SPC00476

TERMINAL LOSS RELIEF – global electronics business operating in the UK through several independently-managed divisions – whether a single trade carried on in the UK – yes, but even if wrong factory closures did not amount to the cessation of separate trades

THE SPECIAL COMMISSIONERS

	ELECTRONICS LIMITED	Appellant

	- and -

	
	HM INSPECTOR OF TAXES	Respondent

		Special Commissioner: 	DR JOHN F AVERY JONES CBE 
						MALCOLM J F PALMER

Sitting in London on 7 to 11 March 2005

David Milne QC, counsel, instructed by McGrigors, for the Appellant

Malcolm Gammie QC and Zoe O’Sullivan, counsel, instructed by the Solicitor of Inland Revenue, for the Respondent

© CROWN COPYRIGHT 2005

ANONYMISED DECISION

1.	This is a joint referral under paragraph 31A of Schedule 18 to the Finance Act 1998 in connection with an enquiry into the 2001 accounting period of the Appellant.   The Appellant was represented by Mr David Milne QC, and the Inspector by Mr Malcolm Gammie QC and Ms Zoe O’Sullivan.
2.	The issue referred to us is whether the Appellant can claim terminal loss relief for losses in two of its product divisions or groups in accordance with s 393A of the Taxes Act 1988.  This depends first on whether such activities were separate trades, and secondly, if they were, whether those separate trades ceased.  The law is not in dispute and we do not need to set it out.  It is accepted that if they were separate trades which ceased, the terminal losses can be set off against total profits in the 3 years prior to the 2001 accounting period.
3.	We had 8 ring binders of documents and heard evidence from the following witnesses: Mr White (Vice-President and Director of Finance of Group 3A) by video link from Site A (non-UK), Mr Orange (Executive Vice-President of the Appellant’s parent company and President of the Resources Organisation), Mr Blonde (Chairman of the Appellant), Mr Pink (European financial director of Division 6), and Mr Blue (former Corporate Finance Director for Europe, Middle East and Africa).  The Appellant put forward a draft statement of facts which the Inspector did not agree on the basis that it dealt with matters solely within the knowledge of the Appellant.  This draft was put to Mr Blonde who was able to speak to most of it and as amended it became an annex to his witness statement.  We have not reproduced it in full as it is not an agreed document but we have drawn on it in finding the facts.
4.	We find the following facts:
The global business
(1)	The Appellant is a wholly-owned subsidiary of Parent Company which operates on a global basis through subsidiaries in various countries.  The global business is run on the basis of divisions which operate autonomously, having their own operational management and reporting lines, supply chain, products, manufacturing, premises, sales organisation, notepaper, invoicing, accounting, and, in the UK, separate trader’s unique reference number for import purposes.
(2)	Some of the divisions were divided into separate groups, in turn being subdivided into sub-groups, which operated separately but reporting ultimately to the division President.  Senior UK employees of a particular division reported to a European, Middle East and Africa (EMEA) Division headquarters, which in the case of several of the Divisions was situated in the UK (There were two other geographical regions, the Americas and Asia Pacific).  From the EMEA headquarters reporting lines ran to Country X and ultimately to the Division President.  Important decisions of the Division President were subject to approval by the Chief Operating Officer, the Chief Executive Officer, the Chief Financial Officer, who operated from a headquarters in Site A (non-UK) and ultimately the Board of Parent Company.  The Chief Executive Officer would set both financial targets (such as sales, sales growth, gross margin and engineering targets) and non-financial targets (such as customer satisfaction and quality) for each division and would monitor these.  The Division President has considerable latitude for decision making in order to meet these targets.  He has his own financial controller and human resources vice-president.  The President of a Division had power to set up separate groups or sub-groups (requiring sales of about $1bn), which would report separately via the regional head of the group and ultimately to the President of the Division.
(3)	In addition to the Divisions was the Corporate function whose job was not to interfere with day-to-day operations of the divisions but to oversee the activities in a more general sense.  Corporate would deal with such matters as real estate, treasury, business development, consideration of mergers and acquisitions.  Reporting was via a regional organisation and ultimately to the Resources Organisation.  The cost of the Corporate function was apportioned to the divisions.
(4)	In 2001 there were five divisions, as follows:  
Division 1 described in the 2001 accounts under the heading At a glance as “a trusted integrator of communication and information solutions for work teams in business and government enterprises.  Our solutions enhance and transform operations by delivering rapid, mobile intelligence to meet mission-critical needs.”  This covers items such as two-way radios for the police, ambulance, fire and private security services.
Division 2 which “delivers the infrastructure, network services and software that meet the needs of operators worldwide today, while providing a migration path to next-generation networks that will enable them to offer innovative, revenue-generating applications and services to their customers.”  This was explained by Mr Blonde as covering telephone exchanges and what might be called network plumbing.
Division 3 which “provides a broad range of embedded systems and products for the automotive, industrial, telematics, telecommunications and portable energy systems markets.”  This is an umbrella for other products or activities where there is no other natural home, including Group 3A (manufacturing car engine management systems), Group 3B (manufacturing computers and components for original equipment manufacturers), and Group 3C (manufacturing batteries for handsets produced by Division 4)).
Division 4 which “designs, manufactures, sells and services wireless subscriber and server equipment including wireless handheld devices for cellular and integrated digital-enhanced networks, advanced messaging devices, personal two-way radios and a broad range of mobile data services, servers and software solutions, with related software and accessory products.”  This includes in particular mobile phone handsets and pagers and associated equipment and software, including ring-tones and video clips.
Division 5 which “creates…system-on-chip solutions for a connected world.  Its strong focus on wireless communications and networking enables customers to develop smarter, simpler, faster and synchronized products for the person, work team, home and automobile.”  This includes the manufacture of computer chips. This Division  has been sold.
Division 6.  This was started in 2001 following the merger with Third Party Corporation in 2000.  The same document described it: “As the world’s leading supplier of digital cable set-tops and cable modems the Division provides end-to-end systems for the delivery of interactive digital video, voice and high-speed data solutions for broadband operators.”  As this division was new in 2001, at the end of the time with which we are dealing, we shall not mention it further.
(5)	Over time, operations and activities relating to particular products have moved between divisions.  For example, in 1996 the Subscriber Division (the predecessor of Division 4, which became a division in 1999) was in the same division as the Infrastructure Group (the predecessor of Division 2) with Group 3B (from 1998 in Division 3).  A former Information Division was disbanded in 1998 when the market for pagers disappeared.  For a short time between 1998 and 2000 Division 1, the Network Division, the Telecom Group, the Internet Group and the Network Group were put under the “Communication Initiative.”  Also for a short time in 2001 Division 2, Division 6 and Division 1 were put under the Networks Division.  Group 3D started within Group 3A, moved out in 1998 and back again in 2001.  Many of the changes are no more than name changes, for example from Subscriber Division to Division 4 when operators changed from referring to subscribers to customers, but changing in divisions will have affected operational management reporting.  A further reorganisation took place in 2005 resulting in four divisions.
(6)	The operations of each Division were so separate that they were sometimes described as “pulling strongly in different directions.”  On one occasion the Minister of Communications of a newly independent country complained that this was the third business of the Appellant to visit him with each proposing a different technical solution.  One of the witnesses, when asked shortly after arrival for his first impressions, pointed to the oddity of manufacturing modems and multiplexers in one place and having Group 3B within 50 miles without any contact between them.
(7)	While the global business operated in separate Divisions, Parent Company often emphasised that these were not unrelated businesses.  For example, the 2001 accounts stated that “Parent Company is a global leader in providing integrated communications solutions and embedded electronic solutions.  Our…solutions include: 
•	Software-enhanced wireless telephone and messaging, two-way radio products and systems, as well as networking and Internet access products, for consumers, network operators, and commercial, government and industrial customers.  
•	End-to end systems for the delivery of interactive digital video, voice and high-speed data solutions for broadband operators
•	Embedded semiconductor solutions for customers in wireless communications, networking and transportation markets.
•	Integrated electronic systems for automotive, telematics, industrial, telecommunications, computing and portable energy systems markets.”  
The first bullet appears to include Division 4 and Division 1, both of which contain computer chips partly produced by Division 5, and Division 2, for the network equipment which has to be compatible with the handsets; the second, Division 6; the third and fourth both Division 5 and Division 3.
(8)	The Divisions operated autonomously but there were some transactions conducted between them on an arm’s length basis.  In particular Division 5 supplied computer chips which were incorporated into products manufactured by other divisions.  Divisions could be in competition with each other.  For example, originally what is now Division 2 was promoting TDMA (time divided multiple access) while what is now Division 4 was promoting the rival CDMA (code division multiple access).  Or in some countries one division might be a network operator and another might sell network equipment and handsets to a rival network operator.  In the UK it was necessary to have “Chinese walls” where one division was selling network equipment to one network operator and handsets to a rival operator.  From 2000 there has been a greater emphasis on shared services between divisions, such as human resources and using the same accounting system.
(9)	Each division or group had its own supply chain and, where this included manufacture, each carried out manufacturing separately in separate locations.  Exceptionally, in 1998 the factory in Site D was converted from manufacturing for Division 1 to manufacturing mobile handsets for Division 4.  From 2000 the group, in common with its competitors, started outsourcing some of its manufacturing, which enabled it to respond more easily to changes in the market. 
(10)	It was unusual for employees to move between divisions, except at the very top.  Several of the witnesses concerned with accounting and finance had moved between divisions, and such moves are more likely in such functions.
(11)	In general the customers of each of the Divisions were different: other manufacturers of electronics for Division 5, mobile phone network operators and retailers for Division 4, car manufacturers for Division 3, mobile phone network operators for Division 2 (including some of the same operators who are customers of Division 4 but the people involved in purchasing would be different), the public services for Division 1.
The UK operations
(12)	In most countries in which the global business operated a local subsidiary owned the assets situated in the country.  The Appellant was the local subsidiary in the UK.  The group’s business model was to operate through a single subsidiary in a country, as was the case with the Appellant.  However, at any time in the UK there would be a few other companies arising from acquisitions which were in process of having their assets moved to the Appellant.  
(13)	The directors of the Appellant were not involved in the chain of Division reporting, but were part of the Corporate function with its own reporting lines.  Their main function was to advise on local compliance requirements.  The terms of reference of the board were:
“In respect of the Appellant businesses which operate under the auspices of the UK legal entity:
•	Ensure compliance with the laws, corporate governance codes and ethical codes of the UK.
•	Provide a vehicle for guiding the long term direction (as distinct from operational management) of Appellant Limited to the extent to which directional issues relate to the UK environment.
•	Initiate UK-specific activities which exploit the synergies between the businesses.
•	Monitor compliance with Another Group Company and the Appellant policies and monitor progress towards the achievement of Corporate UK objectives.
•	Give an account of Appellant’s activities in the UK to the parties (internal and external) to whom an account is properly due.”
The chairman, Mr Blonde, was also involved in high-level discussions with the main customers and the government.  Sometimes he would be involved in group activities in the UK which did not fit the normal Division reporting, which he described as businesses in the nursery (developing activities), infirmary (recovery of the activity) or orphanage (reuniting the activity with the correct core activity).  Other directors were part-time and had other posts in the Divisions operating in the UK.  Reporting lines for the Corporate functions of the directors were also via a European, Middle East and Africa regional corporate headquarters.
(14)	Because of the autonomous nature of the divisions Mr Blonde reintroduced a UK country council as a “talking shop” of senior employees from all the divisions operating in the UK.  Meetings took the form of a part devoted to the understanding of the business in the UK, a second part to review the state of the shared services, and a third part reviewing the governance and compliance issues in the UK.
(15)	All Divisions operated in the UK.  Division 4 was the largest in terms of sales.  Handsets were manufactured at Site B (for which the Site D factory acted as a feeder factory), and the Appellant was involved in the completion, packaging and shipping of handsets in the UK, Scandinavia, the Middle East and African markets.  
(16)	Division 3 operated in the UK first through Group 3A manufacturing and designing car engine management systems, which control the engine, ignition, timing, fuel and temperature of the air in car engines, and telematics (described in Parent Company’s 2002 summary annual report as “an automotive market technology that enables automated roadside assistance, navigation and advanced safety features”), in Site E.  The design centre was the largest outside Country X and at its peak employed up to 200 engineers.  Secondly, Group 3B manufactured and distributed computers and components for original equipment manufacturers.
(17)	Division 5 manufactured semiconductor products in the form of unpackaged silicon chips for the automotive, consumer, industrial networking and wireless markets worldwide.  These were shipped to other group companies in the Far East for further processing into finished products.
(18)	Division 1 manufactured two-way radios in Site H.
(19)	Division 2 manufactures network equipment in Site I and has a large research and development business.
(20)	The financial results of the divisions operating in the UK were consolidated in the Appellant’s accounts.  These are taken from the division accounts, the preparation of which is the priority as the divisions prepared their worldwide results by the sixth working day of the month.  Annual accounts for the Appellant were finalised by the end of the first quarter.  The 2001 accounts of the Appellant describe the principal activities as “to provide Integrated Communications and Embedded Electronic solutions.”  Turnover is divided into three classes: “electronic devices, cellular & radio communications products and services, and other.”  These relate to Division 5, all the other divisions (except for Group 3B), and Group 3B respectively.  The Appellant is financed by the group rather than by external borrowing.
(21)	The closure of the Division 4 factory at Site B was caused by over-capacity when the dot.com bubble burst.  Network operators had spent large sums on third generation spectrum licences which had the effect that they were less able to subsidise mobile phone costs as an inducement to joining the network.  The choice was between closing Site B and Site C (non-UK).  Both plants had roughly equal productivity, levels of quality and the same supply chain.  Although we did not have evidence from those concerned in the decision we infer that the choice was ultimately dictated by tax considerations.  If Site C (non-UK) had been closed there were no other profits in Country Y against which the loss could be set, whereas in the UK there were expected to be profits of more than $200m.  Discussions took place over many months and the decision was made at the highest level in Parent Company since, unusually, the decision depended not only on Division 4 but the availability of profits in other divisions in the countries involved.  The closure was announced in early 2001 and manufacturing ceased by mid-2001.  Excess inventory was sold or transferred to Site C (non-UK).  Nearly all of the 3,200 employees of the Division in the UK were made redundant by the closure, leaving only about 200 employees in the sales and marketing function and the regional headquarters based in Site H.  A journalist described it as the region’s biggest industrial closure in at least 20 years.  The effect of the closure was that whereas previously virtually all the products of the three European factories were sold in Europe, now a majority of manufacturing is outside the region, there is no longer a supply chain management structure in Europe, and the Appellant acts as an interface with buying customers without handling any of the products.  Division 4 is closer to having a global, rather than European, supply chain.  The sales team continue to do the same work with the same reporting lines.  
(22)	In 2000 the Appellant’s sales in Division 4 were £1,349m comprising £881m (65%) from manufacturing (loss £322m), £431 (32%) from distribution of imported handsets to third parties (profit £27m), and £37m (3%) from distribution of imported handsets to other group companies (profit £4m).  In 2001, during which the Site B manufacturing was closed, the equivalent figures were total sales £593m, manufacturing £342m (58%) (loss £93m; closure provision £152m), third party sales £183m (31%) (profit £5m)and intra-group sales £67m (11%) (profit £4m).  In 2002 sales were £317m (profit £30m); there was no manufacturing.  (These figures are taken from a document prepared for transfer pricing analysis purposes which states that some adjustments for 2000 were booked in 2001 and more in 2002 and the adjustments booked in 2002 are reflected in the 2001 accounts, and therefore do not match the analysis from the accounts.)  The tax computation claimed a loss of over £208m for the Division in 2001.  
(23)	Site E principally manufactured electronic car engine control devices for the Motor Group A, and telematics products for the automotive industry.  After the acquisition of Motor Group A by Motor Group B demand for the Appellant’s products diminished and it could no longer maintain production at Site E.  Discussions took place from September 1999 about the future of Site E.  After unsuccessful attempts to manufacture other electronic products the Country X management decided to close Site E and to relocate its work to Site F (non-UK) which was closer to the centre of European car manufacture.  The decision to close manufacture at Site E was announced mid-2000 and manufacture ceased in early 2001.  This initially affected 115 out of 430 employees.  We were not given any financial information about the effect of the cessation of manufacture.  At the time of ceasing manufacturing it was stated that the design and development centre would continue at the same site, but by the second quarter of 2001 it was decided to move this to Site G (non-UK) to be near Motor Group B and the design centre was closed in early 2002 with the loss of the remaining 168 employees (it is not clear how this fits with the 315 employees remaining after the closure of manufacturing).  We saw an analysis of turnover by class of business for 2001 which shows £6.3m turnover from discontinued operations and no turnover in 2002, but it was not explained how this relates to the separate closure of the design centre.
The first issue: whether the Appellant carried on one or six trades
5.	Mr Milne, for the Appellant, contends that the Appellant carried on six trades in the UK identified as: Division 1, Division 2, Division 4, Division 5, and the two groups in Division 3: Group 3A and Group 3B.
6.	In IRC v William Ransom & Sons Limited 12 TC 21 the company’s businesses of growing herbs (husbandry) was capable of being split from the manufacture of drugs for excess profits duty:
“But I can conceive cases where the two branches of a person’s business, and in a person I include company, are so interlaced that it is quite impossible to separate them or to disintegrate them, and I can conceive…that where you have such a case and where the main and substantial portion of the person’s business is of a character bringing it within the Excess Profits Duty, it would be impossible to separate the part of the business chargeable from the part of the business not chargeable, and therefore that the whole would become assessable.” Per Sankey J at 30.
An example of two separate business was underwriting and operating a fleet of steamers in Scales v George Thompson & Co Ltd 13 TC 83, of which Rowlatt J said at p.89 “I cannot conceive two businesses that could be more easily separated than those two.”  Mr Milne contends that so long as the businesses are capable of being separated they are separate trades.  He also points to a dictum of Walton J in Rolls-Royce v Bamford 51 TC 319 that because the receiver considered that the separate businesses of the company were best dealt with on a going concern basis, this meant that the company carried on at least six separate trades, a proposition for which the Revenue had not argued and which would have meant that the appeal was unnecessary.  He draws attention to the difference from the Rolls-Royce case that in this case the Board of the Appellant did not control the business operations.  Control by the Board was one of the factors relied on by the Commissioners in The Howden Boiler and Armaments Company Limited v Stewart 9 TC 205 for deciding that a boiler manufacturer, which made shells in the First World War in separate premises with separate staff, was carrying on one trade, which the Court of Session upheld as a finding of fact.
7.	Mr Gammie, for the Inspector, contends that the Appellant conducted one trade in the UK which continued despite the closure of Site B in 2001 and the cessation of manufacture at Site E in 2001 with the result that the Inspector accepts that the losses can be carried forward.  He contended that the Appellant had not discharged the factual burden of showing that there were separate trades, in particular by reference to the functions or the products of the different Divisions.  The Appellant had not ceased all manufacture in the UK, so that it could not be said that a functionality test was satisfied; and there was no evidence about the other manufacturing facilities in the UK to show that the products manufactured at Site B and Site E were completely different from everything else that it manufactured.  The fact that the global business was managed without regard to the legal entities that owned the assets did not lead to the conclusion that there were separate trades.  If the management structure was relevant it was necessary to ask what level of authority determined that there were separate trades.  The Divisions were ultimately managed by the Division Presidents and by the Chief Executive Officer in Site A (non-UK) who could be regarded as shadow directors of the Appellant, with the consequence that there was a single management of all the Appellant’s activities with the result that there was a single trade carried on in the UK.  The global trade started as the manufacture of a single electronic product and had evolved as electronics had evolved.
Reasons for our decision on the first issue
8.	In part the question whether there is one or six trades turns on the level of generality of the description of the trade: electronics would cover everything, communications would cover nearly all of the activities (presumably excluding the automotive activities dealing with the control of the engine), and one could base descriptions on the divisions or groups, or on the type of operation, such as manufacturing.  
9.	We did not have much technical evidence about the similarities and differences between the products, some of which are highly technical.  Mr Blonde, a former President of an engineering institution, was the only witness with engineering qualifications.  While we acknowledge the helpfulness of his descriptions to us as laymen, there was little evidence about the connection between the various activities.  For example, how different is the supply of mobile phone handsets from the supply of two-way radios to the emergency services?  Mr Blonde explained the differences such as instant communication with two-way radios without the need to dial up; the products had taken a divergent path functionally and technologically with quite different features, such as the red button the police radio for “officer in trouble” which will flash up a map in the control room showing his location.  But we were left without any real guidance on the similarities, and we have adopted a layman’s approach that it seems to us that they are similar in function but naturally containing features designed for the market for each.  Something that we found most helpful in Mr Blonde’s evidence was his description of the progression of mobile phones from voice, then text, then multimedia, then video and finally full colour internet access; and also his comment that the personal communications market is described as the ICE market: Information, Communications and Entertainment, which are increasingly difficult to separate.  Our general impression is that electronic products are becoming more similar so that functions that were formerly found in computers or digital cameras are now available on a mobile handset.  In the circumstances we consider that it would be a mistake to break down electronic products into discrete categories and regard them as separate trades.  While the manufacture of telephone exchanges, described by Mr Blonde as a slow-moving industrial goods business, is clearly different in nature from mobile phone handsets, described as a fast-moving consumer goods business, both relate to the operation of mobile phones and in some cases are supplied to the same operator.  So far as the products are concerned we consider that these are all related under a general electronics heading with most of them being concerned with communication. 
10.	If one excludes differences in the type of product the only features relied on as pointing towards there being separate trades relate to how the group is managed.  Each division had separate supply chains, operational management, products, manufacturing premises, budgeting, sales and marketing teams, notepaper, and invoicing and accounting.  We regard these as a matter of how the parent company chooses to operate and is dictated largely by the different customer base of each division (or in the case of mobile phone operators, the buyers concerned).  Although the facts are very different from Rolls-Royce we do not consider that operational management is a decisive factor in determining whether there are separate trades.  All the divisions are ultimately managed by the Chief Executive Officer and his headquarters team.  The corporate function, operating outside the division operational management, is part of managing the overall business.  The same brand name is used for all products, and the industrial property, which must be an important element in a business of this type, is centrally owned.  
11.	Looking at the matter in the round we consider that globally there is one trade which is one that has evolved through numerous changes in the market for electronic, particularly communications, products by a group that originally made a single electronic product and battery eliminators (a device that allowed battery-powered products to run on household electric current).
12.	What matters for this case is whether the same conclusion is true for the Appellant in the UK.  The main difference looking at the UK on its own is that much of the senior operational management is carried on from outside the UK.  The directors of the Appellant are not concerned in the normal decision-making process of the divisions.  We do not consider that this leads to a different conclusion.  The directors could in their capacity as such become involved; it is merely that they have agreed that they will not.  What matters is who is actually exercising control.  Mr Gammie suggested that the management structure might make the Chief Executive Officer and other officers shadow directors of the Appellant.  It is not necessary to decide whether this is so.  It is enough to say that we do not consider that where the operational management takes place is decisive in determining whether there is more than one trade.  It is a matter of how the group chooses to manage itself.  Since we consider that there is a single global trade, we consider that the same is true in the UK.  
13.	Accordingly we find as a fact that the Appellant carried on one trade.
The second issue: whether, if they are separate trades, they ceased
14.	The second issue arises only if we had reached a different conclusion on the first issue but we shall give our views briefly on it.
15.	Mr Milne contends that, in the words of Walton J in Rolls-Royce (at p.344G) there had been a sudden and dramatic change in the trade.  The cessation of manufacturing leaving only activities that had previously been ancillary leads to a cessation of the trade.  While acknowledging that all the authorities are ultimately decisions of fact he points to the courts upholding findings of fact by the Commissioners that a trade ceased when manufacturing started or ceased in George Humphries & Co v Cook 19 TC 121 (changing from subcontracting the processing of films to the firm carrying out the processing); Laycock v Freeman, Hardy and Willis Ltd 22 TC 288 (subsidiaries ceasing to manufacture and sell to the parent, to the parent taking over the manufacture of shoes and continuing to sell retail); Gordon & Blair Ltd v IRC 40 TC 358 (brewer ceasing to brew and subcontracting the manufacture of beer to its specification to another brewer while continuing to sell it); Seaman v Tucketts Ltd 41 TC 422 (ceasing manufacture of confectionary followed by continuing to sell similar products); and J G Ingram & sons Ltd v Callaghan 45 TC 151 (in period (1) manufacturing and selling surgical and pharmaceutical rubber goods, in period (2) ceasing to manufacture and continuing to sell such goods manufactured by another company, and in period (3) starting to manufacture the same goods but in plastic instead of rubber).  Here at Site B manufacturing, which accounted for 66% of sales and 85% of headcount, had completely ceased.  At Site E all manufacturing had ceased.
16.	Mr Gammie contends that, following the Appellant’s argument of looking at the global management structure, one should look at the global trade to determine whether there has been a cessation of the assumed separate trades, which on a global basis there had clearly not been.  Alternatively, looking only at the UK (on the assumption that each of the activities is a separate trade) so far as Site B is concerned the mere ceasing of manufacture is not a cessation of the trade which consisted of both manufacturing and import and sale of handsets.  So far as Site E is concerned the ceasing of manufacture and the continuation of the design centre do not constitute a cessation of the combined trade.
Reasons for our decision on the second issue
17.	If it is to be assumed that there are separate trades in the UK we do not consider that this issue should be decided by looking at the global trades; the issue is one relating to the Appellant only.  Looking only at the Appellent’s activities we do not read into the authorities a principle that whenever there is cessation of manufacturing there is a cessation of trade.  This case differs considerably from the authorities cited in which the manufactured products accounted for the whole of the sales.  In relation to the closure of Site B the (assumed separate) trade of Division 4 in the UK was that of both manufacturing (accounting for 65% of turnover in 2000, the year before the closure), and selling handsets purchased from elsewhere in the group (accounting for 35% of turnover).  In 2002, the year after the closure, Division sales were £317m (up from £250m in 2001, excluding sales from manufacturing).  Even on the assumption that the Division carried on a separate trade, both of these operations were part of that trade, which did not cease when manufacturing ceased.
18.	Similarly, with the closure of Site E the only statistics that we have is that 115 out of 430 employees were made redundant when manufacture ceased and the remainder continued in the design and development centre for another year.  The analysis of turnover seems to treat the cessation of manufacture and the closure of the design office together, but the case was argued on the basis that they were separate events.  Ceasing to manufacture had a serious effect on Group 3A’s (assumed separate) trade, but we do not consider that it was so substantial to amount to a cessation of the combined trade of manufacturing and of the design centre. 
19.	One final comment is that particularly with an Appellant of this nature the Special Commissioners would welcome the documents in electronic rather than paper form so long as advance notice is given.  We believe that it would be to the benefit of Counsel and those instructing Counsel not to have to move some 8 ring binders of documents plus another binder of authorities into and out of court every day, and for the benefit of witnesses not to have to reach for different binders when giving evidence.  We should add that we are grateful for the core bundle on a CD that was provided during the hearing.  It may be of interest to readers of this decision to know that the VAT and Duties Tribunal Users’ Group has just set up a committee to investigate this, which it is likely that the Special Commissioners’ Users Group will join.  
20.	In summary our decision in principle on the referred matter is that:
(1)	The Appellant carried on a single trade which did not cease in 2001;
(2)	Even if we had reached a different conclusion on (1), neither the closure of manufacturing at Site B nor the closure of manufacturing at Site E amounted to a cessation of the (assumed separate) trades carried on by the Appellant in Division 4 and Group 3A respectively.

JOHN F. AVERY JONES

MALCOLM J F PALMER
SPECIAL COMMISSIONER
RELEASE DATE: 13 April 2005

SC 3055/04

Authorities referred to in skeletons and not referred to in the decision:
The Egyptian Hotels Ltd v Mitchell 6 TC 542
Malcolm v IRC (1919) SC (HL) 33.
North Central Wagon and Finance Co Ltd v Fifield  34 TC 59
Cannon Industries Ltd v Edwards 42 TC 625
J G Ingram & Son Ltd v Callaghan 45 TC 151
Briton Ferry Steel Co Ltd v Barry 23 TC 414
Commercial Union Assurance Co plc v Shaw [1998] STC 386