He made purchases of further quota subsequently.

(3) On 30 July 1988 the Appellant agreed to sell milk quota of 60,000 litres to a third party Mr A L Dean for £18,300 plus VAT. The agreement recited that it was ancillary to a tenancy agreement of approximately 10 acres granted by the Appellant to the purchaser but no copy of such tenancy was provided. The consideration was to be held by Farrer & Co as stakeholders until the Milk Marketing Board had issued written notification that the quota had been transferred. On final completion the consideration was to be released to the Appellant.

(4) Milk Marketing Board Form T2 were completed in relation to the sale. The form relates to the transfer of part of the total quota of 464,315 litres, gives the Appellant's particulars as the outgoing occupier and contains a declaration agreeing that 60,000 litres part of the quota registered in the Appellant's name with a holding of 10 acres be transferred to AL Dean & Son with an operative date of 17 July 1988.

(5) The Appellant entered into two similar agreements on 4 August 1988 one for the sale of quota of 148,397 litres for £37,652.51 plus VAT to MB Sadler described as ancillary to a tenancy of 42 acres, and the other for 90,000 litres of quota for £24,858.10 plus VAT to WB and CA Armitstead described as ancillary to a tenancy of 14 acres. I saw the T2 form relating to the transfer to Armitstead which is similar to the one relating to AL Dean & Sons, and I infer that a similar form was completed in relation to the other sale.

(6) On 6 September 1988 the Appellant entered into a deed of variation of the two tenancy agreement with Mr M K Ridley as agent for Her Majesty in right of the Duchy under which:

(a) the Appellant was responsible for negotiation of the sale of the quota to third parties;

(b) the Duchy consented to the transfer of the quota and permitted the grant of tenancies of parts of the farm of more than one and less than two years to the purchasers;

(c) payment was made to the Appellant of £80,810.61 (the total VAT-exclusive consideration for the three sales)

"in full and final settlement of his claims against the landlord for statutory compensation in respect of all wholesale milk quota allocated to him as milk producer and for which on quitting the Farm he would be entitled to compensation under the said Schedule" [Schedule 1 to the Agriculture Act 1986]

to be paid to the Appellant within 7 days of the unconditional receipt by the Duchy [which should presumably refer to Farrer & Co who are the Duchy's solicitors but who received it as stakeholders] of the gross proceeds;

(d) the Appellant acknowledged that the retained quota of 159,707 litres was wholly attributable to the landlord's interest;

(e) if clause 1 (which should presumably be a reference to the provision described at (d) above) were unenforceable then the tenant's fraction pursuant to para 11(6) of Schedule 1 to the Agriculture Act 1986 was one hundredth of one per cent. (That provision enables the landlord and tenant to agree in advance of the termination of a tenancy the tenant's fraction of the quota which is otherwise based on the annual rental value of the tenant's dairy improvements and fixed equipment as a proportion of the sum of that value and the part of the rent as is attributable to the land used for feeding, accommodation or milking of dairy cows.);

(f) the tenancy agreements were to be varied accordingly but otherwise to continue in full force and effect;

(g) if the Appellant or any successor made any claim against the Duchy under the Schedule the Appellant indemnified the Duchy against any sums the Duchy had to pay.

(7) On 8 September 1988 Farrer & Co paid £80,810.61 to the Appellant's solicitors.

8. Mr Apsion contends first that milk quota was allocated to the Appellant as the relevant producer, and that it was not allocated to the Duchy but to Duchy's land. Accordingly the Appellant sold the quota as agent for the Duchy. Mr Henderson contends that the documents show that the Appellant sold the quota.
9. The method of selling quota described above follows that in Harries v Barclays Bank plc [1997] EG 145 in which the Court of Appeal quotes the following from the judgment appealed against of Rattee J (at p 148):

"It has become common practice that, where farmer A has quota in respect of his holding but no longer wishes to carry on a dairy farming business and, therefore, wishes to dispose of his quota without the land, he will grant a short lease for, say 11 months, of his holding to farmer B, who wishes to acquire farmer A's quota. It will be a term of the arrangement that the land let by farmer A to farmer B shall not be used for dairy production. On taking the lease farmer B will be registered as the holder of what was farmer A's quota in respect of the holding comprised in the lease. Farmer A's land and farmer B's land will thereafter during the continuance of the lease form one holding for the purpose of the quota regulations. As a result, when the lease in respect of farmer A's land terminates, an apportionment will have to be made of the quota enjoyed during the term of the lease in respect of the composite holding, and that apportionment will fall to be made according to the use made of the two parts of that composite holding. Since farmer A's land will not have used during the lease for dairy farming, the whole of the quota will be apportioned to farmer B's land, which will have been used for dairy farming."

10. The Appellant was the registered owner of the quota and he entered into three agreements to sell it under which he was entitled to the consideration. It was simply the disposal of an asset by the Appellant with the agreement of the Duchy, presumably necessitated because of the method of transfer involving the grant of a short sublease. There is nothing to suggest that he was making the disposal as agent for the Duchy. Although the agreement of 6 September 1988 states that the payment was in settlement of the Appellant's claim for statutory compensation to which he was entitled on quitting the farm, this is not a correct description of the payment, which was that it was received by the Appellant for the three sales of quota made with the Duchy's consent. Schedule 1 to the Agriculture Act 1986 provided that compensation was payable on termination of the tenancy and on quitting the land, neither of which occurred. Indeed, the agreement provides that the tenancy agreements to continue in full force.
11. Secondly Mr Apsion contends that milk quota is within the definition of land in the Interpretation Act 1978:

"'Land' includes buildings and other structures, land covered with water, and any estate, interest, easement, servitude or right in or over land."

Accordingly he contends that the disposal of quota is a part disposal of the land. He asks me to distinguish Cottle v Caldecott [1995] STC (SCD) 239 on the basis that this argument was not put forward. Mr Henderson contends that quota is a separate asset for capital gains tax that the facts are identical with those in Cottle v Caldicott save that here the Appellant was a tenant; and that the definition in the Interpretation Act is irrelevant as one is not construing any statutory reference to land.

12. The legislative provisions relating to milk quota are set out in Cottle v Coldicott. The Special Commissioners decided that milk quota was a personal asset of the producer that was incorporeal property within the meaning of what is now s 21(1)(a) of the Taxation of Chargeable Gains Act 1992, and that there was no part disposal of the land in respect of which the quota subsisted when it was disposed of. It was described by the Court of Appeal in Harries v Barclays Bank plc at p149:

"Milk quota is the creation of the legislation both European and domestic to which I have referred. In determining where the benefit of it lies and how it got there it is necessary to apply that legislation to the facts of the case. I do not find it helpful in that context to seek to label or categorise milk quota as an asset or as an asset of a particular description, not least when the description is one of English law which may not be recognised by the domestic laws of the other member states."

13. Again I agree with Mr Henderson. While milk quota is related to holdings of land that does not mean that it is the same asset as the holding because it can be dealt with separately by the method adopted in this case of granting a short subtenancy, which is not itself a disposal of the land. It seems that such a subtenancy can have differing amounts of quota attached to it varying between 3,533 litres per acre in the case of the sale to Sadler to 6,428 litres per acre in the case of the sale to the Armitsteads. Much of the Appellant's quota (216,815 litres, the difference between the total quota of 464,315 litres mentioned in the T2 forms and the original quota of 247,500 litres) was acquired, and the three sales in question were made, while he continued to be tenant of the Duchy of exactly the same holding. The draftsman recognised that quota is a separate asset from the land for capital gains tax by treating it as a separate class of asset for roll-over relief in s 155 TCGA 1992. Although the Interpretation Act point was not argued in Cottle v Coldicott a similar point was argued (see para 9.79), that quota was in a sense (although not in English land law) an interest in or right over the land. The issue was posed by the Commissioners as "was the disposal of the quota the disposal of an interest in or right over the holding which subsisted before the disposal" (see para 9.77), which they concluded it was not. For similar reasons I decide that it was not an "estate, interest, easement, servitude or right in or over land" within the Interpretation Act either. In any case, I agree with Mr Henderson that the Interpretation Act is irrelevant because one is not construing the word "land" in the legislation but determining what asset was disposed of. The answer is that milk quota, and not part of the holding carrying with it milk quota, was disposed of.
14. Thirdly, Mr Apsion contends that the costs of disposal should be taken into account. Originally this was thought by the Revenue to be a claim that £27,798.85 should be deducted but it was agreed in the letter from Philip Burley & Co of 6 June 2005 that no such sum was paid to the Duchy; it merely represents the value of the retained quota. Mr Henderson agrees that costs are in principle deductible but that the Appellant has not quantified them. The Appellant stated that such costs were in the accounts, although I was not referred to them, and he also said that he could in a reasonable time obtain the figures.
15. Documentation showing any incidental costs, if not already provided, was clearly something required to be provided by the directions. One of the reasons for the directions was so that the tribunal was in a position to determine the assessment at the hearing. The disposal was in 1988. If the Appellant has not given the Revenue the figures for the incidental disposal costs by now, I see no reason to give him more time to do so. I have therefore no evidence on which I could allow any deductions.
16. Accordingly I dismiss the appeal, and determine that the Appellant pay a penalty for non-compliance with the directions of £500.
17. Mr Henderson contended that by not complying with the directions the Appellant had acted wholly unreasonably in connection with the hearing and asked for costs. I consider that this aspect is dealt with by the award of the penalty imposed for non-compliance with the directions. Although failure to comply with the directions had made the appeal harder to deal with I do not consider that this goes as far as saying that the Appellant has acted wholly unreasonably. I make no order for costs.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER

RELEASE DATE: 22 June 2005

SC 3127/04