Chapter 1 Flashcards
(31 cards)
Birmingham and District Cattle By-Products Co Ltd v CIR 12 TC92
Distinction between trading & getting ready to trade. They Purchased plant and machinery in June 2013, entered into contracts in August 1913 and started producing sausages in October 1913. October was when the business started. The other occurrences were ‘preparing to trade’.
Mansell v CIR SpC 551
Established that a trader commences when he sets up his business and begins operational activities with third parties and putting money at risk.
Trader was a property developer. In January 1993 he agreed heads of terms (agreement in principle but not legally binding). In April 1994 he signed option agreements granting Mansell rights to purchase land. In December 1994 he found a buyer. The trade started in April 1994.
Mansell v CIR SpC 551 principals (4)
Given approval in which case?
- A trade cannot commence until it has been set up and the act of setting up is not commencing or carrying on a trade
- A trade commences when the taxpayer begins operational activities and involves the trader putting money at risk.
- Entering into a Head of Terms will not constitute operational activity, as no risk has been taken.
- Only after the Head of Terms was agreed did Mansell have a specific site to market, but it was not until he acquired the options on 15 April 1994 that operational activities began and trading commenced.
Given approval in the high court in Tower MCashback LLP v HMRC STC 3366
J & R O’Kane & Co v CIR (commencement)
States that for a retail business, the trader is trading if the shop is open to the public.
When does a manufacturing trade start?
When the trader takes in raw materials and manufactures its products. (Birmingham and District Cattle By-Products Co Ltd v CIR)
When does a retail trade start?
When the trader opens his premises and displays his goods for sale. (J & R O’Kane & Co v CIR)
Key events to consider for cessation (7)
- The date the decision to cease is made by the owner
- The date the last trading stock is bought
- The date the last trading stock is sold
- The date the last supplier is paid
- The date on which final wages or salaries are paid
- The date the business assets are sold
- the date on which the proceeds from the sale of the business assets is paid to the owner
J & R O’Kane & Co v CIR (cessation)
Established that a persons stated intention to cease is not, on its own, sufficient evidence to treat all its subsequent transactions as the realisation of business assets, rather than trading profits.
Early in 1916 the owners sent a letter announcing their intention to retire, along with a list of stock held to customers.
They made few sales in 1916 but by the end of 1917 they has sold all their old stock plus new stock.
They continued to occupy warehouse until June 1917, when it moved to an office.
It was found that, despite the traders stated intentions, it was clear they were trading up until end of 1917 in their ordinary method. They may have intended to cease but they did not.
How could courts overturn the commisioners (aka tribunals) decision?
Only if they have made an error in law. The ask whether any reasonable and properly instructed person could have drawn the same conclusion from the same facts.
(Have the tribunals interpreted the law correctly?)
Marriot v Lane
Established the weight to be given to the traders intentions.
Surrounded CGT retirement relief. Mr Marriot claimed the relief on gains from the disposal of land which was used as the site of an aircraft museum run by a company in which Mr Marriot was director and controlling shareholder.
The museum closed in 1988 with every intention of reopening in the future. Mr Marriot transferred ownership of the land to a subsidiary of his company in 1989. Retirement relief conditions were
1. The asset had to have been used by the business of the individual or personal company at the time the business ceased and
2. the disposal to have occurred within a year of business ceasing.
The crown won at first as the business was going to reopen, however by the time the appeal was heard, it was clear that the museum wouldn’t be reopening. The commissioners made an error of law in holding the trade did not cease in 1988 as the facts did not support the decision.
On the death of a trader, there are several ways in which the business may be disposed of
- Transfer as a going concern - A succession to the trade but it will continue under a different owner.
- Cessation of a trade - Business may cease and the assets may be transferred to beneficiary or trustee.
- Disposal by executors - Could be either by sale as a going concern or sale of the business assets.
Cohan Executors v CIR
What seemed to be an obvious continuation of the trade by the executors was shown by the court of appeal to be the executors realising the deceased estate to the best advantage.
Edward Cohen was a partner in a firm of ship brokers and managers. He also sometimes placed orders on his own behalf making a personal profit. In 1914, he placed an order on his own behalf but died in 1916 before the construction of the ship was completed.
The executors were offered to terminate the contact without a penalty, but they refused this as the contract was valuable. The ship was built in 1917 and sold for a large profit.
The crown stated that the executors had continued the trade until 1917 when the ship was sold, which the commissioners and High Court agreed. However the court of appeal overturned this decision by stated that the executors were realising the assets of the estate to the best advantage, the asset being the contract. the execitors would have been wasting the estate if they did not fulfil the contracr.
They felt the commissioners had made an error in law.
Pattullo Trustees v CIR
Mr Patullo was a farmer, cattle trader and feeder. When he died in 1951, the trustees decided to honour the outstanding winter feed contracts to obtain the best price for the cattle by selling them in summer and to avoid claims for the loss of contracts. They were realising the deceased assets to best advantage.
They bought feed, bought additional cattle, continued to pay wages and cultivated the farm but they didn’t enter into any new feed contacts.
It was found that they were carrying on a trade and were taxed as trading income.
While the intention was to dispose of the estate to the best advantage, the fact they continued to make purchases constituted ample evidence to support the crown’s view they were carrying out a trade.
Weisburg’s Executries v CIR
The Executors tried to first sell the business as a going concern on the death of the trader, a jeweller, which they were not able to do so they began to sell off the business assets. Executors had to cover the rent on the remaining lease agreement and the only way to do this was to continue to fulfill new orders . On taking new orders, they were continuing the trade.
What happens on the death of a partner? (2)
- Executors do not automatically become a partner. They can ask for an account of the amounts due to the deceased (not considered trading)
- If the deceased partner confers their interest to another person, the surviving partners must agree.
What happens on company liquidation?
Normally, it will cease to trade on liquidation as the liquidator is restricted to winding up the affairs to the best advantage of the companies creditors and shareholders.
There may also be times when the liquidator’s activities amount to a trade.
Legislation with the rules for the valuation of stock and work in progress on cessation? (company and individuals)
S173-S186 ITTOIA
S162-S171 CTA09
Definition of trading stock (3)
- any property which is sold in the ordinary course of trade, or would be sold if its manufacture, preparation or construction was completed.
- Materials used in the manufacture, preparation or construction of any property.
- Any services performed in the ordinary course of trade wholly or partly completed for which a charge would be made if not for the cessation.
When trading stock is sold on cessation to an unconnected person (2)
who carries on, or intends to carry on, a trade in the UK and will be able to claim a deduction for the cost in working out their profits chargeable to income or corporation tax.
then you value the stock at the amount realised on sale.
When trading stock is sold on cessation to an connected person (1)
You value the stock at what would have been paid in an arm’s length transaction (market value).
Definition of connected parties (4) and (3)
- they are connected within the meaning of Section 993 and 994 Income Tax Act 2007 (s933-4 ITA07) which is mirrored in s1122 and s1123 CTA10 (corporation tax). Or
- one is a firm (partnership) and the other has a right to a share of the assets or income of the firm. Or
- one is a company and the other has control over that
company (as defined by s1124 CTA10). Or - Some other person has a right to a share of the assets or profits of both of them, and
Both are companies, or
Both are firms, or
One is a firm and the other is a company
Definition of connected person
- Relatives (Limited to a brother, sister, ancestor or
lineal descendant spouse or civil partner. Includes spouse and their relatives.) - Trustees
- Business Partners
- Companies
Effect of an election to use a substitute valuation (2)
You take the stock value as the greater of
- The amount realised on sale
- The acquisition value
Conditions for election to use a substitute valuation (2)
- the arm’s length valuation of the stock must be more
than
— the amount realised on sale
and
— the acquisition value
and - the election must be made within the time limit.
