United Kingdom Special Commissioners of Income Tax Decisions

SPC00551

Date trade commenced - trade set up and commenced - section 218 FA 94 - whether trade had commenced at a time when heads of terms for a purchase had been agreed

THE SPECIAL COMMISSIONERS

NEIL STUART MANSELL Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Special Commissioner: Charles Hellier

Sitting in public in London on 2 May 2006

Keith Gordon of Squire, Sanders & Dempsey for the Appellant

David Ewart instructing by the Acting Solicitor instructed for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2006

DECISION

Introduction

1. During late 1992 and 1993 the Appellant invested significant time and energy in becoming an expert on the development of motorway service stations. He investigated a number of possible sites. In late 1993 he identified a possible site for such a station at Tipshelf near Bolsover. He had detailed discussions with the local landowners. On 23 January 1994 detailed heads of terms for options over the relevant land were agreed. On 15 April 1994 contracts were signed reflecting those heads of terms.
2. Between December 1994 and February 1997 he turned his rights to account and received in total some £300,000 for his hard work.
3. There is no dispute that Mr Mansell made his profits from a trade (although there is some argument about what this trade was). The question in this appeal is when that trade was "set up and commenced". The importance of that issue lies in section 218 Finance Act 1994.
4. Sections 200 to 218 FA 1994 amended the basis on which the trading profits of an individual were assessed. Thitherto the tax charge for a fiscal year ending on 5 April had generally been based on the profits of the trade earned in the accounting year ending in the preceding fiscal year. Sections 200-217 replaced that regime and based the tax change for a fiscal year on the profits of the accounting year ending in that fiscal year. There were transitional provisions.
5. Section 218(1) provides that the Chapter containing these provisions:

"(a) except in its application to a trade set up and commenced on or after 6 April 1994 … has effect as respects the year 1996 - 97 and subsequent years of assessment, and

(b) in its application to a trade so set up and commenced … has effect in respect the year 1994-1995 and subsequent years of assessment".

6. Broadly, as a result of that section; if Mr Mansell's trade was set up and commenced before 6 April 1994 he is taxed more favourably than if it was set up and commenced on or after that date.
7. So the question is: when was Mr Mansell's trade "set up and commenced"?
8. The Respondents say that his trade cannot have commenced before the contract was signed on 15 April 1994. The Appellant says that his trade was set up and commenced on or before 6 April 1994.
9. I am asked to give a decision in principle on this issue. I am told that there is no dispute over the figures.
10. Accordingly, in accordance with Regulation 18(5) of the Special commissioners (Jurisdiction and Procedure) Regulations 1994 this appeal will be adjourned until such further questions arising from this decision have been agreed by the parties or failing agreement decided by the Tribunal on restoration of the hearing.

The Evidence and findings of fact

11. Mr Mansell provided a witness statement and gave extensive oral evidence. There was a statement of Agreed Facts. I had before me a bundle of documents which included the copies of the documents I refer to below. I was also given copies of adverts from the Estates Gazette. From that evidence I find the following.
12. In 1992 Mr Mansell became interested in becoming the lessee or franchisee of a trunk road petrol station. His interest was in developing a catering facility on site. His interest led him into discussion with the major oil companies and to attending seminars. Initially his plan was to take on a franchise at a station but after discussions with those he met he began instead to consider the possibility of owning a station outright.
13. As he was pursuing this idea, he became aware of a heightened interest in motorway service areas (MSAs) among those he met and spoke to. The first MSA had been built in 1960 and the bulk of then extant of MSAs had been completed soon thereafter. These were owned by the state and operated by a small number of companies; Trust House Forte, Granada and others. There had been public concern about the level of service these establishments offered. After the Conservative government came to power the Department of Transport announced, in August 1992, that there would be greater private sector involvement in, and less central regulation of, MSA facilities. In particular, responsibility for identifying new motorway service area sites, seeking planning permission, acquiring the land and developing the sites was to pass to the private sector.
14. As a result, as 1992 went by, Mr Mansell became interested in promoting the possibility of additional MSAs or introducing such possibilities to third parties. Having started by looking at the development of sites on trunk roads for Little Chef type facilities and petrol facilities, he became one of a number of people who were considering new sites for MSAs.
15. During part of 1992 and throughout 1993 made himself aware of the constraints which applied to the development of MSAs: these included the Department of Transport requirements as to the minimum distance between MSAs, the geography of the necessary motorway exit and ingress roads (curvature, weaving distances, signage), and the layout of the MSA; the planning constraints, and the statistics for current and projected traffic volumes. These constraints were different from, and generally more onerous than, those affecting normal commercial developments.
16. In 1993 he continued his research on possible sites. His initial interest was with the M25 which, at that time, had no MSAs. Quite soon however he realised that his best chances of success lay elsewhere: those involved at the major oil companies were concentrating their attention on the M25, large stretches of land bordering the M25 were already under option to other organisations, and it was an area away from where he lived and of which he had little local knowledge. He realised that the number of people across the country working on potential MSA sites was quite small - probably less than 5 (with the larger oil companies), and that his best chance of success was away from their main area of interest. The attention on the M25 had given rise to a number of proposals but by the end of 1993 only one proposal had been successful.
17. During the latter half of 1993 Mr Mansell did extensive research in the Midlands. He had lived in Derbyshire for 30 years or more; the M1 and M6 were half an hour from his home. He identified alternative sites at Norton Farm and North Pie Hill Farm. The local authority offices were 30 minutes from his home: he spent a week or 10 days researching the Local Authority files: looking at environmental assessments, highway submissions and planning issues.
18. These researches however came to nought. In this period he also spent a week in Chester reviewing the submissions for an MSA at Hapsford. He looked at the possibilities further north towards the Lake District and identified an area on the M1 with higher traffic flow near Castle Donnington on which he focussed. He visited the farms in the area adjoining the motorway to identify the landowners. But he came to the conclusion that this area had numerous problems including a proposal to widen the motorway.
19. He then came to concentrate on the Bolsover area. The area had been a coal mining area. That industry had substantially disappeared. There was unemployment in the area. He discovered that the Local Authority were keen to promote projects which would give rise to new employment. A MSA would provide 300 jobs. He met and received encouragement from the local authority.
20. He had found that when the motorway had been built provision had been made for an MSA at Tipshelf. Access lanes had been provided for. He approached the Highways Agency who owned the site. But the Agency said it would not dispose of it because the land was wanted for road widening. He contemplated acquiring additional land to add to what would be left of the site after the road widening but still the Agency said no.
21. So he looked for a new site in the same area. He knocked on the doors of the local farmers: getting to know who owned the land and whether they would be disposed to sell. Just before Christmas 1993 he met Mr John Ball who farmed land on the side of the motorway and close to the Tipshelf site.
22. Mr Mansell had a number of meetings with Mr Ball in December 1993 about the use of part of his land. Mr Mansell's researches however revealed that an insufficient part of Mr Ball's farm was suitable and that additional adjoining land was needed for a site which would meet the Highways Agency's requirements. The neighbouring farmer was Mr Franklin, Mr Ball's cousin. Mr Mansell had a meeting with Mr Franklin and Mr Ball in early January 1994. Over the period from late 1993 to 22 January 1994 Mr Mansell had 9 or 10 meetings with Mr Ball, or Mr Ball and others to discuss the proposal.
23. Mr Ball and Mrs Franklin (for Mrs Franklin was the owner of the farm) appointed Mr John Copeland to act for them in the negotiations. Mr Copeland was a surveyor from a firm in Chesterfield who had previously acted for a number of local farmers when the M1 was first built. A number of meetings took place between Mr Mansell, Mr Copeland, Mr Ball and Mr and Mrs Franklin in January 1994. The final points of the deal were agreed on 23 January 1994, following which heads of terms of agreement were drawn up by Mr Copeland and made available to the parties respective solicitors.
24. On 15 April 1994 option agreements were signed between Texas Oil Company and Mr Ball, and between Texas Oil Company and Mrs Franklin. The agreements granted Texas Oil Company a right to purchase the relevant land if the option was exercised within the option period specified in the agreement. The purchase price of the land exceeded its agricultural value. A premium of £500 was paid for the grant of each option.
25. There was some question as to when and why Mr Mansell sought options from Mr Ball and Mrs Franklin, and a suggestion that it was Mr Copeland who may have promoted the idea of an option. I find that it is more likely that Mr Mansell sought to acquire options in his negotiations with Mr Ball and Mrs Franklin, and that Mr Copeland is more likely to have been brought in to negotiate those options. Acquiring an option over the land was a mechanism known to Mr Mansell which would better secure his position than any agreement which gave him no interest in the land.
26. In relation to the Heads of Terms and the Option Agreements I note the following:

(i) the heads of terms contain 15 well drafted clauses describing the land, the options and the conditions for their exercise. Had they been signed by the parties (but see (ii) below) there is to my mind little doubt that they would themselves have been an enforceable contract;

(ii) the grantee of the option is described as "A.B. Ltd" in the Heads of Terms. The Option Agreements are between Texas Oil Company Limited, an Isle of Man company which I believe was nominee for Mr Mansell;

(iii) besides the addition of an amount of boilerplate (including VAT provisions) the Option Agreements contain only a few terms of commercial significance which are not in the Heads of Terms:

(a) a provision which permits an extension of the option period from 12 months for two further periods of 12 months each on the payment of an additional £100;

(b) rights to use adjoining land for running service pipes and cables;

(c) a covenant not to use adjoining land for MSA uses if the option was exercised;

(d) a covenant by the grantor not to acquire other land broadly within a 10 mile radius within the option period.

27. Mr Mansell recalled little negotiation of these additional issues with Mr Ball and Mr Franklin. Part of a letter dated 2 March 1994 to Mr Mansell from his solicitors was in the bundle before me. The letter apparently accompanied draft contracts for Mr Mansell's approval. The terms of the letter indicate terms somewhat different from those in the Heads of Terms or in the final Option Agreements. On the balance of probabilities I found that there were negotiations with Mr Ball and Mrs Franklin over the precise terms of the Option Agreements but that these were not hard fought negotiations.
28. Having secured agreement Mr Mansell contacted operators and oil companies. He felt he could hand over the proposal to a team of experts who had the weight and support of a major company to bring the proposal to fruition.
29. In March 1994 (while the Option Agreements were being finalised) Mr Mansell had meetings with Acer Consultants Ltd, a specialist firm of highways experts and part of a conglomerate of consulting engineers, transport specialists and water engineers. He engaged Acer to carry out a feasibility study on the site. Acer reported with their preliminary findings at the end of March 1994. Mr Mansell was charged for the report and paid the bill in late April 1994. Acer's report was favourable.
30. At this stage Mr Mansell felt able to cash in on several month's hard work. But he decided not to sell straight away. That was for two reasons. First he began to realise the value of the opportunity he had identified. Originally he had thought that he might reap a reward of up to £100,000, but he discovered that Hallam Land, another property developer had received £10m when it had sold its MSA site to an operator. Second, he realised that he was now quite expert in the field.
31. In December 1994 an agreement was made between The South East Oil Company, a Turks and Caicos Islands company acting on Mr Mansell's behalf, and Kuwait Petroleum (GB) Limited ("Kuwait"). Under the agreement Mr Mansell's company received £50,000 in return for which the company granted exclusivity in relation to the site for three months. The parties also agreed to negotiate a sale of the site to Kuwait within that period.
32. In the bundle there was a copy of an unexecuted agreement between The South East Oil Company and Kuwait. This provides for the purchase of the site by Kuwait for £7.6m subject to the receipt of planning consent for an MSA and signage confirmation from the Secretary of State for Transport. It appears likely that an agreement in this form was made. Under the agreement Kuwait had no obligation to secure the satisfaction of the conditions. That was up to Mr Mansell.
33. Mr Mansell said that he then set about obtaining planning permission but he was running out of money. In May 1995 and February 1997 he entered into agreements with Hallam Land Management Limited ("Hallam") under which Hallam paid him £250,000 and he agreed to pursue the planning application and to pay £1,250,000 to Hallam on the disposal of the site.
34. Despite Mr Mansell's later endeavours another MSA proposal succeeded in place of Mr Mansell's.

Mr Mansell's intentions

35. I should mention the adverts from the Estates Gazette. These were by developers seeking land to develop. They indicated that introduction fees would be paid to non-retained agents. I find that it was not unusual for developers to pay commission or fees to agents who introduced them to sites which they could or did purchase or develop. None of the adverts related specifically to MSAs but I accept that it was possible that an enterprise concerned with the development of MSAs could pay a fee to the introducer of a suitable site.
36. I find that the receipt of such a fee was within the contemplation of Mr Mansell in 1993, but by January 1994 his aim was to sell an interest in the land rather than a simple introduction to it.
37. Until his meetings with Mr Ball and Mrs Fletcher in late December 1993 it does not seem to me that Mr Mansell had a clear idea of how he intended to reap his reward, or, if he did that his idea changed shortly before or after the commencement of discussions with the landowners. It seems to me that once those discussions had started Mr Mansell's concept was clear and was to use his expertise to sell the land interest he was about to acquire at a profit. It was not suggested that Mr Mansell had the capital to develop a MSA himself. The only way in which his expertise and knowledge could be turned to account was by selling his interest to an outsider. That was the way in which he would reap the greatest reward. Without the options he could not pursue that path.
38. Having heard Mr Mansell, it seems to me that either:

(i) there was a fairly specific concept in Mr Mansell's mind at some time in 1993 and before late December in that year of realising an introducer's fee but that concept was abandoned at that time. The original concept was to find a good site and to obtain an introduction fee. But when he realised that he could obtain an option, and that, so armed, his prospects were substantially better, he changed course. That change of course gave rise to a concept different from the old one. It was acquire a land interest and turn it to account rather than simply to turn his knowledge and expertise to account; or

(ii) Mr Mansell's ideas prior to late December 1993 were nebulous. He had no specific concept for the realisation of profit. That concept became clear only in December 1993, and involved the acquisition and turning to account of the option which he hoped would be granted by Mr Ball and Mrs Franklin.

The Case Law

39. Both Mr Gordon and Mr Ewart drew my attention to The Birmingham & District Cattle By-products Co Ltd v The Commissioner of Inland Revenue 12 TC 92. This was a decision about Excess Profits Duty. Section 38 of the Finance (No.2) Act 1915 levied excess profits duty. It provided:

"38(1) there shall be charged, levied, and paid on the amount by which the profits arising from any trade or business to which this part of the Act applies…a duty (in this Act referred to as "excess profits duty") of an amount equal to 50% [the excess of the profits in the accounting period over the pre-war amount of those profits]."

Section 40 provided:

"The profits arising from any trade or business to which this part of this act applies shall be separately determined…, but shall be so determined on the same principles as the profits or gains of the trade or business are or would be determined for the purposes of income tax…"

Part 2 of the Fourth Schedule to that Act provided rules determining the "pre-war standard. Rule 4 provided that:

"Where, owing to the recent commencement of a trade or business, there have not been three pre-war trade years [particular rules would apply to determining what the pre-war standard profits was]."

In each quotation the emphasis is mine.

40. Thus this decision was not about when a "trade" commenced, nor was it about when a "business" commenced. It was about when a "trade or business" commenced.
41. It was an admirably short decision of Rowlatt J which extended to no more than four paragraphs. He said that the question was "when the company commenced its trade or business". I shall quote from those paragraphs:

"Now… the company was incorporated on the 20th June [1913] to carry on the business of making some use of the by-products of the butcher's trade. It arose out of a combination of a number of butchers who entered into a contract with the trustees of the company to be formed that they would supply, and the company to be formed would take, those products… Now the company took over those agreements…"

42. Mr Gordon says that those agreements must have been framework agreements - agreements dealing with issues such as delivery, price per lb, and payment terms - and not agreements for specific purchases of specific goods on specific dates. Agreements for such purposes he says must have been made later under the terms of those frameworks. Mr Ewart did not dissent from that inference. The reported case does not include the copies of the agreements which were annexed to the case stated; in their absence this seems a fair inference to me.
43. Rowlatt J went on:

"Now the company took over these agreements, and… the directors… went about and looked at places of business of a similar character in various parts of the country. That was an admirable thing to do preparatory to commencing business, but it certainly was not commencing business."

44. Looking at other businesses Rowlatt J says, is preparing to commence business not commencing business. Mr Ewart says that if the company had merely been negotiating these framework agreements, then still less would they have had commenced business. I note that Rowlatt J regards the gathering of information as not itself constituting the commencement of a "business".

"Then they entered into a contract for the erection of works…That again is preparatory… Then they purchased machinery and plant for carrying on the business. That was getting ready."

45. It seems to me that these activities might have been described as part of setting up the business rather than carrying it on.

"Then they entered into agreements for the purchase of products. Those are the agreements I have already referred to which formed the substance of the company, but no materials came in nor were any sausages made from 20 June [1913]."

46. I believe that when Rowlatt J commences this paragraph "Then" he does not have a temporal sequential sense of that word in mind: he is using it in the sense of "so". It appears to have been an extempore judgment. He is not referring here to further agreements, or to specific purchase agreements but referring back to the framework agreements referred to earlier in his judgment.

"They waited and I suppose in October, the date they refer to in their Minutes having looked round and having got their machinery and plant, and having also employed their foreman, and having … generally got everything ready then they began to take the raw materials and to turn out their product."

47. Mr Ewart points to the last words of this paragraph "take the raw materials and turn out their product". Rowlatt J, he says, is referring to the occurrence of both those activities not merely one.
48. Rowlatt J then says:

"I am bound to say that I think the case is extremely clear, and the commissioners have taken the view that they had not commenced business till then, and I do see the slightest sign of any error of law… It seems to me it is the only view both in law and fact that they could take…"

49. The reference to "then" is to "October" because the Commissioners' view was that it was on 6 October that the company commenced trading: it appears from the Tax Case Report of the case stated that it was from that date that the Directors had resolved that "the business shall open and commence". I note that there is nothing in the case stated which indicates that it was on that date that they both took in materials and turned out product, but it seems clear that it was at least assumed by Rowlatt J that it was on that date that the company was open for business and that operations started.
50. There are two further points to note before leaving this case: first that it was an Excess Profits Duty case and that the relevant statutory condition being adjudicated upon was when the company had commenced trade or business. The commissioners' decision was that the "company commenced trading on 6 October 1913"; Rowlatt J said the question was "when the company commenced its trade or business", and held it "commenced business" on 6 October.
51. The second point is that there is no suggestion that there has to be a sale before the business or trade commences: Rowlett J views the operations of taking in of raw materials and turning out sausages as enough for trade or business to commence.
52. In Kirk and Randall, Limited v Dunn (HM Inspector of Taxes) 8 TC 663. Rowlatt J considered, five years after his decision in Birmingham Cattle, whether and when the appellant company in that case had "set up and commenced" a "trade". There are four points I should make about this case.
53. First, I note that throughout his judgment Rowlatt J refers to a "business" (or a "trade or business") rather than a "trade" although the statutory question related to whether a trade had been set up and commenced. He sets out early on the definition of trade as "trade, manufacture, adventure or concern" and I believe paraphrases this as "trade or business".
54. Second, the facts were that the company started life by taking over the completing some construction contracts; thereafter there was a period of 6 years or so during which it sought new business but unsuccessfully, and then in 1920 it got something when somebody yielded to its solicitations for a contract. The new business was the same class of business as the old. On these facts Rowlatt J held that in the intervening period the company had been carrying on a trade or business and accordingly allowed the appeal against the Special Commissioners' decision that the trade was discontinued, and then set up and commenced again in 1920.
55. Third, I have been concerned that the ability to describe the company as carrying on a trade in the interim period was dependent upon the fact that it had worked on the earlier contracts. If it had not worked on those earlier contracts but its activities in the interim had been the same, would it have been carrying on a trade in that interim period: would the mere commencement of those interim activities have been commencing a trade? If not why should the earlier activities affect the proper classification of the later ones? It seems to me that in the context of section 218 the answer lies in the word "commenced", and that it is inherent in this word that before an activity previously carried on can be said to commence again, it must have stopped completely. And, because the continuation of significant elements of the activity prevents one saying that the activity has stopped, it is therefore not possible to say it commences when the other elements again take place. It therefore does not seems to me to follow that interim activities, looked at in isolation and on the assumption that there were no earlier activities, would have been the carrying on of a trade. As a result I do not find this decision authority for the proposition that the negotiating or attempts to negotiate new business on their own indicates the carrying on or commencement of a trade.
56. Fourth, at the start of his judgment Rowlatt J, having recited the definition of trade, says:

"Now several cases came before me, and I took rather a narrow view of those words which define the sort of company. I did not pay much attention to the internal activities of the company - its functional activities in carrying on its own life, and I laid some stress on "carrying on" and on "business", but the Court of Appeal have taken a freer view of the words than I did, and they have certainly taken into consideration the circumstances that the company was performing its internal functions, that is to say, holding its meetings and so on, as indicative, if not alone sufficient, to establish the fact that it was carrying on a business".

57. He goes on to say that perhaps he had been taking too narrow a view of the word "business".
58. Mr Gordon suggested that Rowlatt J's reference to the "several cases… before him" included Birmingham Cattle, but Mr Ewart says that this is not clear; neither, he says, is it clear to which Court of Appeal cases Rowlatt J is referring. Furthermore, more Mr Ewart says that, even if Rowlatt J was referring to Birmingham Cattle, it is not clear why he was saying he was wrong. I share this latter difficulty unless Rowlatt J was saying that the "internal functions" of the company in that earlier case were its erection of works and purchase of plant and machinery, and that by putting them to one side in the "preparations" or "getting ready" class he had taken too narrow a view of what constitutes a business (rather perhaps than a trade). But that approach to his words requires a very broad meaning to be given to: "internal functions, that is to say holding meetings and so on".
59. In Khan and another v Miah 2001 1 A11 ER 282, the House of Lords considered whether persons who had entered into a joint venture to open and run an Indian restaurant were in partnership. They would have been in partnership if they were conducting a business. The Court of Appeal had held that the parties did not become partners until trading commenced: it identified the business as the restaurant business and said that because no food had been bought or bookings taken at the relevant time that trade was not being carried on, and all that had been done was merely preparatory to commencing trading.
60. The House of Lords held that the question was not whether the parties had commenced trading, but whether the parties had done enough to be found to have commenced the joint enterprise (the business) in which they had agreed to engage. It was not necessary to give that business a name before it could be determined whether it was being carried out. On the facts the parties had commenced business: they had found premises, fitted them out, and bought furniture and equipment: that was conducting a business.
61. In the course of his speech, Lord Millett made a distinction between commencing a trade and commencing a business. That distinction was the reason for his disapproval of the approach of the Court of Appeal. Mr Ewart referred to me a number of passages including the following:

"The restaurant was not open for business. There was nothing for the first defendant to manage, and no function for the two chefs to perform. No food had been bought or bookings taken. Everything that had been done was preparatory to the commencement of trading.",

and

"Many businesses require a good deal of expenditure before trading commences."

62. Mr Ewart says that even though the point was not central to Lord Millett's decision that the partnership was carrying on a business at an early date, Lord Millett evidently considered that the partnership had not commenced trading before it opened its doors for business. Mr Gordon points to the fact that no stock of food had been bought - had it been bought and had the doors been open - he says the partnership would have been trading even if no one had come through the door.
63. Lord Millett also considered the relevance of Birmingham Cattle and said:

"Even if Rowlatt J's decision was right on the facts (which is doubtful) it was in an entirely different statutory context,"

and referred to Rowlatt J's comments in Kirk Randall. It seems to me that it may be that Lord Millett's reason for casting doubt upon Birmingham Cattle was the fact that that decision dealt with the commencement of a "trade or business", and if, or to the extent, it decided that the "business" (rather than the "trade or business") did not commence until 6 October 1913, Lord Millett was holding that it was wrongly decided.

64. Mr Gordon relies on Lord Millet's statement for the proposition that Birmingham Cattle imposes too stringent a test for the time of commencement of a trade. He says that whatever the nature of Rowlatt J's doubts there is no authority here that mere negotiations, however detailed, cannot constitute the start of a trade.
65. In the New Zealand Case of Slater v Commissioner of Inland Revenue 1996 1 NZ LR 759, the question was whether expenditure was necessarily incurred in carrying on a business for the purpose of gaining or producing the assessable income. "Business" was defined by the New Zealand statute to include (and, it was noted by the Court, probably meant) "any profession, trade, manufacture or undertaking carried on for pecuniary benefit"; it was noted that it required two elements: (i) some form of organised commercial activity and (ii) the conduct of that activity for the purpose of making a profit. Fisher J said that it was inherent in the statutory provisions that to qualify as the conduct of a business:

"there must be more than mere preparation… the taxpayer must embark on the actual course of conduct which it is ultimately hoped will yield profit if persisted in. I did not think that merely setting up a business structure and purchasing plant or organising the decision making structures, management and equity structures will suffice. That is not "carrying on a business" but "setting up a business". Nor do I think that activities which are confined to the organisation of relationships between the proprietors… would normally qualify because they are non-productive of income. As I understand it there must be an operational activity".

66. Lord Millett in Khan v Miah said that this was of little assistance because the statutory context was different from that which was relevant in that case. The exclusion of the purchase of plant and the distinction between "carrying on" a business and "setting up" a business was understandable in the statutory context of Slater - for the expenditure had to be incurred for the purpose of producing the assessable income in the tax year it was incurred.
67. It seems to me however that in the context of section 218, which itself draws a distinction between "setting up" and "commencing" a trade, and which affects the taxation of the profits of the trade, the approach of Fisher J is more relevant. It is true that he was considering the question of whether a business was carried on rather than whether a trade was carried on, but the New Zealand definition of business, although potentially broader than the Taxes Act concept of trade, has a lot in common with it. Further if Fisher J's tests were applied (reading for his word "business" the word "trade") to the restaurant in Khan v Miah I suspect that they would result in the same view as that expressed by Lord Millett - that the trade (rather than its business) did not commence until there was operational activity i.e. activities other than mere preparation and acquisition of plant and premises. "Operational Activity" seems to me to describe well what is required before a trade starts.
68. In the Canadian case of Gartry v The Queen 94 DTC 1947 T.C.C. (which was later cited in Miller v The Queen 2001 Case L11 593 (T.C.C.)), Bowman J said:-

"In determining when a business has commenced, it is not realistic to fix the time either at the moment when money starts being earned from the trading or manufacturing operation or the provision of services or, at the other extreme when the intention to start the business is formed … but where a taxpayer has taken significant and essential steps that are necessary to the carrying on of the business it is fair to conclude that the business has started …

…in order that there be a finding that a business has commenced it is necessary that there be a fairly specific concept of the type of activity to be carried on and a significant organisational structure assembled to undertake at least the essential preliminaries … when an activity consists merely of a review of the possibilities in the expectation or hope that information will be obtained to justify going into a business of some kind, such an activity does not represent the commencement of a business. A business would be reviewed as being merely contemplated for the future if no serious or reasonably continuous efforts are being made to begin normal business operations."

69. This seems to me to push the time of commencement to a time earlier than that which Lord Millett would have recognised for the commencement of a trade in Khan v Miah, because the acquisition of premises, fixtures, equipment and a chef would be serious continuous efforts to begin - or at least to prepare to begin - normal business operations.
70. Mr Ewart says that it is impossible to find any relevance in this case because it appears that in Canada tax is charged on income from a business, rather than a trade; but, he says, that if relevance is sought the phrase "money starts being earned from its trading operation" suggests that a trade is different from, and starts later than, the business. Mr Gordon noted the use of the word business in the Canadian legislation was not wholly dissimilar to the concept of trade, and noted that the Court had held that "when money starts being earned" was an unrealistic approach when assessing when a business commences.
71. For my part I find Bowman JTCC's formulation in the second paragraph quoted above of what I would call preparatory steps helpful.
72. Mr Gordon also drew my attention to the Canadian Federal Court of Appeal judgment in Minister of National Revenue v MP Drilling Limited (1976) 76 DTC 6028. He says that case demonstrates that a trade can be said to have commenced before the goods are ready for sale.
73. In that case, the Court was considering whether expenditure was allowable under the section 12(1)(a) of the Income Tax Act. This read:

"In computing income, no deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from property or a business of the taxpayer."

74. Mr Gordon notes that this is akin to ICTA 1988, section 74.
75. MP Drilling had been incorporated to carry on the business of marketing liquefied petroleum gasses. After 3 years and losses of $407,000 it decided the plan to market gas was not feasible and abandoned it. It changed to contract drilling instead. It sought to carry forward its losses. The successful marketing of liquid petroleum gas involved many difficult problems: arranging the supply, creating extraction plants, gathering and transporting the gas, obtaining export permits, contracting refrigerated facilities, arranging tankers and negotiating contracts with overseas buyers. A large part of the expense was incurred in feasibility studies to convince the oil producers, the financiers and the governments that the plan was sound. A special Canadian Act of Parliament was required to deal with the problem of transporting the gas. Serious negotiations were had with potential overseas buyers.
76. Mr Gordon referred me to part of the judgment of Urie J:

"In short, the company was then in existence and was engaged in doing the normal things that any new business must do to bring its wares to the market place, hopefully with profitable results. As I see it, this business activity … falls within paragraph (b) of Jackett, C.J.'s test in Canada Starch case… Not to characterize such activity under this head is to ignore the commercial reality of the situation, which was that the Respondent's efforts at all times were directed to bring products it expected (by negotiation) to be able to acquire, to users who, through the promotional efforts of the Respondent's officers, indicated that they would be interested in becoming purchasers thereof. Negotiations proceeded with some twelve suppliers and the same number of potential foreign customers culminating in expressions of intent from some of each. The permanent structure, the market and the products all existed and the efforts of the Respondent were directed to bringing them together with a resultant profit to it."[emphasis added by Mr Gordon]

77. Mr Gordon notes that whilst section 12 of the Canadian Act refers to "business" and section 218 Finance Act 1994 concerns "trade", it is clear that the section 12 meaning of "business" is sufficiently close to that of trade for the dictum to be relevant. He says that the Canadian cases make the same distinction between pre-commencement and post-commencement activities as UK law: in both jurisdictions, there is a distinction between preparatory works and activities in the course of a trade or business. In the UK, the word trade tends to have a narrower meaning whereas the meaning of the word business can be extended in some cases to encompass all pre-commencement activities. Nevertheless, he submits that the word "business" in the Canadian cases is sufficiently close in meaning to the word "trade" to show that they support the proposition that the acquisition of trading stock is as much part of the trade as the subsequent sale.
78. There were two issues for the Court in MP Drilling. First: was the expenditure capital rather than revenue? It was argued by the Minister that it was for the purpose of acquiring or creating the business structure. Second: given that there was no income produced, the Minister argued that the expenditure was not incurred for the purpose of gaining income from a business. The second argument was quickly dismissed, and Urie J's comments quoted above were made in relation to the first argument only. The paragraph (b) "to which he refers to in Canada Starch was part of a distinction drawn in that case between (a) capital expenditure on the creation of, or addition to, a business entity or structure, and (b) revenue expenditure in the process of operation of that business. In this context Urie J's comments are not directly addressing the question of whether or not MP Drilling had commenced a business: although it is clear that Urie J considers that the negotiations were in the course of, or in the process of operation of, the business which had started, he was not holding that on their own they would have been enough to say that a business had commenced. The operations MP Drilling had conducted appear to me to have gone far beyond mere negotiation. Lastly, it seems to me that the Canadian concept of business appears to be wider than the New Zealand concept of business and potentially wider still than the UK concept of trade (even allowing for its extended definition). Taking all this together I am not persuaded that Urie J's comments help to determine whether a trade has commenced for the purposes of section 218.
79. I note that none of the cases to which I have referred dealt directly with the issue of when a trade commences. Birmingham Cattle dealt with when a "trade or business" commenced, Kahn v Miah dealt with when a business commenced (although there were some useful comments by Lord Millett on the distinction between commencing a trade and a business), the New Zealand cases dealt with when a "business" commenced (although meaning of "business" in that jurisdiction seemed to have a lot in common with the UK meaning of trade), and the Canadian cases dealt with when a "business" commenced but in circumstances where the Canadian meaning of "business" was probably wider than that of the UK meaning of "trade".

The Parties' Arguments

80. Mr Gordon puts his case thus:-

(i) the Appellant's trade consisted of more than merely the purchase and sale of an interest in land. He was developing a proposition. That trade commenced at some time before 6 April 1994; but

(ii) if it is held that the Appellant's trade "is to be reduced to the acquisition and sale of interests in land, then that trade must be said to commence when the detailed negotiations were first entered into for the acquisition of trading stock", which was by January 1994 and in any event before 6 April 1994.

81. In relation to the first limb of his submission Mr Gordon cites the Court of Appeal's endorsement of a wide meaning for the concept of "trade" in Barry v Cordy [1946] 2 All ER 396 and the meaning of "adventure" adopted by that court in relation to its presence in the term "adventure in the nature of trade" as "a pecuniary risk, a venture, a speculation [or] a commercial enterprise". Mr Mansell's activity was not simply buying and selling an interest in land; he was engaged in developing something which he could sell. That might be a proposition (the well argued, well presented product of his research) which he would "introduce" to another party for a fee, or it might be an option over land, or an agreement to sell land. The trade was not defined by a simple sale: it was larger than that. It was the risking of his time, energy and money in seeking to make money from the identification of a suitable motorway service station site. Mr Gordon pointed to the evidence that introducers can turn their knowledge to account, and Mr Mansell's understanding of that possibility. He said that Mr Mansell's trade evolved: initially he had intended to sell his knowledge, but later, in view of the potential returns, chose to acquire options so that he had a more complete package to sell. Mr Mansell had created a viable proposition before 6 April 1994 which had value and could have been sold independently of any agreements concerning the underlying land.
82. "Trade", he notes, includes every trade, manufacture, adventure or concern in the nature of trade. The acquisition of a single asset and its sale or turning it to account may be an adventure in the nature of trade even though the activity may not be repeated. But Mr Mansell's trade was more than turning the option to account. Mr Gordon says that the Appellant was well into his "adventure" before 6 April 1994.
83. Mr Ewart says that "developing a proposition" is not a trade: is merely a name for a preparatory activity. In any event he invites me to look at what actually happened (although Mr Gordon argues that later events cannot determine the nature of earlier ones): Mr Mansell turned his options with Mr Ball and Mrs Franklin to account in two agreements. The options were never exercised but they were exploited by those agreements. That exploitation defines the trade he actually conducted, and the trade he intended to conduct. Mr Mansell was not in the business of finding an opportunity, selling it and moving on; he was in the business of acquiring a land interest and turning it to account. His evidence demonstrated that: he realised that the site at Bolsover as he said in his witness statement, presented a rare opportunity, he realised that it "had some value, perhaps even a substantial value" and that, it "could have been sold as an "introduction" for value prior to April 1994". But he chose not to. He went on to acquire the options and his "intention was to dispose of the property as early as possible". This testimony pointed not to an introduction business - which he had never really undertaken, but to a business of acquiring and turning interests in land to account.
84. In relation to his second proposition Mr Gordon says that essential to most trades is buying and selling, and that buying is as important as selling. Buying he says does not just mean the completion of a legal agreement to acquire, but the process of buying. The entry into serious negotiations to purchase what it was desired to turn to account was the step which distinguished the preparation for trading from the trading itself. He says that Birmingham Cattle makes clear that the trade there started when the company started to buy the products, not when it sold the sausages. He notes the doubt cast on the strict line taken in Birmingham Cattle - where the time of acquiring raw material, buying and starting the sausage making appears to have been treated as the commencement time: serious negotiation and the reaching of an agreement (albeit not an enforceable contract) before that date would be clearly trading if that strict line was relaxed.
85. When a grocer is negotiating a possible sale of goods to a customer, or acquisition of goods from a supplier, he will be engaged in his trade in the course of negotiations even if a sale does not take place. The Heads of Terms represented an agreement reached by persons who treated their word as their bond: it was the end produce of those negotiations. The trade must have started by the time those negotiations were concluded.
86. Mr Ewart says that up until the grant of the option Mr Mansell was only preparing to trade. Until then he had nothing with which to trade. The earliest a trade could start was when it was open for business. Mr Mansell could not have been open for business if he had nothing to sell.
87. Mr Ewart says that there is no authority that detailed negotiations make a trade. In Birmingham Cattle the negotiation of the framework agreements preceded the entry into those agreements. Rowlett J did not even suggest that the entry into the agreements was the start of the trade or business: how could the antecedent steps of negotiations be the start of a trade? Even if Birmingham Cattle was in Rowlatt J's mind when he made his remarks in Kirk and Randall there was no indication that mere preparation, mere negotiation, was trading.

Discussion

88. Section 218 speaks of a trade "set up and commenced" before, or on or after, 6 April 1994. The words "set up" suggest that a trade can be set up without being commenced. This echoes the distinction drawn in Slater (see paragraph 72 above), the distinction between getting ready and commencing in Birmingham Cattle, Lord Millett's observation that "the work of finding, acquiring and fitting out a shop or restaurant begins long before the premises are open for business and the first customer walks through the door", and the assembly of a "sufficient organisational structure" to undertake the essential preliminaries noted in Gartry. I conclude that a trade cannot commence until it has been set up (to the extent it needs to be set up), and that acts of setting up are not commencing or carrying on the trade. Setting up trade will include setting up a business structure to undertake the essential preliminaries, getting ready to face your customers, purchasing plant, and organising the decision making structures, the management, and the financing. Depending on the trade more or less than this may be required before it is set up.
89. Although none of the cases cited to me dealt directly with the question of when a trade commences, those cases suggest to me the following principles. First before the trade can be said to commence, there must be a fairly specific concept of the type of activity to be carried on.
90. Second: an activity which consists merely of a review of the possibilities in the expectation or hope that information will be obtained to justify going into a business of some kind is not the carrying on of a trade.
91. Third: is not always necessary that a sale is made or a service supplied before a trade can be said to be commenced. It is tempting to say that a trade commences only when the first sale is made. In normal everyday usage one would say that a person starts trading when he becomes entitled to money from his first customer. But, for the following reasons, it does not seem to me that making the first sale is necessarily the earliest time when a "trade is …. commenced" for the purposes of section 218:

(a) there is a small but fine distinction between "trading starting" and a trade being commenced, which may make everyday usage a pilot slightly out of its home waters ;

(b) the comments made by Lord Millett in Khan v Miah tend to suggest that selling the first meal is not the earliest time when trading starts; and

(c) for these purposes the extended definition of trade affects the question. The question becomes: when did the trade, manufacture, adventure or concern in the nature of trade start? In normal usage an adventure in trade might start before the "trading" started. An adventure normally starts when the adventurer leaves home, or the merchant first charters his ship rather than when the first monster is killed or the cargo is brought back home and sold.

92. I note that it is possible that for the linguistic reasons noted in paragraph (c) above, there may be somewhat different considerations relevant to when a trade such as buying and selling flowers commences from those relevant to when an adventure or concern in the nature of a trade may commence.
93. It seems to me that a trade commences when the taxpayer, having a specific idea in mind of his intended profit making activities, and having set up his business, begins operational activities - and by operational activities I mean dealings with third parties immediately and directly related to the supplies to be made which it is hoped will give rise to the expected profits, and which involve the trader putting money at risk: the acquisition of the goods to sell or to turn into items to be sold, the provision of services, or the entering into a contract to provide goods or services: the kind of activities which contribute to the gross (rather than the net) profit of the enterprise. The restaurant which has bought food which is in its kitchen and opens its doors, the speculator who contracts to sell what he has not bought, the service provider who has started to provide services under an agreement so to do, have all engaged in operational activities in which they have incurred a financial risk, and I would say that all have started to trade.
94. It does not seem to me that carrying on negotiations to enter into the contracts which, when formed, will constitute operational activity is sufficient. At that stage no operational risk has been undertaken: no obligation has been assumed which directly relates to the supplies to be made. Not until those negotiations culminate in such obligations or assets, and give rise to a real possibility of loss or gain has an operational activity taken place. Until then, those negotiations may be part of setting up the trade but they do not to my mind betoken its commencement.

Conclusions

95. It seems to me that Lord Millet's statement that "it is necessary to identify the venture in order to decide whether the parties have actually embarked upon it, but it is not necessary to attach any particular name to it" is equally applicable to the question as to whether a person has commenced a trade. But it is necessary that there be a fairly specific concept of the type of activity in the mind of the putative trader which is to be carried on, although it does not have to be given, or be capable of being given a simple name.
96. Mr Gordon said that prior to 6 April 1994 Mr Mansell had created a viable proposition which had value and could be sold independently of the option. That on its own is not enough in my judgment to constitute carrying on a trade because the possession of that proposition must be viewed in the context of the concept of the activity which is to be carried out in the mind of the putative trader. If that activity is merely the review of possibilities in the hope of profit, there is no trade; if it is identified as being the sale of propositions as an introducer, it is possible that Mr Mansell's possession of the proposition may indicate that trade has started; if it is identified as acquiring and turning for account interests in land then Mr Mansell's possession of the proposition is less likely to indicate that a trade has started. In each of the latter cases it seems to me that the answer depends upon whether the trade can be regarded as having been set up and, if so, whether there have been operational activities in the course of that trade.
97. At paragraph 38 above I concluded: either (i) that at some time before late December 1993 Mr Mansell had in mind getting a profit from an introducer's fee but then abandoned that concept in favour of getting a land interest which he could turn to account; or (ii) that his ideas prior to December 1995 were fairly nebulous and the concept of acquiring a land interest became clear only in December 1993.
98. On the first analysis it seems to me that the trade characterised by turning knowledge to account in return for an introducer's fee or the like never commenced. It was abandoned before it was fully set up and before operational activities commenced. That is for the following reasons.
99. First, in 1992 and for a large part of 1993 Mr Mansell was reviewing the possibilities in the expectation or hope that information would be obtained to justify going into the business of selling it. That was not carrying on any trade at all.
100. Second, it was not until late 1993 that Mr Mansell identified the owners of the Tipshelf site. It was not until he had met them and discussed the possibility of an MSA with them - not until he had ascertained that the land was not under option to another person and was generally available, that he had a proposition which he might have introduced to a third party. It was not until then that his trading concept was fully formed and the setting up of his trade had come, or had begun to come, to an end. But on this first analysis, that was the time when he abandoned this first concept. This trade - the trade characterised by obtaining an introducer's fee therefore never commenced.
101. On the first analysis the new concept emerged in December 1993. On the second analysis referred to above the only specific concept emerged then and until then there was nothing specific enough in mind to be a trade. In each case the concept of this trade was characterised by the acquisition, and the turning to account, of a land interest such as the options. But it seems to me that, for the reasons in the two following paragraphs, there was no operational activity in relation to this trade until the option agreements were made.
102. Although the Heads of Terms were detailed and clear it was not suggested that an enforceable agreement was made until they were signed on 15 April 1994: Spiro v Glencrown 1991 1 ALL ER 600 is authority for the proposition that an option to purchase land is a contract within section 2 Law of Property (Miscellaneous Provision) Act 1989 which as a result can only be made in writing. No asset was acquired or obligation assumed until the option contracts were signed. Since, for the reasons explored in the succeeding paragraphs this was the only potential operational activity in this trade which occurred before 15 April 1994, there was in my judgment no operational activity in this trade until 15 April 1994, and therefore the trade commenced after 6 April 1994.
103. It is true that prior to December 1993 Mr Mansell had incurred expenditure - travelling costs and the like - but in my judgement the activity which gave rise to this expenditure was not sufficiently directly linked to the supply he was to make to constitute the start of the identified trade; even if it was activity which could in principle betoken the carrying on of a trade it was not the trade in which his profit arose.
104. If I am wrong in my conclusion at paragraph 37 above about the nature of Mr Mansell's activities, and it is possible to describe his activity from late 1993 onwards as being directed to the realisation of profit from the turning to account in some way of his expenditure and knowledge, it still seems to me that that trade did not commence until after 6 April 1994. That is for the reasons in the following paragraphs.
105. It may be possible to describe the meetings with Mr Ball and Mrs Fletcher as the end of the period of the setting up of Mr Mansell's adventure. Once the Heads of terms were agreed he had a specific site to market: he was ready - or almost ready- to approach his potential customers. He had a specific concept mind, a site to apply that concept to, and had done his homework. He was ready for operations to begin.
106. But operations did not begin with the agreeing of the Heads of Terms because nothing was acquired, nothing was expended or risked, nothing was ventured and nothing won until, at the earliest, the option agreement was made.
107. Had Mr Mansell eschewed the getting of the options, and gone directly to a developer and agreed with the developer to divulge his proposition for a fee, then that would have been what I would call an operational activity which would have indicated that trading had commenced. Mr Mansell may have been ready to do this, but the fact that he was ready is irrelevant to whether this trade had commenced - although it might be highly relevant to whether it had been set up. But he did not approach a developer and so for all his readiness to engage with third parties, the fact that he did not means that his trade had not commenced.
108. It was not until 15 April 1994, when the options were acquired, that operational activities began - when expenditure was incurred on acquiring the thing which was to be supplied. It is clear that before this time Mr Mansell expended time and money on his researches. I infer from his evidence that in his activities up to the time the options were signed, Mr Mansell had incurred expenditure, but on the evidence before me that expenditure was not, with one possible exception, expenditure on operational activities. Apart from that exception, which I discuss below, Mr Mansell's expenditure had been limited to expenditure on travel and other matters in the pursuit of his researches. That expenditure was in my view in the nature of overhead costs and not expenditure directly on acquiring the particular thing which was to be turned to account: it did not directly produce that which was to be supplied. The activity in which that expenditure was incurred was in my view preparing to trade.
109. That possible exception relates to the contract with Acer to carry out a feasibility study. If Mr Mansell had instructed Acer to produce a detailed scheme for the MSA which included drawings and specifications which could be put to the Highways Authority, or if he had instructed architects to act with Acer to produce plans for the MSA which he could submit to the local planning authority, then it would have been possible, in my opinion, that he would have commenced to trade. That would be because he would have incurred obligations in acquiring that which he would turn to account. That would be the case (on the view of his trade currently being considered) whether or not at that time he had acquired a right to the options. Although the options gave greater commercial certainty than would the possession of well considered plans, both were capable of being turned to account and neither were either merely preparatory activities or the setting up of the trade.
110. However, from the evidence before me, Acer was instructed to deliver substantially less than this. It seems to me that it was expenditure in preparation for trading rather than an operational activity: the report assured Mr Mansell he had something well worth exploiting rather than giving him something to exploit. He told me that "they made it clear that the site was ideal". Acer's letter of 16 March 1994 indicates that:

"We have examined your site to provide an initial assessment of the development you had in mind."

and the letter then expresses some concern about the adequacy of the motorway frontage Mr Mansell has in mind. Later on it says:

"If you wish to proceed further with this venture we would be pleased to assist you… The next step would be a feasibility study involving "in confidence" consultations with others."

111. Presumably after receiving further instructions from Mr Mansell, Acer wrote again on 31 March 1994 enclosing "two notional layout sketches as requested". In that letter Acer also give estimates for the time required to obtain detailed planning permission and say:

"We could provide support services or indeed manage the project on your behalf if you so wish, including dealing with the Department of Transport, Planning Authority and architects and contractors as required…"

Sketches rather than formal plans are included with the letter.

112. All this, even when taken with the expected grant of the option does not seem to me to be the stuff of a supply at a hoped for profit: Acer's work simply provided confidence about the value of the option to be obtained: it did not add something which could itself be sold together with the option; neither did it constitute something which could be sold if the option were not in the eventual outcome granted.
      
     
113. As a result, I find that the contract with Acer did not mark the start of Mr Mansell's trade or indicate that it had started.
114. Taking all this together I therefore conclude that Mr Mansell's trade did not commence before 6 April 1994. On the preliminary point I therefore dismiss the appeal.

Charles Hellier

SPECIAL COMMISSIONER

RELEASE DATE: 3 July 2006

SC/3060/2005