In the Gloucester Railway Carriage and Wagon Co Ltd v CIR [1925]
12TC720 case (see
BIM35480) 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
was assessable under Case I of Schedule D. 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 are 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 charged
under Case I of Schedule D (on page 166):
…at the end of the war the company found itself with a shipbuilding and repairing business. But it was anxious to get back to its old activity of carrying passengers off the beach when the holidaymakers should return to Bournemouth. With that object, it purchased from the Admiralty two undecked boats, and also one vessel of a larger kind. The two open boats were bought for very small sums. The first was bought for £627 and promptly sank, and there was a profit on the insurance: this obviously is no evidence of a trading activity. The second one was bought for £50 and was converted at a cost of £1,600 and sold at a profit of £350. The third cost £800 and was never put into service: it was sold for £6,000 after being kept for about five months. The accountant says that was because when it arrived it was in such a bad condition that it really was not suitable to be used in the passenger carrying business. Then the second vessel, which was converted and used for a short time, was sold towards the end of the first season because it was said that by itself it was not much good. At the same time, the company bought four Admiralty vessels called L.C.G.M’s. which means landing craft, gun, medium, I think. those were bought for £800 each and were converted at a cost of many thousands of pounds. Each of them, having been acquired in 1946, was sold in 1948 or 1949 at a large profit. Three of them were used as passenger boats in the 1946 and 1947 seasons. The fourth one was not used at all. It was said these were sold because they turned out not to be suitable for running up the beach. How it is that landing craft are not suitable for that purpose is a little difficult for those who remember their original use to understand, but there is the statement, and the Commissioners apparently accepted it. There were some more Skylark boats at a later time, and they were all sold, the profits getting less and less; in fact, the last two or three made a modest loss of £50 or so.
According to the accountant, the whole of these transactions may be explained by saying that they were efforts to restart the passenger carrying business. I think there were not two businesses in any proper sense of the word. There was the boat repairing business, and the other branch of the business was the passenger carrying business and the two worked very well in together.
It seems remarkable to me that it was possible to go on buying and selling boats in this way, each time, until the end, making a profit, and then giving up this kind of transaction because, by some curious coincidence, at the moment when it ceased to be profitable, it was exactly the right moment to stop and it was no longer necessary to sell a boat and buy another. This appears to suggest that the Commissioners, who have believed all this, were rather gullible people. But they have seen this accountant and I have not. I do not know what it was which persuaded them to believe this. It may be that the accountant's tongue was more powerful than his written statement: I do not know.
The only question for me is: Was there, in those circumstances, any justification for the Commissioners saying that the buying and selling of these 12 ships was a trading activity? I have had a lot of cases cited to me, but none of them are really any authority for the present case, but are merely a lot of illustrations about what is not and what is an activity in the nature of trade. A deal done once is probably not, though it may be. Done three or four times it usually is. Each case must depend on its own facts. In the end, I do not really get any assistance from the authorities one way or the other. 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 L J 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 L J (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 L J says (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.
The position might well be different in a case in which a company such as the appellant company could be shown to be holding something in the nature of a permanent fleet of passenger vessels, using them for carrying passengers, and replacing or exchanging vessels as and when necessary to keep their fleet up to date. But here the appellants, being anxious to start passenger carrying again after the war, seem to have pursued an experimental course, perhaps intending ultimately, when they found vessels ideal for that purpose, to keep them; but in the meantime dealing in vessels with a frequency and on a scale which I think the Commissioners were well justified in holding incompatible with the view that there was no trade in these transactions.
The learned judge came to the conclusion that, in truth, there were here not two separate businesses; but, as I have said, I prefer to deal with the matter on the footing that the businesses can be separately treated. Even on that footing, for the reasons I have endeavoured to state, I hold that this appeal should be dismissed.
