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HMRC internal manual

Business Income Manual

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Meaning of trade: scope of trade: The Gloucester Railway Carriage and Wagon Co Ltd v CIR [1925] 12TC720

The point at issue in the case was whether the sale of wagons, manufactured by the company and retained for hire, was the disposal of trading stock or fixed capital assets, i.e. had the wagons retained for hire been transferred to a separate trade carried on by the company.

The company manufactured wagons, some of which it sold, either outright or on hire-purchase terms, and others it let for hire. The company from time to time also purchased wagons and sold them.

The wagons let for hire were capitalised at a sum that included a manufacturing profit, which had been brought into the trading profit. A ‘wear and tear’ deduction on the capitalised wagons had been allowed in computing the trading profits each year.

During World War I, the government prohibited the manufacture of wagons. This led to a shortage of railway rolling stock after the war, resulting in an increase in their value. The company decided to cease letting wagons, together with the associated repair activities, and sell the hire fleet of wagons.

The company argued that it carried on two distinct trades, one involved the manufacture and sale of wagons, the second the hiring of wagons. Further, that the sale of wagons used in the letting trade was not by way of trade and gave rise to a capital profit.

The Special Commissioners held that there was a single trade, manufacturing and making a profit out of wagons, and that the profits were assessable as trading profit.

In the High Court Rowlatt J noted at page 736 that although ‘… the case is not so clear as either side represents it to be’, the Commissioners had declined to divide the businesses and that there ‘… is plenty of evidence in support of that way of looking at the case…’. 

Eve J, in the Court of Appeal concluded that the question was one of fact and that the Commissioners had evidence on which to base their conclusion. However, should it be decided that it was, in part, an inference of law he made the following comments:

‘What is the business of the company? The manufacture of and trading in wagons… It is primarily a manufacturing company, the output of the factory constitutes the stock in trade, and the realisation of that output the source from which profit on the capital invested in the purchase of the business and of the factory, plant and machinery is to be looked for… It manufactures and trades in wagons, and the methods from time to time adopted of dealing with the manufactured products are matters of domestic policy and cannot be regarded as converting stock retained for letting on hire into plant or as establishing a separate business distinct and apart from the ordinary business of the Company’ (pages 746-747).

In the House of Lords, Lord Dunedin commented that:

‘The Commissioners have found - and I think it is the fact - that there was here one business. A wagon is none the less sold as an incident of the business of buying and selling because in the meantime before sold it has been utilised by being hired out’ (page 748).