Case law

HMRC know of no case in which it was necessary to decide whether a corporate body can carry on a profession for tax purposes.

William Esplen, Son and Swainston Ltd v CIR (1919), 2 KB 731 concerned a corporate body whose shareholders and directors were three naval architects who had previously carried on their profession in partnership. Their activities had not changed in any way since incorporation.

There was an exception from Excess Profits Duty for:

Any profession, the profits of which are dependent mainly on the personal qualifications of the person by whom the profession is carried on ..

Rowlatt J said in his judgment that the company was not carrying on a profession for the purpose of that provision. But his reasoning was that “profession” in that provision means a profession the profits of which are mainly dependent on the personal qualifications of the person who carries it on, and only an individual can have professional qualifications. In CIR v Peter McIntyre Ltd (1926), 12 TC 1006 CS on page 1014 the Lord President (Clyde) explained Rowlatt J’s decision as follows:

It follows from what has been said that the profits of a profession may, or may not, fall within the statutory exemption, according as the person who carries it on is an individual on the one hand, or a corporate person on the other hand. For a professional business may be carried on by a company as well as by an individual; but, if by a company, it is difficult to see how the profits can be dependent on the company’s personal qualifications, for the simple reason that a company is incapable of personal qualifications. That is all, as I understand, that was decided by Mr. Justice Rowlatt in William Esplen, Son and Swainston, Ltd. v The Commissioners of Inland Revenue, (1919) 2 K.B. 731, and I respectfully think his decision was right.

The decision in the Esplen case was referred to by Scrutton L J in Brighton College v Marriot (1925), 10 TC 213 HL. He said on page 226:

It is clear that a private schoolmaster would be assessed as carrying on a profession, but it has been decided in Esplen’s case, (1919) 2 K.B. 731, that a limited company employing professional men to do professional work does not carry on a profession; it must be assessed, if at all, as carrying on a trade...

And on page 227:

The question then is: Do the Company in carrying on the school carry on a trade? In my view, when any person habitually and as a matter of contract supplies money’s worth for full money payment, he “trades” within the meaning of Schedule D.

But his interpretation of that decision appears to go too wide and should probably not be given much weight.

So these cases contribute little to the question whether a corporate body can carry on a profession for the purposes of corporation tax.

The nature of a profession

A profession is carried on by a person who uses his or her professional skills, knowledge and training to carry on the distinctive work of the profession, whether it is sculpting, school teaching, the work of an architect etc. Although a professional person can delegate some of his or her work, it is never the case that the possession of knowledge, or the carrying on of activities, by one individual can constitute the carrying on of a profession by another individual. There is no reason why the position should be any different between a company and an individual.

Since the person who has the skills and knowledge and does the professional work must be an individual, it appears that only an individual can carry on a profession. This conclusion is founded on ordinary notions of what is involved in carrying on a profession, and coincides with the instinct that a person who carries on the profession of architecture must be the person who is by qualification an architect (and similarly with other professions).

This suggests that the starting point ought to be that a company cannot carry on a profession for the purposes of corporation tax legislation. But there is a contrary argument. The view is sometimes taken that a business of supplying professional services may be equated with a profession. On this view it is proper to say that a person who carries on such a business carries on a profession even if that person does not personally provide the professional services.

Since references to carrying on a profession may be used either in the strictest sense, or in a looser sense to include a business of providing professional services, the first argument based on the nature of a profession is not conclusive.

“Profession” in the corporation tax legislation

The second argument that there are no acts which would, for the purposes of corporation tax, constitute the carrying on of a profession by a corporate body is based on internal evidence in the corporation tax legislation.

FA 1965

The drafters of FA 1965 proceeded on the basis that a corporate body cannot carry on a profession.

It is true that section 53 of FA 1965 (see now section 9 of ICTA) provided that:

.. any income shall for purposes of corporation tax be computed in accordance with income tax principles, all questions as to the amounts which are or are not to be taken into account as income, or in computing income .. being determined in accordance with income tax law and practice..

..

(3) Accordingly, for purposes of corporation tax income shall be computed, and the assessment shall be made, under the like Schedules and Cases as apply for the purposes of income tax ..

Therefore, if a corporate body were to have profits from carrying on a profession those profits could be calculated and taxed under Schedule D Case II as applied for corporation tax purposes:

Case II: tax in respect of any profession or vocation not contained in any other Schedule (section 18(3) of ICTA)

But it is significant that professions are not anywhere catered for explicitly in the corporation tax code introduced by FA 1965.

So, for example, the following provisions of FA 1965 did not cater for professions:

• Section 50 brought non-UK resident companies within the charge to corporation tax, but only if they carried on a trade in the United Kingdom through a branch or agency. (See now section 11 of ICTA.)

• Section 51 set out the rules for determining when a company’s accounting period begins and ends.

• —     Subsection (3)(c) provided that an accounting period ends on “the company beginning or ceasing to carry on a trade, or to be, in respect of a trade, within the charge to tax”. (See now section 12(3)(c) of ICTA.)

• —     Subsection (5) set out the rule that applies if “a company carrying on more than one trade makes up accounts of any of them to different dates”. (See now section 12(5) of ICTA.)

• Section 54(2) provided that “where a company begins or ceases to carry on a trade, or to be within the charge to corporation tax in respect of a trade” the profits computation was on the basis that the trade commenced or ceased. (See now section 337(1) of ICTA.)

• Section 56(2) dealt with capital allowances to be made “in taxing a trade”. They were to be treated “as a trading expense”. (See now sections 247 and 251 of CAA where the income tax and corporation tax rules are combined.)

• Sections 58 and 59 set out the loss relief rules, wholly in terms of trades. The special rule for “trade charges” in section 58(8) referred to “payments made wholly and exclusively for the purposes of a trade”. (See now sections 393 and 393A of ICTA.) This carries through to group relief as a result of the reference to section 393A in section 403ZA of ICTA.

• Section 61 provided for continuity in the case of a company reconstruction without change of ownership - “The trade shall not be treated as permanently discontinued”. (See now section 343(2) of ICTA.)

Section 89 (see now section 6(4)(b) of ICTA) provides that in the provisions discussed above:

“trade” includes “vocation”, and includes also an office or employment..

but there is no general extension to include professions.

If the corporation tax code was intended to cover professions it is extraordinary that the references to trades in these key provisions were not extended to professions. Nor is there any mention of professions in the 1965 Notes on Clauses.

In line with the apparent intentions of the 1965 legislation, it has long been the Inland Revenue/HMRC view that a corporate body cannot carry on a profession for corporation tax purposes. Where a corporate body carries on a business consisting of the provision of professional services the practice is to treat it as carrying on a trade.

References to “profession” in the current corporation tax legislation

A significant number of references to “profession” in the current legislation (some two dozen or more) arise as a result of the ITTOIA split of income tax from corporation tax. Where the source legislation applied to both income tax and corporation tax and concerned professions the reference to profession was maintained in the corporation tax only rule. This was done on the basis that if companies cannot carry on professions the references do no harm, and because the issue was seen as one to address in the context of the rewrite of corporation tax.

A slightly smaller number appear in provisions that apply to both income tax and corporation tax. They are clearly needed until these provisions are split into income tax and corporation tax rules.

A dozen or so are concerned with partnerships that might be made up of both income and corporation taxpayers. If a partnership consists of an individual and a corporate body and exists to exploit the professional services of the individual it may well be correct to regard the individual as carrying on the profession but the company as carrying on a trade.

A small number cannot be explained in any of the above ways.

Corporate bodies and professions - conclusions

There are three conclusions:

• the nature of a profession and some comments in the case law suggest that corporate bodies cannot carry on a profession for corporation tax purposes - when they provide professional services they are trading;

• consistent with that, the 1965 corporation tax code made no explicit provision for professions; and

• references in the current legislation arise for a mixture of reasons, are inconsistent and therefore shed no great light on the issue.

So there are strong grounds for concluding that for the purposes of the charge to corporation tax under Schedule D Case II there are no activities that should be taken to constitute the carrying on of a profession by a corporate body.

Corporate bodies and vocations

The nature of a vocation

“Vocation” is not defined for tax purposes.

According to the Oxford English Dictionary a vocation is:

• the fact or feeling of being called to undertake some specific career, function or occupation;

• a strong feeling of fitness or suitability for a particular career;

• a mode of life or employment regarded as requiring dedication.

The thread that ties all of these definitions together is that the exercise of a vocation requires a personal commitment to a particular activity.

Corporate bodies are artificial persons. They are not animated by callings. They do not have careers, still less can they be said to have feelings of fitness and suitability as regards a particular set of activities. Nor do they have a mode or a way of life and they do not engage in activities out of a sense of dedication.

That being the case it does not appear possible for a corporate body to carry on a vocation.

FA 1965

Section 89(2)(j) of FA 1965 provided that “trade” includes “vocation” for the purpose of Part 4 of the Act (taxation of companies and of company distributions). (See now section 6(4)(b) of ICTA.) Notes on Clauses explain that this is because:

an old Court decision suggests that a bookmaking business may have to be considered as a vocation rather than a trade in the strict sense.

That decision is found in Partridge v Mallandaine, 2 TC 179. That case was heard in the High Court in 1886. Today there is little doubt that a company carrying on a bookmaking business is trading.

Corporate bodies and vocations - conclusions

There are two conclusions:

• corporate bodies cannot carry on a vocation; and

• although the 1965 corporation tax code makes explicit provision for vocations this is the result of an excess of caution for reasons that are no longer relevant.

Unincorporated associations

The meaning of “unincorporated association”

In Conservative and Unionist Central Office v Burrell (1981), 55 TC 671 CA on page 699 Lawton LJ considered the meaning of “unincorporated association” for the purposes of s.832(1) of ICTA:

It is sufficiently like a “company” for it to be put in the charging section within the ambit of that word. The interpretation section makes it clear that the word “company” has a meaning extending beyond a body corporate but not as far as a partnership or a local authority. I infer that by “unincorporated association” in this context Parliament meant two or more persons bound together for one or more common purposes, not being business purposes, by mutual undertakings, each having mutual duties and obligations, in an organisation which has rules which identify in whom control of it and its funds rests and on what terms and which can be joined or left at will. The bond of union between the members of an unincorporated association has to be contractual.

The HMRC view of unincorporated associations differs from this in two main respects. These are that the union between the members need not be legally enforceable and that there is no reason why an unincorporated body should not have trading or business objectives or carry on significant commercial activities.

Unincorporated association or partnership?

In the case of Blackpool Marton Rotary Club v Martin (1989), 62 TC 686 CA the club argued that it fell within the definition of a partnership because it was an association of persons “carrying on a business in common with a view of profit” (section 1 of the Partnership Act 1890). This was rejected by the Commissioners and their decision was confirmed by Hoffman J. He contrasted the position of partners, who are individually entitled to some proportion of profits, with the members of the club, who were not individually entitled to share in any profits which might arise from its activities. Their entitlement was to whatever privileges were conferred upon them by the rules of the club and no more.

Unincorporated associations and professions

The Blackpool case shows that if individuals come together to carry on a profession and are entitled to share the profit as it arises the arrangement will be a partnership liable to income tax rather than an unincorporated association liable to corporation tax.

HMRC are not aware of any instance of an unincorporated association being assessed to corporation tax as carrying on a profession.

Unincorporated associations and vocations

HMRC are not aware of any instance of an unincorporated association being assessed to corporation tax as carrying on a vocation.

Unincorporated associations - conclusions

The corporation tax charge under Schedule D Case II on the profits of a profession or vocation of an unincorporated association does not have any practical effect.

It is theoretically possible that the application of trading income rules to activities that a company could argue is a profession or a vocation could lead to a change in the measure of taxable profits.

This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 3: Trading income: profits of mines, quarries and other concerns: clause 39

This change identifies two consequences of the approach taken to the rewrite of section 55 of ICTA.

It brings the income tax and corporation tax codes back into line.

Section 55 of ICTA provides that profits arising out of land in the case of certain listed concerns shall be charged to tax under Schedule D Case I (Schedule D Case 1 rules are rewritten largely in Part 3 of this Bill). The concerns listed include mines, quarries, railways and canals.

Section 55 of ICTA is rewritten as clause 39. It treats the profits and losses of the concern as if they were the profits or losses of a trade. This has two consequences.

(A) Section 55 of ICTA does not specify how the profits to be taxed under Schedule D Case I are to be calculated. Clause 39(1) makes clear that the profits are calculated in the same way as trade profits. This means that the calculation rules in Part 3 of this Bill will apply. It is possible that the calculation rules in Part 3 might produce a result less favourable than the result which would have been produced by the calculation rules contemplated by section 55. But since it is not possible to say which calculation rules were contemplated by section 55, it is impossible to be certain whether or not this is indeed so.

(B) Section 55 of ICTA refers only to profits. In practice loss relief is allowed for losses of concerns as if they were trade losses. Clause 39(4) gives that practice statutory effect. Legislating this practice will invariably be favourable.

This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 4: Trading and property income: caravan sites where trade carried on: clauses 43 and 213

This change gives statutory effect to ESC C36 (caravan sites where there is both trading and letting income).

It brings the income tax and corporation tax codes back into line.

ESC C36 states:

Where the proprietor of a caravan site carries on material activities associated with the operation of that site which constitute trading, there may be included as receipts of that trade any site income from the letting of pitches for static or touring caravans, and any income from letting caravans where the letting does not of itself amount to a trade.

In practice there is an element of trade, such as the operation of a site shop or the provision of leisure facilities such as a café, included in the operation of most caravan sites.

This change gives a company which meets the qualifying conditions a statutory right to treat receipts from letting caravans or pitches as receipts of the trade of operating a caravan site. So trading losses (including those brought forward) may be available against the caravan site receipts.

This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 5: Trading and property income: surplus business accommodation: clauses 44 and 213

This change gives statutory effect to the HMRC practice on receipts from surplus business accommodation known as Revenue Decision 9.

It brings the income tax and corporation tax codes back into line.

The case of Salisbury House Estate Ltd v Fry (1930), 15 TC 266 HL is authority for the proposition that the income tax Schedules are mutually exclusive so any amount received by a company from the letting of premises surplus to the requirements of the company’s trade should not be taken into account in calculating the profits of the trade but assessed separately to tax as income from property under Schedule A. Similarly, any outgoings in respect of the premises should be apportioned between the part which is let and the part used for the purposes of the trade.

In practice, HMRC do not object to a company including receipts from letting surplus business accommodation in trade receipts provided certain conditions are met. This practice, published in the February 1994 edition of Tax Bulletin under the heading “Revenue Decisions - Schedule D Cases I and II - Letting Surplus Business Accommodation”, is referred to in some reference books as Revenue Decision 9. The practice extends to trades within Schedule D Case V.

The conditions in Revenue Decision 9 are:

• the accommodation is temporarily surplus to the current requirements of the trade;

• part of the accommodation is used for trade purposes;

• the rental income is comparatively small; and

• the rent is in respect of the letting of surplus business accommodation only - not surplus land.

In legislating the conditions in Revenue Decision 9, clause 44 sets out rules for determining whether accommodation is temporarily surplus to requirements. These are:

• that the accommodation must have been used for the purposes of the trade within the last three years (or acquired within that period);

• that the accommodation must be let for a term of not more than three years; and

• that the company must intend to use the accommodation for trade purposes at a later date.

This gives taxpayers increased certainty as to whether the condition is met.

If the conditions are met, trading losses (including those brought forward) may be available against the receipts from letting the surplus business accommodation.

This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 6: Trading and property income: rents in respect of wayleaves where associated with a trade: clauses 45, 213, 279 and 288

This change shifts the charge on rents from certain wayleaves associated with a trade from Schedule D Case V and Case VI to a charge on trade profits.

It brings the income tax and corporation tax codes back into line.

Section 120 of ICTA makes provision about rent payable in respect of “any easement enjoyed in the United Kingdom in connection with any electric, telegraphic or telephonic wire or cable” other than an easement of a kind mentioned in section 119(1) of ICTA. Section 119 of ICTA applies to certain easements which are or might be used or enjoyed in connection with any of the concerns listed in section 55 of ICTA. Those concerns include mines, quarries, certain industrial concerns, canals, docks, markets, bridges, ferries, and railways. “Rent” and “easement” both have wide meanings for this purpose (see section 119(3) of ICTA).

Section 120(1) of ICTA provides for the rent from electric-line easements to be charged under Schedule D unless other income from the land to which the easement relates is charged under Schedule A. In that case the rent is charged to tax under Schedule A, section 120(1A) of ICTA.

Section 120(1) of ICTA does not specify under which Case of Schedule D the rent is to be charged. In practice, where the easement relates to land on which a person carries on a trade, the rent is charged under Schedule D Case I and, in other cases, under Case VI. In the absence of section 120 of ICTA the rent would be charged to tax under Schedule A. Section 120 of ICTA does not apply to rent from easements relating to land outside the United Kingdom, which is charged to tax under Schedule D Case V.

Section 120(1) of ICTA as it applies to trades is rewritten in clause 45. Under clause 45:

• the word “easement” is rewritten as “wayleave”. The rest of this note refers to wayleaves;

• rents from wayleaves related to land associated with a trade will be charged to corporation tax under Part 3 of this Bill (as profits of the trade) if the taxpayer so chooses and has no other income from the land in question; and

• all other rents from wayleaves will be charged to income tax under Part 4 of this Bill (property income).

This enacts the existing non-statutory practice for easements to which section 120 of ICTA applies which are associated with a trade but represents a change both in practice and in the law as respects:

• wayleaves other than those connected with “electric, telegraphic or telephonic wire or cable”;

• wayleaves relating to land outside the United Kingdom; and

• wayleaves of a kind mentioned in section 119(1) of ICTA.

Clause 45 makes clear that any expenses incurred in respect of the wayleave can also be allowed as deductions in calculating the profits.

Section 119(1) of ICTA is rewritten in Chapter 7 of Part 4 of this Bill. Under the law as it applies before the commencement of this Bill, rent in respect of a wayleave that meets the conditions in both sections 119(1) and 120(1) of ICTA is taxed under section 119 of ICTA. Clause 288(3) of this Bill reverses that order of priority. This is necessary to allow the company to have such rent taxed as the profits of a trade. It will not prevent a claim for relief under clause 273 of this Bill (relief in respect of mineral royalties) as rent for an electric-line wayleave would not qualify for such relief.

All rents that are in practice charged to tax under Schedule D Case VI (see the table in section 834A of ICTA) by virtue of section 120(1) of ICTA, as that section applies before the commencement of this Bill, will be charged under clause 277 (charge to tax on rent receivable for a UK electric-line wayleave). The table in section 834A is inserted by Part 1 of Schedule 1 to this Bill, and is a list of places where some of the Schedule D Case VI charges are rewritten.

The application of trading income rules to income which previously was subject to Schedule D Case V or Case VI could increase access to allowable deductions and to loss relief.

This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.