Schemes to avoid tax on the development value of land not defeasible on the basis that the controlling owner was engaged in ‘trade or an adventure in the nature of trade’–‘Bold and novel’ argument for Revenue fails–If controlling owner were held to be trading, he would in effect be trading with himself–Artificial price paid by a company as part of one scheme cannot however be deducted from company’s profits for the relevant year–Possibility of further assaults by Revenue on parties involved in both schemes proving successful
These were
five appeals (the first two referred to as ‘the Higgs cases,’ the remainder as
‘the Downes cases’) which arose out of similar schemes designed to avoid tax on
the development value of land owned by companies controlled by (1) Mr Alan
Edward Higgs and his wife, Mrs Freda Gwendoline Higgs, and (2) Mr Albert James Downes.
Mr C N Beattie
QC, Mr P W Rees QC, Mr D C Potter QC and Mr J R Gardiner (instructed by
Pickering, Kenyon & Co) appeared for the appellants (Pickersgill and his
cc-trustee) in the first appeal, and for the respondent (Higgs) in the second
appeal; Mr R A MacCrindle QC, Mr P W Medd QC and Mr H K Woolf (instructed by
the Solicitor of Inland Revenue) for the respondent inspectors of taxes in the
first four appeals; and Mr D C Potter QC and Mr A R Thornhill (instructed by
Pickering, Kenyon & Co) for the appellants (Lees and another) in the third
appeal and respondent (Downes) in the fourth appeal. The parties to the fifth
appeal were not separately represented.
In his speech,
LORD REID said that Mrs Higgs and her husband owned and controlled a number of
companies. Several of these (‘the Higgs companies’) owned parcels of land ripe
for development. Another (‘Coventry’) was engaged in land development. If there
had been no scheme for tax avoidance the natural course would have been for the
Higgs companies to have transferred the land to Coventry, which would then have
carried out the development. The lands held by the Higgs companies had been
bought by them at prices amounting in all to about £80,000, and it was expected
that development would yield a profit of about £200,000. In the absence of this
scheme, tax would have had to be paid on this profit. But it was suggested to
Mr Higgs by a representative of a finance company, Harlox, that matters could
be arranged in such a way that, after paying to Harlox a fee of £30,000, the
remaining £170,000 would come into the hands of trustees of a discretionary
trust for the Higgs family free of liability to tax. Mr Higgs agreed to carry
out the scheme, and procured the co-operation of all those companies and
individuals who played parts in it. Admittedly, he (Mr Higgs) took no direct
part in its operation. He never owned any of the land and he never handled any
of the money. He obtained the consent of his wife to his acting on her behalf
in respect of her interests. The first step in the scheme was to form a
partnership called HLN, consisting of Mrs Higgs and two subsidiary companies–in
which Mrs Higgs had a 90 per cent interest–of Harlox. The capital of this
partnership was £100, and then the partnership entered into some trifling
transactions. Next, Mrs Higgs assigned to the family trustees (the appellants
in the first appeal) her whole interest in the partnership. The validity of the
assignment was not questioned. Then the Higgs companies sold their lands to the
partnership for £87,000, which was considerably less than the market value. No
money was paid to the Higgs companies. After this, Harlox sold their whole
interest to a subsidiary, Harley Street, for £286,000. There were some other
transactions between subsidiaries of Harlox, the purpose of which was not very
clear. In the end another Harlox subsidiary, Downry, bought the land for
£286,750. Downry then made what was called an agency agreement with Coventry.
The special commissioners had said that they did not fully understand this, and
he (his Lordship) did not himself quite understand how it dealt with the cheque
which the trustees had given to Coventry, but its main purpose seemed to have
been that Coventry were to develop the land by building houses on it, and when
from time to time they sold these houses they were to pay the sums which they
received, less their own expenses, to Downry, up to a maximum of £287,000. If
the development yielded more than that, Coventry were to keep the excess. The
net result was clear enough. If all went well, Downry were to receive and to
pass on to Harlox £287,000. That would enable Harlox to retain their fee of
£30,000, pass on £87,000 to the Higgs companies and ultimately pass on £170,000
to the Higgs family trust. If the development brought in less than was
expected, however, the family trust would not receive the full sum of £170,000.
Confronted by
this labyrinth, the Revenue were in some difficulty. Whom should they
assess? For what profit? In what year of assessment? It was said in argument that there were five
possibilities apart from the course which the Revenue ultimately took. The
Higgs companies had sold below market value, so they might be assessable; the
partnership, the trustees, Harlox and Coventry were also possibly liable to be
assessed. Even if the Revenue failed in the present appeal, therefore, it by no
means followed that the scheme was a successful attempt to avoid tax. The
Revenue decided to take a bold and novel course, based on the view that in the
matters under consideration Mr Higgs had engaged in trade and that the trustees
were assessable as having received the profits of his trading. They (the
Revenue) did not now seek to defend an assessment on Mr Higgs himself, but they
stren-
1960-61 in the sum of £170,000 in respect of ‘profits in connection with
partnership interest in HLN properties.’
This assessment was dependent on the proposition that Mr Higgs was
engaged in trade or an adventure in the nature of trade; if he was not so
engaged, the assessment could not stand. The Income Tax Acts had never defined
trade or trading further than to provide that trade included every trade,
manufacture, adventure or concern in the nature of trade. As an ordinary word
in the English language, ‘trade’ had had a variety of meanings or shades of
meaning. Leaving aside obsolete or rare usage, it was sometimes used to denote
any mercantile operation, but it was commonly used to denote operations of a
commercial character by which the trader provided to customers for reward some
kind of goods or services. The contexts in which the word ‘trade’ had been used
in the Income Tax Acts appeared to indicate that operations of that kind were
what the legislature had primarily in mind. The Act of 1842 showed that
Schedule D covered inter alia the annual profits or gains arising from
any profession, trade, employment or vocation, and that Rule 1 of Case 1
provided that the tax was to be charged on the balance of the profits and gains
of such trade, manufacture, adventure or concern in the nature of trade. He
(his Lordship) found nothing in later legislation to alter the fundamental
conception of trade in that old Act, but as there was no limiting definition, trade
had been held to include cases where some element was absent which was normally
present in trading. Normally it was a question of law whether the provisions of
an Act applied to the facts of a particular case; there might, however, be a
difference where the question was whether provisions with regard to trading
applied to particular facts.
Mr Higgs did
not deal with any person. He did not buy or sell anything. He did not provide
anyone with goods or services for reward. He had no profits or gains. Under
this scheme he never could have had any, and it was for that reason that it was
admitted that he could not be assessed personally. There appeared to be no
characteristic of trading in anything Mr Higgs did. The case for the Revenue
nevertheless was that he procured others to enter into transactions most, if
not all, of which were trading transactions. ‘Procuring’ appeared to include
‘compelling’ where the person concerned had a power to compel, or making an
agreement or merely persuading where he had no such power or did not use it. He
(Lord Reid) could understand an argument that if A compelled B or obliged B to
agree to carry out a trading operation, then A and not B was the trader. But
that was not what was now said in this case. And if A merely persuaded B to
conduct a trading operation he (his Lordship) did not see how A could be said
to be the trader. The Revenue made no attempt to show that when Mrs Higgs and
the other parties entered into the HLN partnership, when she assigned her
interest to the trustees, when the Higgs companies sold their land, when the
trustees sold to Harlox, when Harlox manipulated its subsidiaries, and when
Downry made the agreement with Coventry, all were acting as Mr Higgs’s agents,
so that he, and not they, did the trading. The case for the Revenue seemed to
be that all these others did their own trading, so that receipts and
expenditure by them would enter their own profit and loss accounts, but that Mr
Higgs carried on a separate trade of procuring them to do what they did. He
(his Lordship) did not understand the basis of this argument. Was it to be said
that whenever A persuaded B to do some trading which yielded a profit, A as
well as B was liable to pay tax on that profit?
That would be ridiculous, but it had never been made clear what it was
that distinguished the present from such a case.
Mr Higgs
procured a number of people and not merely one to act as he wished, but that
was not said to make a difference. He got an indirect benefit out of the
scheme, because he was one of the possible beneficiaries and he had a moral if
not legal obligation to provide for the other beneficiaries, but that had never
been said to make the difference. It appeared to him (Lord Reid) that the case
for the Revenue was totally misconceived. Besides Mrs Higgs and the trustees
there were perhaps a dozen companies which played parts in the scheme, each
carrying out one or more transactions with one or more of the others. Most if
not all of these transactions were trading transactions. The Revenue case was
that, in addition to the participants in any one transaction trading with each
other, Mr Higgs also traded by procuring them to trade. As he (his Lordship)
understood it, the argument was not that he (Mr Higgs) traded with them. He
just traded. It was said that in dealing with Mr Higgs their Lordships must
treat the scheme as a whole and not seek to break it up. He (Lord Reid) did not
understand that. If procuring a dozen participants to play a dozen parts was
trading, then procuring each one of them must be a part of that trading. No one
appeared to have realised that this could lead to double taxation of the
profits of one transaction. It would enter the profit and loss account of the
participants, and in so far as procuring it contributed to the profit of Mr
Higgs’s ‘trade’ it would be taxed again.
The further
one analysed this matter the more novel and anomalous the case for the Revenue
became. He (his Lordship) had found some difficulty in discovering what
precisely were the grounds of judgment below, but the special commissioners did
not appear to have thought that the trading of Mr Higgs was something apart
from the trading of the participants in the transaction. They said:
In
approaching the question whether, in all this, Mr Higgs embarked on an
adventure in the nature of trade, we think it immaterial that part of the
object was to avoid tax on £170,000; that was the explanation of the method
employed, but the substance of the matter is that what we have in front of us
is Mr Higgs’s chosen method of making £170,000 out of the exploitation of the
properties. Apart from one small piece of land, Mr Higgs did not venture any
property or capital of his own; it all belonged initially to Higgs’s companies,
but as we see it, it was in reality he who ventured it, and he did so for the
purpose of this scheme. There seems to us no other explanation of the action of
the Higgs companies in selling the land at what was quite patently a very
substantial undervalue; no other explanation was offered to us. There is here
undoubtedly a background of trade. Although the reported cases afford no
example of an activity of this nature being held to be trading, they do
indicate that a wide variety of different methods of money-making may
constitute trades. Our conclusion is that Mr Higgs engaged in an adventure in
the nature of trade in exploiting the properties in this manner.
That appeared
to him (his Lordship) to mean that the land, the development of which yielded
the profit, was really the property of Mr Higgs, because he owned the companies
which owned it, and that the transactions which constituted the scheme were
really his transactions and not those of the apparent participants. If that was
what the special commissioners meant, he (Lord Reid) need not deal with it
further, because that view was not argued to their Lordships; but that, he
thought, was the view of Megarry J, who adopted the reasoning of the special
commissioners (see [1973] 1 WLR 1187), and said with regard to the Downes
cases, which in this matter were indistinguishable:
It cannot be
that a trader ceases to trade merely because he leaves to others the
organisation and execution of his trading.
It never
seemed to have been pointed out that if the trading of the others was his
trading, then Mr Higgs was trading with himself, because he had procured the
actions of both parties to each transaction. That a man could trade with
himself was indeed a novelty. He (his Lordship) thought that that was also the
view of the Court of Appeal (per Roskill LJ):
. . . the
reason why Mr Higgs is to be held to have been trading or engaged in an
adventure in the nature of trade is because of
did or were procured to do by him and those acting with him. I therefore reach
the same conclusion on this issue as did the special commissioners and Megarry
J.
No doubt Mr
Higgs engaged in an adventure, but for the reasons given, he (Lord Reid) could
not agree that it was an adventure in the nature of trade. Therefore he would
find for the taxpayer in the Higgs cases. The first two Downes cases also arose
under a scheme prepared by Harlox for the purpose of tax avoidance. The general
nature of the scheme was the same as that of the scheme in the Higgs cases, and
the object was that the Downes trustees should get from the development of the
land involved a sum of £60,000 in such a way that no tax was payable. The Court
of Appeal sustained an assessment on the trustees. Again it was admitted that
this assessment could only stand if Mr Downes could be held to have been
trading etc in procuring the various transactions required by Harlox’s scheme.
For the reason given in the Higgs cases, he (his Lordship) was of opinion that
he (Mr Downes) was neither trading nor engaged in an adventure in the nature of
trade. Therefore he found in favour of the Downes trustees in the first two
Downes cases. The third Downes case, referred to as the Kilmorie case, raised
an entirely different question. It arose because the final stage in the Downes
scheme differed from the final stage in the Higgs scheme.
On March 21
1962 Downes, a company owned by Mr Downes, made an agreement with the owner of
the Landywood estate under which Downes was to pay £67,500 for the right to
develop certain land. This sum was to be paid by instalments as Downes sold
leases of the houses built by them. Sums received by Downes in excess of that
sum, and certain others, were to be kept by Downes as a profit. Then Mr Downes
put in operation the Harlox scheme. The first step was important. Downes sold
their right to Sproul (a Harlox company) for £2,250, and on March 31 Sproul
sold those rights for £2,500 to a partnership of Mrs Downes and two Harlox
companies in all material respects similar to the HLN partnership in the Higgs
cases. Sproul had no connection with Mr Downes or his companies, and this sum
of £2,500 was accepted as a fair price at the time. In other words, the sum of
£67,500 paid for the development rights on March 21 was little short of a full commercial
price. Then similar transactions to those in the Higgs scheme took place, and
the development rights came into the ownership of a Harlox company called
Opendy. But the last stage of the scheme differed from the last stage of the
Higgs scheme. On April 5 1962 Opendy sold their rights to Kilmorie, which was a
Downes company, for £77,250. It was not suggested that the market or commercial
value of these rights had altered between March 31 and April 5. So this sum of
£77,250 was a gross overvaluation. But the scheme under which £60,000 was to
reach the Downes trustees free of tax made it essential that Kilmore should
undertake to pay this large sum. The money was paid by Kilmorie to Opendy
during the three years ending on March 31 1966. The first part of it, £19,240,
was paid during the year ended March 31 1964, and their Lordships were
concerned only with that sum in the present case, which arose out of an
assessment of Kilmorie for the year 1964-65. Kilmorie claimed that this sum was
a proper deduction, in determining their profit for that year, under section
137 of the Income Tax Act 1952, because it was ‘money wholly and exclusively
laid out or expended for the purposes of’ their trade. The sole question in the
case was whether that claim was justified.
The special
commissioners decided against Kilmorie. They held that the agreement with
Opendy ‘was an essential pre-requisite to the carrying out by Kilmorie of the
development of the estate. It proved, moreover, in the event to be very much to
the advantage of Kilmorie to enter into the first-mentioned agreement
(hereinafter referred to as ‘the Kilmorie-Opendy agreement’) on the terms
specified therein. We have, however, to consider the position at the time when
the Kilmorie-Opendy agreement was made, and against the background of the
series of transactions which led up to it. So approaching the matter, we are of
opinion that the Kilmorie-Opendy agreement was entered into by Kilmorie with
the objects both of enabling that company to develop the Landywood Estate and
of facilitating the scheme for avoiding liability to income tax referred to in
paragraph 2 (2) above. In our view the latter object was on the facts of the
case one of the main purposes, and not a mere secondary consequence, of the
entering into by Kilmorie of the agreement, and the outlay totalling £19,240
was thus incurred by Kilmorie for dual purposes, being purposes one of which
was, and one of which was not, a trading purpose.’ There was considerable argument about the
meaning of this finding. He (his Lordship) thought it plainly meant that
Kilmorie would not have paid so large a sum to Opendy but for their non-trading
purpose of enabling the tax-avoidance scheme to succeed. Neither party to the
agreement was acting as a free agent in its own interest. Opendy was a Harlox
subsidiary and Kilmorie was a Downes company. Both had been procured to play
their part in the scheme. The price was dictated by the scheme, and plainly had
nothing to do with the market value of the rights sold.
It was argued
that their Lordships must presume that the directors, or whoever made the
agreement on behalf of the two companies, acted properly in what they believed
to be the interests of the companies. In the ordinary course, their Lordships
would presume that, in the absence of evidence to the contrary. But here it was
quite obvious that neither the Downes nor the Harlox companies acted in their
own interests. They did just what Mr Downes and Harlox wanted. He (his
Lordship) would agree that if a trader was actuated by none but commercial
motives the Revenue could not come along and say that he had paid too much. He
might have been foolish, or he might have had what could fairly be regarded as
a good commercial reason for paying too much. But if it was proved that some
non-commercial reason caused the trader to pay more than he otherwise would
have done, then it seemed quite clear that the payment could no longer be held
to have been wholly and exclusively expended for the purposes of the trade. No
authority was needed for so obvious a proposition. But what happened if even
without the non-trading purpose the trader would have spent part of the sum for
the purposes of his trade? On one view,
section 137 was so unreasonable that it forbade deduction even of that part
which would in any case have been expended for trading purposes. It seemed,
however, that the section could well be read as meaning that if it could be
shown that a part of the expenditure was in fact wholly and exclusively for
trading purposes, then that part was a proper deduction. But their Lordships
did not have to decide that question, because the Revenue had agreed that in
this case £2,500 of the £77,250 paid would be allowed as a deduction, being the
then market value of the rights. In the Kilmorie case, he (Lord Reid) was of
opinion that the decision of the Court of Appeal was clearly right, and he
would dismiss the appeal.
LORD MORRIS OF
BORTH-Y-GEST, LORD WILBERFORCE, LORD SIMON OF GLAISDALE and LORD CROSS OF
CHELSEA concurred, and the house accordingly found for the taxpayer in the main
Higgs and Downes cases and dismissed the appeal in the Kilmorie case.
