Spc00717

INCOME OR CAPITAL GAIN – payment for sale of partnership share – capital gain but no taper relief because the trade had not commenced – appeal dismissed

THE SPECIAL COMMISSIONERS

	CHRISTOPHER MARTYN CHAPPELL	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		Special Commissioner: 	DR JOHN F. AVERY JONES CBE 

Sitting in public in London on 7 November 2008

The Appellant in person

Lee Paddon and Nicola Parslow, HMRC Appeals Unit London & Anglia for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	Mr Christopher Martyn Chappell appeals against an amendment to his self-assessment for the year 2002-03 giving effect to the conclusions contained in a closure notice dated 21 June 2007 to the effect that taper relief of 75 per cent is not available and that the income was taxable under Case I of Schedule D.  The Appellant appeared in person; the Respondents (“the Revenue”) were represented by Mr Lee Paddon and Mrs Nicola Parslow.
2.	The issue in this appeal is how a receipt by the Appellant of £500,000 pursuant to an agreement of 1 May 2002 should be taxed, the Appellant contending for capital gains tax as a business asset with taper relief of 75 per cent, and the Revenue for income tax either under Case I or Case VI of Schedule D.
3.	The Appellant provided a witness statement and gave evidence and was cross-examined on one point.  I also had a bundle of documents.  I find the following facts:
(1)	The Appellant entered into an oral agreement with Mr Jack Dellal, who is a well known figure in the property world, for property ventures under which each had a 50 per cent interest.  This is described as a consortium called the Allied Commercial Consortium (“the Consortium”).  I deal with its nature below. 
(2)	The Appellant, on behalf of the Consortium, was interested in acquiring the head lease of Dolphin Square from Westminster City Council together with the sublease owned by Dolphin Square Trust Limited.  He considered that by merging the two and actively managing the property, including granting long leases to tenants wanting to acquire them the value would be enhanced.  Since the purchase was never finalised I shall not set out any details of what was proposed.  Negotiations for the purchase began when an offer of £120m was made in November 2000, but no doubt there were earlier actions taken by the Appellant although I did not see anything as early as October 1999 mentioned in the Appellant’s income tax return (see below).  The offer was later increased to £145m although I am not sure when, but the offers were eventually unsuccessful.
(3)	Mr Justin Cadbury contacted the Appellant in connection with the property venture and the Appellant considered that the chances of success for the purchase would be increased if Mr Cadbury were involved.  The Appellant entered into an agreement of 1 May 2002 (“the Agreement”) with Swan House Investments Holdings Limited (“Swan”), Mr Cadbury’s holding company under which for £500,000 the Appellant sold to Swan 10 per cent of his 50 per cent interest (ie 5 per cent of the whole) in the Consortium.  
(4)	The Agreement recited that the Appellant on behalf of the Consortium had been engaged in research into the Dolphin Square project for 2 years and that they had received an offer dated 21 February 2002 from Crown Dilmun plc for the sale of the two leasehold interests for £175m.  The offer refers to entering into a lock out agreement between all parties and that there should be no acceptance of any other offer by the Consortium.  The Appellant had accepted this offer (subject to contract) on behalf of the Consortium on 22 February 2002. 
(5)	the Agreement provided that :
“[The Appellant] covenants with Swan to use his best endeavours to seek acceptances of the offers made for the respective Leasehold interest in Dolphin Square and agrees to take all reasonable steps therefore relating to its onward disposal to Crown Dolphin, in accordance to Schedule 3 herewith”  [Schedule 3 was the offer letter from Crown Dilmun]
(6)	The Appellant agreed to keep Swan informed about negotiations.  He also agreed to pay a notional rate of interest on the £500,000 at 6 per cent per annum for two years or until the transaction was concluded.  The Agreement also provided for the parties to take out a term Keyman policy on the Appellant’s life for two years for £500,000. 
(7)	The Agreement suggests that the Consortium intended to sell to Crown Dilman at £175m and expected to buy the interests for a lower price, thus making a dealing profit.  The Appellant in evidence said that he had interested Royal Bank of Scotland in financing the purchase, but the only letter from the bank that I saw was dated 28 October 2003 confirming their interest in funding the proposals.  The Consortium would hold the property in order to grant leases at a premium for the remainder of the leasehold interest to the occupational tenants (the present arrangements were only for leases at a rent) and, after sorting out the dilapidations being claimed by the freeholder (before which the leasehold would not have been saleable), acquire the freeholder’s interest and after two years grant 90 year commonhold leases to the tenants, and make other changes to the management.  He said that he would not have merely accepted Crown Dilman’s unsolicited offer.  He said that the Agreement should be considered in the light of events before and after.  The Appellant’s tax return including the receipt stated “In October 1999 I commenced working on a venture to purchase the leasehold interests in a substantial London property with the intention of re-selling at a profit.”  Since the leaseholds were never acquired it is not necessary for me to make a decision about whether the Consortium would have been a dealer or investor in the property.  I shall assume in favour of the Appellant (in relation to taper relief) that it would have been a dealer as this is supported by the contemporary Agreement.
(8)	The Appellant regarded what he was selling as the opportunity to take part in the Consortium.  His tax return described it as a sale of his interest in the goodwill of the Consortium.
(9)	The Consortium failed to persuade the leaseholders to sell and the property was eventually sold to another purchaser in September 2005. 
4.	The Appellant contends that the sale made by the Agreement was of a capital asset that qualified for business taper relief.
5.	Mr Paddon and Mrs Parslow contended that the sale made by the Agreement was taxable under Case I, or Case VI or as a capital gain without its qualifying for any taper relief.  In particular they contended:
(1)	If the purchase and sale of the leasehold interests had taken place there would have been a trade, or at least an adventure in the nature of trade, see the badges of trade set out in Marston v Morton 59 TC 381 at 391.  This infects the sale pursuant to the Agreement which is also a trading transaction.
(2)	The payment under the Agreement was made by an enforceable Agreement for the provision of the Appellant’s services, resulting in a Case VI liability, as in Brocklesby v Merricks 18 TC 576.
(3)	If the Agreement created a capital gain no business taper relief would be available as no trade had then begun.
6.	As a preliminary mater, since the Appellant is unrepresented, I have considered whether in the light of Tower MCashback LLP1 v HMRC [2008] EWHC 2387 (Ch) 13 October 2008, not yet reported, the Revenue are entitled, having made the amendment and closure on the basis of Case I they can now contend for other treatment.  I conclude that they can on the basis that the factual background is the payment of £500,000 pursuant to the Agreement.  The other contentions are different arguments of law, that in my view, are permitted.
7.	I infer from the above facts that the Consortium was a partnership.  Although not dealt with in argument because Mr Paddon agreed that it was, I have considered whether there was a sufficient business for a partnership to have started.  This was the issue in Miah v Khan [2000] 1 WLR 2123 in which three people agreed to start a restaurant business but before it opened the one providing the money fell out with the others and determined the partnership at will (if it had started) before the restaurant opened.  There had been preliminary work in finding premises, obtaining planning permission, opening a bank account, obtaining a bank loan to purchase the freehold reversion, and doing so, commissioning a design, contracting with builders and purchasing he equipment and furniture. Lord Millett, with whom the others concurred said:
There is no rule of law that the parties to a joint venture do not become partners until actual trading commences. The rule is that persons who agree to carry on a business activity as a joint venture do not become partners until they actually embark on the activity in question. 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. Any commercial activity which is capable of being carried on by an individual is capable of being carried on in partnership. Many businesses require a great deal of expenditure to be incurred before trading commences. Films, for example, are commonly (for tax reasons) produced by limited partnerships. The making of a film is a business activity, at least if it is genuinely conducted with a view of profit. But the film rights have to be bought, the script commissioned, locations found, the director, actors and cameramen engaged, and the studio hired, long before the cameras start to roll. The work of finding, acquiring and fitting out a shop or restaurant begins long before the premises are open for business and the first customers walk through the door. Such work is undertaken with a view of profit, and may be undertaken as well by partners as by a sole trader.
…
The question is not whether the restaurant had commenced trading, but whether the parties had done enough to be found to have commenced the joint enterprise in which they had agreed to engage. Once the judge found that the assets had been acquired, the liabilities incurred and the expenditure laid out in the course of the joint venture and with the authority of all parties, the conclusion inevitably followed.
While there the partnership had acquired assets and had clearly started a business (though not a trade), I do not read the decision as requiring the acquisition of assets when, as here, the acquisition of the sole asset is the important part of the activity on which two years’ negotiations had taken place.  In carrying out the two years’ research including making offers to purchase the parties had, in my view had “done enough to be found to have commenced the joint enterprise in which they had agreed to engage.” On that basis there was as partnership and the sale pursuant to the Agreement is of a partnership share or interest, that is to say of a share in the underlying assets.
8.	If the Consortium intended to be a dealer in property (or, which comes to the same thing, enter into an adventure in the nature of trade), Mr Paddon contended that no trade commenced because nothing was ever purchased.  He relied on The Birmingham & District Cattle By-Products Co Ltd v IRC 12 TC 92 that a business may carry on activities preparatory to starting to trade.  In that case the company was incorporated in June 1913 and erected a works, purchased plant and machinery, entered into agreements for purchase, but only in October 1913 did it take in raw materials and turn out the product.  Rowlatt J upheld the General Commissioners’ decision that it was not until October 1913 that the trade commenced.  Strictly the question before him was whether a trade or business had commenced for excess profits duty purposes.  In a later case, Kirk and Randall v Dunn 8 TC 663 Rowlatt J had doubts whether he had been right about business in the light of the view taken by the Court of Appeal in other cases.  But I consider that in relation to trade it is impossible to commence a trade without acquiring trading assets.  Admittedly the Consortium had accepted the offer from Crown Dilman to sell to it but this was subject to contract.  Accordingly, I agree that the Consortium never started to trade.
9.	There is no suggestion that the Appellant entered into the Consortium intending to sell an interest in the Consortium and so it is difficult to see how he can be taxable on the sale under Case I.  Mr Paddon relied on Brocklesby v Merricks 18 TC 576 for the proposition that Case VI could apply to a payment for services pursuant to an enforceable agreement.  In that case an architect had introduced a client to the owner of a property who was selling it and the client agreed to pay the architect 25 per cent of the profit he made on re-selling the property on terms that the architect carried out architect’s and surveyor’s work in connection with the re-selling without charge.  In fact he did little work as the property was immediately sold but it was held that he was taxed under Case VI as remuneration for the services to be provided under the agreement.  Here, under the Agreement the Appellant agreed to use his best endeavours to seek acceptances of the offers to purchase and to take all reasonable steps relating to its onward disposal to Crown Dilman.  His services were clearly thought to be valuable because of the key man insurance for the next two years.  It seems to me that Brocklesby v Merricks is different in that the payment pursuant to the agreement was for services otherwise to be provided without charge.  Here, while the Appellant did agree to perform services, the payment is really for 10 per cent of his 50 per cent partnership share and not realistically for services which it was in the Appellant’s interest to carry out anyway because they benefitted his remaining 40 per cent partnership interest.  Accordingly I do not consider that Case VI is applicable.
10.	The Revenue did not suggest that s 776 might apply, presumably because no property was ever acquired, so I need not consider this. 
11.	This leaves capital gains.  A partnership interest, which is essentially a share in the partnership assets, which are in this case intangible, can be a capital asset liable to capital gains tax.  I consider that this is the right head of charge.
12.	As to whether taper relief applies, para 5 of Schedule 1A to the Taxation of Chargeable Gains Act 1992 provides:
5—(1) This paragraph applies, in the case of the disposal of any asset, for determining (subject to the following provisions of this Schedule) whether the asset was a business asset at a time before its disposal when it was neither shares in a company nor an interest in shares in a company.
(2) Where the disposal is made by an individual, the asset was a business asset at that time if at that time it was being used, wholly or partly, for purposes falling within one or more of the following paragraphs—
(a) the purposes of a trade carried on at that time by that individual or by a partnership of which that individual was at that time a member;
13.	Was the partnership share an asset that was being used for the purposes of a trade carried on at the time of the disposal by a partnership of which the Appellant was a member?  I said that I would accept that the partnership would have been a trader if it had acquired the property.  But since it never started to trade, the answer must be that the assets representing the partnership interest were not being used for the purposes of a trade carried on by the partnership.
14.	Accordingly I dismiss the appeal and uphold the amendment to the self-assessment but as a capital gain without any taper relief, on which the same income tax is due but not National Insurance Contributions of £1,806, making the amendment income tax of £181,455.20.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER
RELEASE DATE: 12 November 2008

SC 3125/08

Authorities referred to in skeletons and not referred to in the decision:
Atherton v British Insulated and Helsby Cables Ltd 10 TC 155
John Smith & Son v Moore 12 TC 266
Short Bros v IRC 12 TC 955
George Thompson & Co Ltd v IRC 12 TC 1091
Vodafone Cellular Ltd v Shaw 69 TC 376
IRC v John Lewis Partnership 75 TC 131
IRC v Muller & Co Margarine Ltd [1901] AC 217
Ryall v Hoare 8 TC 521
Goff v Osborne & Co (Sheffield) Ltd 34 TC 441