CTM08050 - Corporation Tax: management expenses: investment company - business of making investments: case law
In the context of CTA09/S1218B ‘making’ can mean simply ‘investing and holding’: dicta of Rowlatt J in CIR v Tyre Investment Trust Ltd (1924) 12TC656. There is no reason to refuse investment company status to a company that makes a single investment on that ground alone.
The meaning of ‘business’ in CTA09/S1218B
In Medway Housing Society Ltd v Cook, (1997) 69TC319, the High Court upheld the decision of a Special Commissioner, that the society was an investment company within the meaning of what was then ICTA88/S130. The Special Commissioner thought the correct approach was to start with the S130 definition and ask whether, on its ordinary meaning, the business of the society fell within it.
In the Commissioner's view, the purpose for which the society existed was one relevant factor but not necessarily the most important. Thus, even if one took into account the social purpose of the society, it did not change the fact that houses were acquired for renting. The Commissioner found that the houses were income producing investments, the object of the society was to acquire housing for renting and, therefore, the business of the society consisted in the making of investments.
Principles
In the High Court, Lightman J considered the matter first on the basis of principle and secondly on the basis of the relevant authorities. It was clear, his Lordship said, that the objects of the society were to provide housing to those in need at rents they could afford. But, his Lordship held, it was perfectly possible for a property at the same time to be held to provide affordable housing and to provide a profitable return. Therefore, the society's business could be the provision of housing and holding such housing to produce a profitable return. The fact that the profit was to be ploughed back into furthering the objects of the society (and not distributed to the members) was, in his view, irrelevant. In principle, his Lordship considered, the purpose and nature of the society's business was holding investments even though in so doing its object was to fulfil the social purpose of providing affordable housing.
Authorities
Lightman J then reviewed the authorities. First, he distinguished an Excess Profits Tax case, CIR v 1933 Housing Society Ltd [1946] 26ATC355. In that case, the question was whether the company was carrying on a business consisting ‘wholly or mainly in the dealing in or holding of investments’. Atkinson J said the holding of investments incidental to the real purpose of a company does not necessarily involve it carrying on a business of holding investments. In the view of Lightman J, the 1933 Housing Society Ltd did not hold its properties as investments - there was no prospect of any profitable return, and the object of the society was to break even and not to make a profit.
His Lordship considered two other UK (Excess Profits Tax) cases, where the legislation referred to the ‘functions’ of a company consisting in the holding of investments. In CIR v Buxton Palace Hotel Ltd (1952) 29TC329, Atkinson J thought the legislation was aimed at companies of a particular nature and quality, companies which set out to make a profit in the way indicated or which have changed their business into one of that character. And in Carpet Agencies Ltd v CIR (1958) 38TC223, where a company which had ceased to deal in carpets continued to receive income from investments, Harman J said it must be proved not merely that the company is one that happens to hold some income bearing investments but that one of its functions, meaning one of its purposes, has always been or has been for a considerable time the making of money by the holding of investments.
Lightman J also considered two Irish cases (see below). His Lordship concluded
In determining what is the business of a company for the purposes of section 130, it is necessary to have regard to the quality, purpose and nature of the company and its activities, and that includes the full circumstances in which the relevant assets are acquired and retained, including the objects clause in the memorandum of association of the taxpayer and the objects of a society such as the society as revealed in its rules.
It is relevant to have regard to the actual activities carried on by the taxpayer at the relevant date, but if these are viewed without regard to the taxpayer's past history or future plans they may give only a partial and incomplete picture. The critical question is whether the holding of assets to produce a profitable return is merely incidental to the carrying on of some other business, or is the very business carried on by the taxpayer. In this case the very business of the society is the provision of housing at a return below the market return, but nonetheless a return producing a profit.
Irish cases
Medway Housing Society Ltd v Cook is the first (and, so far, the only) case on ICTA88/S130, as it then was, to be decided by the UK courts but there have been two cases in the Republic of Ireland on ITA1918/S33, a direct predecessor of S130. They are Howth Estate Company v Davies (1934) 2ITC74 and Casey v The Monteagle Estate Company (1962) 3ITC313. The courts in Ireland also concluded that the definition calls for an appraisal of the object or purpose of the company and of its general nature. It is not sufficient that investments are held and that they make up the company's principal assets for the company to be an investment company.
In the Monteagle Estate case, Teevan J gave an explicit warning against confusing these two matters. His Lordship said that:
What has to be looked to is the nature of the operations or functions of the company. The search is not for a company making investments but for a company whose main business is the making of investments. That, to my mind, involves the purpose of the operations as well as their nature.m In the Howth Estate case, the Court of Appeal held that the business of the company was that of managing the estate and the purchase of investments was incidental.
The essential point from these cases is that it is not enough that a company has investments, but rather its business (in the sense of its occupation) must consist in the making of investments. That is a question of fact to be decided by looking at the totality of the company's functions and activities. The two Irish cases are not binding but have persuasive authority.
Excess Profits Duty and Excess Profits Tax cases
As indicated in Medway Housing Society Ltd v Cook the definition of ‘investment company’ in ICTA88/S130 has parallels in other former Excess Profits Duty (EPD) and Excess Profits Tax (EPT) cases. Note that being an ‘investment company’ within these parallel provisions was disadvantageous to the company. By contrast, S130 relates to a provision that gives relief to a company. Three EPT cases have already been mentioned. Two earlier cases on EPD cast some light on the meaning of ‘business’ and the importance of a company's purpose in determining its business.
Case Law on the meaning of ‘business’
Rowlatt J considered the meaning of the word ‘business’ in CIR v The Marine Steam Turbine Co Ltd (1920) 12TC174. His Lordship at page 179 said ‘business’ has two distinct meanings: it may mean any particular matter or affair of serious importance...(or) in another and very different sense, as meaning an active occupation or profession continuously carried on, and it is in this sense that the word is used in the act.
In the Marine Steam Turbine case Rowlatt J thought of ‘business’ as an ‘active occupation or profession continuously carried on’. However this aspect of his judgment was later qualified in another case. In CIR v The Korean Syndicate Ltd (1921) 12TC81 the Court of Appeal thought that any emphasis on the word ‘active’ would unduly limit the meaning of the word ‘business’.
Case Law on ‘purpose’
In the Korean Syndicate case the Court of Appeal emphasised the purpose for which the company was set up. Lord Sterndale MR at page 202 said that:
A limited company comes into existence for some particular purpose, and if it comes into existence for the particular purpose... and turning (it) to account, then that is a matter to be considered when you come to decide whether doing that is carrying on a business or not.