Special Commissioners' Decision

RICHARD CURTIS reports the recent decision in Rosemoor Investments Limited (SpC 320).

Trading or investing?

Rosemoor Investments Limited was an investment company and a wholly owned subsidiary of H Limited (an asset finance company) which was in turn owned by W Bank.

It was suggested to W Bank that a subsidiary company of C plc would dispose of six properties on a long lease and then lease them back. C plc would have the option to reacquire the long lease after five years. The aim was to provide relatively low-cost funding for the subsidiary.

H Limited, which was asked to deal with this matter by W Bank, was concerned that the option might not be exercised by C plc after the five-year period, and considered taking out insurance to cover this possibility. In the event, this was not done, but the level of rents payable took this risk into account and Rosemoor Limited entered into the following transactions during 1989 with W Limited:

• granting a 999-year lease for a premium of £40 million;
• leasing the properties back for a rent which was originally below market value, but would increase at five yearly intervals;
• granting an option to another subsidiary of W Bank, HC Limited, for the properties to be re-purchased after five years for £49 million; and
• electing that capital allowances on the machinery and plant in the properties should be claimed by Rosemoor.

Subsequently, in 1994, HC Limited exercised the option to re-purchase.

The Inland Revenue refused Rosemoor's claims to capital allowances and assessed the sum of £49 million as a trading receipt, on the basis that the transactions were trading rather than investment. Rosemoor appealed against these decisions.

Short-term finance?

Although the Revenue argued that it was certain that the option to re-purchase would be exercised, the Commissioners found that the underlease was for 35 years and, while there was an expectation that the option would be exercised, this was not certain. Rosemoor was aware of the risks associated if the option was not exercised and had entered into the transactions on the basis that the lease would in fact last for the full 35-year period.

After hearing expert evidence, the Commissioners found that the transactions were at 'arm's length'. Following MacNiven v Westmoreland Investments Ltd [2001] STC 237, the Commissioners held that the transactions were real transactions in land and these could not be recharacterised as the provision of short-term finance.

Relying on Littlewoods Mail Order Stores Limited v McGregor 45 TC 519, where it was held that a wholly-owned subsidiary need not be treated as a separate and independent entity, the Revenue argued that the transactions were arranged by H Limited and simply 'routed through' Rosemoor, which having no employees or assets itself, could not have negotiated for itself. The Commissioners disagreed and held that, for tax purposes, every company had its own separate legal identity.

Was this a trading transaction?

Finally, the Commissioners considered whether the transactions comprised trading or investment. After considering the 'badges of a trade', the Commissioners concluded that Rosemoor was investing its money and not trading. The appeal was therefore allowed.

Subsequent legislation

See now section 43D, Taxes Act 1988, inserted by the Finance Act 2000, which may impact on some schemes of this nature, depending on their accounting treatment.

(Rosemoor Investments Limited (SpC 320).)

Issue: 3883 / Categories: