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HMRC internal manual

Business Income Manual

Capital/revenue divide: tangible assets: sale of trade assets (ships): incident of trade or capital?

In the Gloucester Railway Carriage and Wagon Co Ltd v CIR [1925] 12TC720 case (see BIM35428) the courts accepted as a finding of fact by the Commissioners that the company carried on only one business. The business being that of making a profit in one way or another out of wagons, all the wagons owned by the company, however used, remained part of the company’s stock in trade, or circulating capital.

In the case of J Bolson & Son, Ltd v Farrelly [1953] 34TC161 the courts held that profits arising from the sale of boats were chargeable as trade profits. The High Court took the line that there was only the one trade that had two branches; boat building/repair and passenger carrying. The Court of Appeal was content to accept that there were two separate trades. But the court took the view that the passenger carrying trade when it used one of the boat building/repair trade’s vessels (trading stock of the building/repair trade) did not convert the subsequent profit/loss on the disposal of that vessel into a capital matter. On the facts, the buying, modification and sale of the disputed vessels amounted to a trade notwithstanding that many of them saw service in the passenger carrying trade.

The company was established before the First World War. The company’s main activity was the operation of a passenger boat service. The company also carried on business as shipbuilders and repairers at a shipyard where it built ships for the passenger boat service. Before the Second World War, the receipts of the passenger carrying business exceeded those of the shipyard business.

From time to time ships, which had been employed in the passenger carrying business, were replaced by newer and more suitable craft. The company accountant gave unchallenged evidence that the company had always kept its passenger carrying business (including the ships, which were its fixed capital assets) separate from its shipyard business. The Revenue treated any profits on the sales of the old ships from the passenger carrying business as capital profits.

At the outbreak of the Second World War the Admiralty requisitioned the company’s vessels. During the war the company carried on the business of shipbuilding and repairing. The passenger carrying business went into abeyance. After the end of the war, with the object of re-commencing its passenger boat services the company re-acquired requisitioned vessels and purchased others from the Admiralty. The company also repaired and converted vessels for use as passenger carriers.

Certain of the vessels acquired, some of which were used by the company for a time in its passenger boat services, were subsequently sold.

The company argued before the General Commissioners that the profits arising from the sale of these vessels were capital profits. The Commissioners decided that the profits were trading profits.

Harman J in the High Court held that there was evidence on which the Commissioners could come to the conclusion that the sales were made in the way of trade. Harman J described the various transactions that the company had undertaken and decided that the company carried on two strands of business that were complementary to each other; boat repair and passenger carrying. Harman J did not see the buying and selling of boats as part of the company’s attempts to restart their passenger carrying activities. Rather he saw this as a profitable venture that the company carried on so long as it was profitable and ceased when it was no longer so. That the boats involved may have been used for a time as passenger carriers did not preclude any profit on sale from being chargeable as trade profits (on page 166):

‘I must consider what was the fact, if there were one, in the Commissioners’ minds when they came down on the side of the fence on which they eventually rested. It must have been, I think - this is inevitable from the facts stated - that this was a shipbuilding and repairing business, and the profits made were largely made by repairing these ships, which was part of the ordinary trade of this company. Notwithstanding that they were bought with the object of re-establishing another activity of the company, nevertheless, the purchase and sale after conversion in the case of these ships was one of the normal trading activities of the company.’

In the Court of Appeal Jenkins LJ examined the facts and came to the conclusion that there was evidence upon which the Commissioners could decide that the ships were not part of the fixed capital of the passenger carrying business. The company in its ship buying, modification and selling activities was carrying on a trade. Jenkins LJ (unlike Harmon J in the High Court) thought that this was a separate trade. It did not matter that for a while the company used the vessels in question in its passenger carrying business. Jenkins LJ said (on page 174) that the position could have been different if the company had maintained a permanent passenger carrying fleet; replacing or exchanging vessels as and when necessary to keep the fleet up to date.

‘I think there was evidence on which the Commissioners could conclude that these ships never did become the “fixed capital assets” of a business of carrying passengers, but they were, throughout the relevant period, the subjects of a trade, albeit that while in hand they or most of them were used for passenger carrying purposes.’