In the case of British Legion, Peterhead Branch, Remembrance and
Welcome Home Fund v CIR [1953] 35TC509 the weekly holding of public
dances was held to amount to a trade within Case I of Schedule D.
The Fund, a local committee of the British Legion, held
public dances weekly from June, 1944, to June, 1947, in the local
drill hall. The Fund only paid a nominal sum for use of the
facilities. All management services were given gratuitously by
members of the Legion. The charge for admission was 2s. 6d. per
head, but considerably more was often given by those who could
afford it.
The proceeds were partly used to pay a sum to the British
Legion Remembrance Trust Fund and another sum as a contribution
towards the cost of erecting a local war memorial, and the balance
was accumulated with a view to the provision, when practicable, of
a local hall or club rooms for ex-members of the armed forces.
The Special Commissioners decided that the Fund was trading.
The Court of Session held that there was evidence on which
the Commissioners could find that a trade was being carried on.
The question then arose as to the amounts properly deductible
in computing the profits of the Fund’s trade. The court
decided that the Fund should be allowed a deduction for the
expenses that would have been incurred if the Legion had not
provided facilities and services on a gratuitous or nominal basis.
The Lord President (Cooper) at page 514 of 35TC thought that
whether the Fund was trading was a mixed question of fact and law.
The taxpayer’s motives and the destination of any profits
were irrelevant factors. What mattered was whether the activities
were conducted on commercial principles.
The…question raises a mixed issue of fact and of law. In my view, a person cannot be said to be engaged in carrying on a trade or a concern in the nature of trade within the meaning of the Income Tax Acts unless, in a reasonable sense, he is conducting business on commercial principles. If he is so conducting business, it matters not from what motive he acts nor to what purpose he devotes the profits, if any. If he is not so conducting the business, enterprise or adventure - if, for example, he is merely using some of the trappings of trade as a means of procuring subscriptions or donations not properly related to any service he renders or to any commodity which he supplies - he may be wearing an easily penetrated disguise which deceives nobody, but he is not trading. Instances of the latter type of operation which readily occur to the mind are the hawking of flags, the conducting of occasional bazaars and sales of work and whist drives, and the showing of private gardens for an admission fee, usually exorbitant.
The Lord President stressed that the Commissioners had found that the whole of the work of organising the dances and giving services at them was performed by members of the Legion without charge. There were at least ten present at each dance. If the dances had been run on an ordinary commercial basis, a hall being rented at a commercial rent and payment at ordinary rates being made for services, etc., the Special Commissioners had found that the surplus would have been very greatly reduced. The Lord President said that this finding could be read two ways, either:
The Lord President (Cooper) at page 515 of 35TC was reluctant to overturn the Commissioners and sided with the latter view. The balance appearing to be tipped by the scale of the activities involved - at least one dance a week over a three-year period.
This finding certainly suggests that the
enterprise was not conducted on an ordinary commercial basis, but
was simply one form of the devices familiarly employed for
extracting subscriptions and donations from the local public; but
it is also capable of being read as merely importing that the
actual receipts require to be considerably discounted, and such a
discount has evidently been allowed in the reduced assessments
actually made, for these assessments total £2,600 for the
three years as against realised surpluses from the dances of nearly
£6,000. The difficulty is created by the very large scale of
the operations conducted by the Appellants, dances having been held
once a week for three years, or over 150 dances in all.
It appears to me that the choice between trade
or no trade must in every case involve a large element of fact and
may be a question of degree. While the point is narrow and
difficult, I have come with regret to be of opinion that there was
evidence sufficient to justify the finding of the Special
Commissioners and that they have not misdirected themselves in law,
though I doubt whether I should independently have reached the same
conclusion.
Lords Carmont and Russell concurred. Lord Russell at page 516-517 of 35TC was also of the opinion that the motivation for and the destination of the fund raising were irrelevant. The issue was whether what had been done amounted to trading. The provision of gratuitous or under priced facilities and services had no bearing on that question but it did come into consideration when determining the quantum of profits. The Fund should be allowed a deduction to cover what it would have spent had commercial rates been paid for the facilities and services in question.
…I am of opinion that the object or
motive of the promoters and the use to which the accrued profits
will ultimately be put are not relevant.
Moreover, I doubt whether the fact that it got
a cheap let of the hall and got gratuitous services at each dance
is relevant to the question of trading, although that element may
well be open for consideration in fixing the amount of profits
properly to be taken as the trading profits truly accruing from the
dances. In every case like the present the question becomes one of
circumstance and degree. I am unable to affirm that there are no
facts relevant to infer that the activities of the Fund in running
the dances were conducted on business or commercial lines. In most
respects indeed I consider that they were run substantially as a
business of the kind run for private profit would be run. In that
situation, it seems to me that there was evidence to support the
Commissioners' finding, and that there was no misdirection in law
by which that finding is vitiated. I would therefore answer the
first question in the affirmative, leaving open the further
question, not yet debated, whether the Appellant Fund is entitled
to exemption from Income Tax on the profits of the trade in terms
of Section 30 of the Finance Act, 1921.
The latter issue being one of charitable exemption.
You should recognise that this case involved a significant
number of dances (more than 150) held weekly over a three-year
period. Notwithstanding the number of events and the time period
involved, the judges indicated that the case was borderline; some
expressing the view that they would have gone the other way but,
unable to say that the Commissioners had erred sufficiently, felt
constrained to go along with their findings. Unless there is some
other significant factor (for example commercial sponsorship, media
funding, etc) it is unlikely that a body of Commissioners could be
persuaded that a local annual fund raising event amounted to a
trade.
At a practical level you should also bear in mind that the
application of the principle approved of in the Peterhead decision
can have a substantial effect in decreasing taxable profits where
significant facilities or services have been provided gratuitously
or at considerable undervalue - in Peterhead it was accepted the
taxable profits were only just over one third of the declared
surplus.
See also
BIM24794.
