Taxation — Capital gains — Disposal of covered cattle yard for development — Whether taxpayer entitled to relief under section 69 of the Finance Act 1985 — Whether taxpayer altered farming business to obviate the need for the cattle yard
The
respondent, who had originally owned and farmed 113 acres at Princes Farm,
Aston Somerville, Broadway, Worcestershire, sold 83 acres in 1986, including
the farmhouse; relief from capital gains tax was given under section 69 of the
Finance Act 1985. He retained 30 acres including a covered cattle yard
extending to over half an acre which he had used for rearing young stock bought
in. It was agreed that from early 1986 the cattle yard had been run down in
anticipation of receiving planning permission for the development of the
covered-yard land. Planning permission was granted in September 1987 and the
yard was sold for £250,000 on September 27 1988. On February 12 1992 the
General Commissioners allowed an appeal by the respondent and confirmed his
entitlement to relief from capital gains tax in respect of the sale on the
ground the disposal was part of his business. At the date of disposal the
respondent was 67 years old. He continues to farm the retained land.
his land for development and with a view to the sale changed the nature of his
business so that he no longer required the land in question for the purposes of
that business. Having done that, and having obtained the necessary planning
permission, he sold the land. To categorise the sale of the land in those
circumstances as the sale of part of his business is the antithesis of the true
position. By reason of the change of the business the respondent had made the
land in question no longer required for the purposes of his business when he
sold it.
The following
cases are referred to in this report.
Atkinson v Dancer, Mannion v Johnson [1988] 61 TC 598
Cooper v Stubbs [1925] 10 TC 29
Edwards v Bairstow [1955] 36 TC 207
McGregor v Adcock [1977] 1 WLR 864; [1977] 3 All ER 65; [1977] 51 TC
692; (1977) 242 EG 289, [1977] 1 EGLR 73
This was an
appeal by the appellant, Derek John Pepper (HM Inspector of Taxes), from the
decision of the General Commissioners of Taxes allowing an appeal by the
respondent, Gilbert Henry Daffurn, and confirming his entitlement to relief
from capital gains tax under section 69 of the Finance Act 1985.
Timothy
Brennan (instructed by the Solicitor for the Inland Revenue) appeared for the
appellant; Alun James (instructed by Cox & Hodgetts, of Evesham) represented
the respondent.
Giving
judgment, JONATHAN PARKER J said: This is an appeal by the Crown from a
decision of the General Commissioners at a meeting on February 12 1992 allowing
an appeal of the taxpayer, Mr Gilbert Henry Daffurn, and confirming his entitlement
to relief from capital gains tax in respect of the sale by him on September 27
1988 of a covered cattle yard extending to just over half an acre at Princes
Farm, Aston Somerville, Broadway, Worcestershire.
I turn first
to the relevant statutory provisions, which are to be found in section 69 of
and Schedule 20 to the Finance Act 1985. Section 69(1) of that Act provides, inter
alia:
Relief from
capital gains tax shall be given, subject to and in accordance with Schedule 20
to this Act, in any case where a material disposal of business assets is made
by an individual who, at the time of the disposal–
(a) has attained the age of 60 . . .
The taxpayer
in this case was born on March 20 1921 and so was 67 years of age at the date
of the disposal in question, that is to say, September 27 1988.
Section 69(2)
of the Act provides as follows:
For the
purposes of this section and Schedule 20 to this Act, a disposal of business
assets is —
(a) a disposal of the whole or part of a
business, or
(b) a disposal of one or more assets which, at
the time at which a business ceased to be carried on, were in use for the
purposes of that business, or
(c) a disposal of shares or securities of a
company (including a disposal of an interest in shares which a person is
treated as making by virtue of section 72 of the Capital Gains Tax Act 1979 —
capital distributions),
and the
question whether such a disposal is a material disposal shall be determined in
accordance with the following provisions of this section.
It is common
ground that paras (b) and (c) of the subsection do not apply in
this case and that the sole question at issue is whether the disposition
amounted to a ‘disposal of . . . part of a business’ for the purposes of para (a)
of the subsection.
The meaning of
the word ‘material’ in the expression ‘a material disposal of business assets’
in section 69(1) is dealt with in section 69(3), and it is common ground that
the disposition in question was a material disposal for the purposes of the
section. The operation of the relief granted by section 69 is governed by Part
II of Schedule 20 to the Act. I need not, however, read any of the operative
provisions of the Schedule since no issue arises in relation to them.
The salient
primary facts as they appear from the agreed statement of facts and other
material placed before the commissioners and from the case stated are as
follows. Prior to September 1986 the taxpayer had for many years farmed 113
acres at Princes Farm. Aston Somerville. The farm included a farmhouse and a
number of outbuildings including the covered yard, to which I have referred,
the disposal of which in September 1988 gives rise to the issue on this appeal.
Since about 1975 the taxpayer had kept beef cattle and sheep. The cattle side
of the business consisted of buying and rearing young calves, keeping them for
some two to two and a half years prior to sale and over-wintering them in the
covered yard.
In September
1986 the taxpayer sold 83 acres of the farm, including the farmhouse, and
relief was granted under section 69 of the Act in respect of that disposal. He
retained some 30 acres of the farm including the covered yard. The covered yard
was considered by the taxpayer to have development potential and some time
prior to
September 1986 that application was refused. A further application was in due
course made. According to the agreed statement of facts, from about the end of
1985 or early 1986 the cattle herd was run down ‘in anticipation of receiving
the planning permission which was granted in September 1987’.
The last year
in which calves were purchased was 1985. Three animals were purchased in July
1986, but contrary to what is set out in the stated case they were not calves
but store cattle, that is to say older beasts. Sales were made during 1986 and
1987 but the cattle sold were not replaced. The farm records before the
commissioners showed that, whereas the herd consisted of 46 beasts as at April
5 1986, by April 5 1989 it had run down to nil, although the taxpayer
subsequently purchased older animals aged about 18 months, which could be
wintered outside. Those animals were sold after approximately one year.
Planning
permission for development of the covered yard was granted in September 1987
and on September 27 1988 the covered yard was sold for £250,000. The taxpayer
continues to farm on what he has retained of Princes Farm, but on a much
reduced scale, grazing cattle rather than rearing them. He does this partly as
a hobby, partly because it is his way of life and partly to provide sufficient
income for the land to pay for itself.
It is common
ground that without a covered yard it would be impossible for the taxpayer to
carry on the business of rearing cattle as opposed to grazing them since young
calves must be kept in a covered yard during the winter months.
On those
primary facts the commissioners found that: (i) the taxpayer’s farming
activities before and after the sale of the covered yard were fundamentally
different; (ii) the rearing of calves followed by fattening and wintering out
was in their view totally different from merely fattening 18-month-old beasts
until ready for sale; and (iii) the sale of the covered yard caused the change
(which they described as fundamental) and that the taxpayer had satisfied the
‘interference test’ said to have been propounded by Fox J in McGregor v Adcock
[1977] 51 TC 692* at p696.
*Editor’s
note: Also reported at (1977) 242 EG 289, [1977] 1 EGLR 73.
Accordingly,
they allowed the taxpayer’s appeal and granted relief under section 69 of the
Act on the footing that the sale of the covered yard was a disposal of part of
the taxpayer’s farming business for the purposes of subsection (2)(a) of
that section.
In McGregor
v Adcock, Fox J had to consider the effect of similar relieving
provisions in section 34 of the Finance Act 1965, in particular the question
whether a sale by a farmer of part of his farm land amounted on the facts of
that case to a sale of part of his farm business. It was contended by the
taxpayer in that case that the trade of farming consisted simply of the
occupation of land with a view to making a profit out of it and that
consequently every sale of farm land necessarily amounted to a sale of part of
the farming business.
Fox J rejected
that submission. In so doing he said at p696F:
As regards
the proposition that the statutory trade of farming is the occupation of land
with a view to making a profit out of it, I do not think that this really
assists the resolution of the matter. The fact is that there was here a
business. A business involves activity by the person conducting it. Mere
occupation of land is not enough. The business of mixed farming comprises
varied activities and involves the use of many things. It must be a question of
fact in each case whether there has been such an interference with the whole
complex of activities and assets as can be said to amount to a disposal of the
business or a part of the business.
Thus, in
finding that the sale of the covered yard satisfied what they described as ‘the
interference test’, the commissioners were finding that by reason of the sale
there had been such an interference with the whole complex of the taxpayer’s
activities and assets as amounted to a disposal of part of his farming
business.
Against that
background, and bearing in mind the principles set out by Lord Radcliffe in the
well-known passage from his speech in Edwards v Bairstow [1955]
36 TC 207 and following, to which reference has been made in the course of
argument by both Mr Brennan, for the Revenue, and Mr James, for the taxpayer, I
return to section 69(2) of the Finance Act 1985. Before turning to the precise
words of the subsection, however, I must first refer to the so-called
interference test said to have been propounded by Fox J in McGregor v Adcock.
It seems to me that there are potential dangers inherent in attempting to
restate, rephrase or paraphrase a statutory provision, one of them being that
the resulting restatement may itself be treated as if it were a statutory
provision in substitution for the terms of the statute. This danger was
expressly recognised by Peter Gibson J (as he then was) in Atkinson v Dancer
and Mannion v Johnson (in which a single judgment was given) [1988]
61 TC 598. Thus, at p608H of the report the learned judge said:
But with
respect I doubt whether it is particularly helpful or illuminating to rephrase
the simple and clear test posed by the wording of s124(1)(a) [of the
Capital Gains Tax Act 1979] by a test in terms of interference with the whole
complex of activities and assets.
However, since
counsel on both sides in that case were agreed that that was the appropriate
test for the learned judge to apply he went ahead and applied it, leaving it to
a higher court if it thought fit to (as he put it) lay down some other test.
I respectfully
echo Peter Gibson J’s concerns about applying what is in effect a substitute
test. Moreover, it seems to me that in the instant case the danger, which I
mentioned a moment ago, has materialised in that the commissioners have
effectively elevated the so-called interference test and given it the status of
a statute. In any event, I respectfully doubt whether when he gave judgment in McGregor
v Adcock Fox J intended to lay down any test at all. As I read the
relevant passage of his judgment all he was doing was rejecting the proposition
put by counsel for the taxpayer in that case that the sale of farm land
necessarily involved the sale of part of the farmer’s farming business, and
stressing that whether it did so must be a question of fact in every case. At
all events, for my part, I am not prepared to read into that passage from the
judgment of Fox J anything more than that.
I return then
to the wording of section 69(2). In the first place, reading para (a) of
the subsection in the context of the provision as a whole, in particular in the
context of para (b), it is plain that a distinction is drawn between a
disposal of a business or part of it on the one hand and the disposal of a
business asset on the other. The disposal of a business asset qualifies for
relief under para (b) only if there has been a cessation. In the second
place, the reference to the disposal of part of a business necessarily connotes
that there was immediately before the disposal a further part of the business
which was not included in the disposal. Subject to that, there is, so far as I
can see, no guidance to be gleaned from the statutory context as to the meaning
of the expression ‘disposal of part of a business’.
At first sight
one might have been excused for thinking that para (a) was intended to
relate to disposals of a business, or part of it, as a going concern, whereas
para (b) was intended to deal with the break up of a business following
cessation, but neither counsel was disposed to accept such a construction.
Moreover, I recognise the force of the point that had Parliament intended para
(a) to relate to disposals of going concerns it could easily have said
so in terms. Accordingly, I am content to proceed on the footing that para (a)
is not limited to the sale of a business, or part of it, as a going concern.
On that
footing, the question for present purposes is whether the sale of a particular
business asset — in this case, the covered yard — amounted on the facts to the
sale by the taxpayer of part of his farming business. The commissioners found
that the sale of the covered yard caused a fundamental change in the taxpayer’s
business represented by a change from rearing cattle, for which the covered
yard was required, to grazing cattle, for which it was not. But since on the
facts that change predated the sale of the covered yard, in my judgment, the
commissioners clearly misdirected themselves in treating the subsequent
disposal as the cause of a change in the taxpayer’s business which had occurred
previously. It appears clearly from the agreed statement of facts that the
cause of the change was not the
never happen, but the prospect of planning permission for development being
granted (as it was in fact granted in September 1987).
Mr Alun James,
for the taxpayer, submitted that the commissioners were not merely entitled,
but right to find that the sale of the covered yard caused the change from
rearing to grazing notwithstanding that that change had already taken place
before the sale. He submitted with force that what was happening was a
continuing process of running down the herd on the one hand and applying for
planning permission in respect of the covered yard on the other, which process
was completed by the sale of the yard. He submitted that only at that point did
the change become irreversible and final and that it would have been
unrealistic and uncommercial to expect the taxpayer to carry on with his herd
at full strength right up to the moment of sale, thus leaving himself with
calves which he would have to dispose of by means of a forced sale.
However, in my
judgment, what happened in this case on the agreed facts was that the taxpayer
had in mind to sell part of his land at an advantageous price and with a view
to that sale he changed the nature of his business so that he no longer
required the land in question for the purposes of that business. Having done
that, and having obtained the necessary planning permission, he sold the land.
To categorise the sale of the land in those circumstances as the sale of part
of his business seems to me, with all respect to the commissioners, to be the
antithesis of the true position. By reason of the change that the taxpayer had
made the land in question was no longer required for the purpose of his
business when he sold it. That is not to say that he may not have used the
covered yard from time to time after the change from rearing to grazing. That
aspect of the matter is not specifically dealt with in the agreed statement of
facts. But the point is that by reason of the change which he made the yard was
no longer necessary to enable him to carry on his business in the form which
that business took at the date of sale.
For the
Revenue, Mr Timothy Brennan submitted that the change from rearing to grazing
was not in any event a fundamental change in the taxpayer’s business. I see no
basis for interfering with that finding of the commissioners, but since the
change predated the sale and was not caused by it, its fundamental nature does
not affect what I regard (to use the words of Lord Radcliffe in Edwards
v Bairstow) as ‘the true and only reasonable conclusion’ on the facts of
the case, namely that the sale of the covered yard was not a sale of part of
the taxpayer’s business within the meaning and for the purposes of section
69(2)(a) of the Finance Act 1985. Since no other paragraph of the
subsection is applicable, relief is not available to the taxpayer under the
provisions of section 69(1). Accordingly, I allow the Crown’s appeal.
Before parting
with the case I should like to add a postscript, which has nothing to do with
the decision in this particular case. In the course of his speech in Edwards
v Bairstow at p228 of the report, Lord Radcliffe included a classical
quotation. Having referred to the decision of Rowlatt J at first instance in
the case of Cooper v Stubbs [1925] 10 TC 29, he continued:
In the Court
of Appeal the majority did not agree with him, holding, in effect, that it
would not have been right to give such a direction to the jury on the facts as
found. We are not rehearing the case of Cooper v Stubbs, though
one can say, at any rate, ‘sed victa Catoni‘.
In case the
sense of that allusion is lost on anyone — and it was certainly lost on me
until my usher, who is a very learned man in these matters, enlightened me — I
should like to pass on what I have learnt. The words in question are part of a
line from Lucan’s Pharsalia, Book I, line 128. The full line, which will
be instantly recognised as a dactylic hexameter, is as follows:
Victrix
causa deis placuit, sed victa Catoni.
Rather
inelegantly translated, it means:
The gods
favour successful causes, whereas Cato prefers a lost cause.
This reference
is to Cato the younger, who had espoused the cause of Pompey against Caesar. In
other words, as I understand it, Lord Radcliffe is implying that he has a degree
of sympathy with the view expressed by Rowlatt J at first instance and by the
minority in the Court of Appeal.
If there are
any further queries about this, please refer to my usher.
Appeal
allowed.
