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HMRC internal manual

Business Income Manual

Miscellaneous income: scope of the provisions: sweep-up - judicial comment

S687-S689 Income Tax (Trading and Other Income) Act 2005, S979-S981 Corporation Tax Act 2009

This section contains further information on the cases referred to in BIM100125.

The Special Commissioners’ case of Property Company v Inspector of Taxes [2004] SpC433 concerned a series of transactions including a tax avoidance scheme.

Under a ‘business sale agreement’, ‘Property Company’ agreed to sell to another company in the C Group, all its assets excluding a payment of rental income (the retained rent payment), recoverable tax and cash. ‘Property Company’ was then sold out of the C Group.

At that point ‘Property Company’ had the right to the retained rent payment, less the expected tax thereon, and a liability in respect of an inter-group debt which was paid off out of the rent. The intention was to offset the retained rent payment by creating a deduction in ‘Property Company’, the benefit of the tax saving from which would be split between the C Group and the new owners of ‘Property Company’. However, the proposed tax avoidance scheme to create a deduction did not work.

The question was whether ‘Property Company’ was taxable on the retained rent payment either as property income, or alternatively under the miscellaneous income sweep-up charge.

The Commissioners determined that part of the money was a post cessation receipt from its letting business, but the remainder was not income from land, but arose from the agreement, and was taxable under sweep-up provisions:

‘The balance arises solely from the business sale agreement. The balance stands in the shoes of the remainder of the retained rent payment but it is not rent and it has no legal connection with land because the effect of the 1995 Act is that it is not possible to retain such an interest in land. The only property right relates to CGP’s ownership of land that it, as successor in title to the appellant, has exploited by continuing to let it to CGI pursuant to the 1996 Agreement for Lease. The balance is a sum equal to the rent receivable from CGI but the fact that it is measured by reference to rent does not give it the necessary connection with land so as to be able to say that the source of it is derived from land. It is in the nature of income that is ejusdem generis with [property] income and, not being taxable under any other [provision], is accordingly taxable under [the miscellaneous income provisions].’

The case ofBlack Nominees Ltd v Nicol [1975] 50TC229 involved an elaborate scheme designed to reduce the taxable income of the actress, Julie Christie. As part of the scheme, Julie Christie entered into a service agreement under which she became an employee. The Court held that Black Nominees were not carrying on a trade of exploiting the professional services as an actress of Julie Christie, nor were they taxable as receiving profits of gains from a profession as Julie Christie had ceased to carry on her profession when she entered the service agreement. Templeman J held that:

‘Tax is charged under [the sweep-up charge] in respect of annual profits or gains not falling under any other [provision]. In my judgment, the moneys received by Black Nominees in consequence of the transactions entered into in December 1965 fit within this description. If it were not for the trick with the £475,000, no one would suggest that the moneys received by Black Nominees were capital. Once the trick is exposed the moneys are seen to be what they are: namely, annual profits or gains. They escape any other [provision] and fall into [the sweep-up charge].’

Templeman J further held that:

‘The sources of the moneys received by Black Nominees were the contracts between Cymbeline as assignee of Rosebroom and the film or theatrical companies for the services of Miss Christie, not the contract between Rosebroom and Miss Christie which, together with the transfer agreement, enabled Cymbeline to fulfil its contractual obligations to the film and theatrical companies by making available the services of Miss Christie.’

Templeman J held that the income was taxable under the sweep-up provisions.

Income from ‘property’

The case of Alloway v Phillips [1980] 53TC372 involved the wife of one of the Great Train Robbers. Whilst living in Canada, she received £39,000 from a newspaper. It was not in dispute that she had provided information to the newspaper which led to the newspaper publishing a series of articles. It was found that she had entered into an agreement, governed by English law, to assist the newspaper.

The Court of Appeal held that the £39,000 was taxable in the UK under the miscellaneous income sweep-up provisions as it arose from ‘property’ in the UK. Lord Denning MR said at page 387D:

‘The truth is that she had a chose in action in England. It was property in England: but she had no property at all in Canada. She had no copyright there. She only had the information in her head which she told to the newspaper reporter. That is not a species of property known to the law of England.’

Under the agreement that she had entered with the newspaper, she had a valuable right enforceable in law. The valuable right was property and it was situated in the UK. As she was receiving income under that agreement she was taxable under the miscellaneous income sweep-up provisions.