TC09530 - [2025] UKFTT 00566 (TC)

Fecha: 22-May-2025

the facts

the facts

There was no disagreement between the parties as to the facts relevant to our decision. Their disagreement related entirely to the manner in which the relevant law applied to the facts.

Nevertheless, we have found it surprisingly difficult to identify the precise facts in this case because of the unsatisfactory nature of the evidence with which we have been provided.

Starting with the witness evidence, it was clear to us at an early stage in the proceedings that no reliance could be placed on CP’s evidence as his witness statement contained a number of obvious errors and it became apparent when he started giving his oral evidence that he had very little knowledge of the company’s activities and had been content to leave the operation of the company to his fellow director and shareholder, Mr Spencer Whitworth (“SW”).

SW was therefore the only witness on whose evidence we could place any reliance but even he was not very clear on the precise timing of the various events in the life of the company.

In addition, the company’s accounts did not inspire confidence. They had not been audited – the company was entitled to an exemption from audit as a result of its size – and they appeared to contradict the evidence of SW in various important respects. For example, we were provided with no information about the activities of the company prior to its acquisition of land at 17–19, 30–32 and 34A Panorama Road, Poole, BH13 7RD (the “Property”) in 2016 other than the fact that:

(1)

the company had made a loan to an unrelated third party (the “Original Property Owner”) to enable the Original Property Owner to acquire the Property; and

(2)

the company had subsequently acquired the Property by way of the discharge of that loan by the Original Property Owner.

SW testified that the loan had been funded out of profits made by one or more of PSSL’s affiliated companies and yet the accounts for PSSL’s accounting period ending 30 June 2016 (the “2016 AP”) – the earliest set of accounts made available to us – made no reference to any such funding and instead referred to accumulated profits from earlier accounting periods of £900,544, thereby suggesting that the company must have had considerable activities apart from the loan and had financed the loan out of the profits which it made from those activities.

10.

Despite the difficulties described above, we set out below the facts so far as we can determine them from the documentary evidence with which we were provided and the testimony of SW and they are our findings of fact for the purposes of the appeals.

11.

The facts are as follows:

(1)

PSSL was incorporated on 12 December 2011;

(2)

all three Appellants were directors of PSSL from incorporation until they resigned on 30 June 2018;

(3)

the shares held by each Appellant in PSSL at incorporation were as follows:

(a)

CP – 100 ordinary A shares

(b)

TE – 200 ordinary C shares; and

(c)

ZM – 200 ordinary C shares;

(4)

there was a fourth director and shareholder of PSSL at incorporation – SW – who held 100 ordinary B shares and 400 ordinary C shares;

(5)

TE and ZM are the daughters of CP and PSSL was established as a joint venture between CP, TE and ZM, on the one hand, and SW, on the other hand. SW’s expertise lay in residential property development whereas CP’s background was in commercial property. Prior to the formation of PSSL, SW and CP had together invested in a number of residential property development joint venture companies, with SW providing the residential property development expertise and being responsible for the day–to–day activities of the relevant companies and CP, as a passive investor, providing working capital to the relevant companies. In each case, the relevant company had obtained planning permission for the development in question and then either carried out the development itself or sold the land to a third party developer with the benefit of the planning permission;

(6)

unlike those other special purpose joint venture companies, PSSL was not formed with the intention of owning land or engaging in residential property development itself. Instead, it was incorporated initially in order to provide the loan to the Original Property Owner referred to in paragraph 9 above. The principal amount of that loan, together with accrued interest on the loan, amounted to some £600,000 by June 2016, when the company acquired the Property as described in paragraph 9 above. It is common ground that the activity of making the loan and receiving interest on it was an investment activity on the part of PSSL;

(7)

at the same time, PSSL’s wholly–owned subsidiary, Leopold Land Limited (“Leopold”), provided consultancy services to the Original Property Owner in connection with the proposed development;

(8)

by June 2016, it was apparent that, as a result of cost–over–runs and sales at lower than anticipated prices, the Original Property Owner was not going to be able to discharge the principal and accrued interest on the loan. Consequently, the parties reached an agreement whereby the Property was transferred by the Original Property Owner to PSSL in satisfaction of the principal and interest which was due to PSSL under the loan;

(9)

the Property was recorded in the accounts of PSSL for its accounting periods ending 30 June 2017 (the 2017 AP”) and 30 June 2018 (the “2018 AP”) as “investment property”;

(10)

at the time when the Property was acquired by PSSL, the Property was let out for a mixture of commercial and residential use. The ground floor of the main building and the boatyard and café behind the main building were let out to businesses whilst the upstairs of the main building was let out for residential use;

(11)

at the time when it acquired the Property, PSSL’s intention was to make a profit by maximising the development potential of the Property. To that end:

(a)

in addition to acquiring the Property, PSSL purchased an option to acquire land adjacent to the Property at 28 Panorama Road from an unrelated party and applied for planning permission to raise the land on that site with a view to building some semi–detached houses on the site, along with part of the land at the Property. (That planning permission was granted on 9 June 2017 although the option over 28 Panorama Road had expired without being exercised on 10 February 2017;)

(b)

PSSL granted an option to an unrelated property development company called Fortitudo Limited (“Fortitudo”) over part of the Property;

(c)

PSSL assisted, and made common purpose with, Fortitudo in a planning application made by Fortitudo on 9 November 2016 for a re–development of the Property along with certain land adjacent to the Property at 34 to 38 Panorama Road;

(d)

after that planning application was refused on 21 June 2017, PSSL assisted, and made common purpose with, Fortitudo in a second planning application made by Fortitudo on 23 June 2017 in relation to the same site;

(e)

following the withdrawal of that second planning application on 9 March 2018, PSSL made a joint planning application with an affiliate of Fortitudo, Jacob Carr Homes Limited, on 24 April 2018 in relation to the same site. (That planning application was refused on 14 December 2018;)

(f)

the planning applications described in paragraphs 11(11)(c) to 11(11)(e) above envisaged that part of the Property following the re–development – SW estimated some 22% – would be let out to commercial tenants at a rent whilst the remainder would be residential and would be sold at a profit;

(g)

SW’s role in seeking planning permission was crucial in two respects – first because of his extensive experience in the residential property development market and, secondly, because he was the owner and sole director of the company which occupied the commercial area at the Property and therefore he needed to be satisfied with the nature of the re–development as a whole;

(h)

given the difficulties which were being experienced in obtaining planning permission for the whole of 30 to 38 Panorama Road, PSSL also took advice from its architects on an alternative re–development plan for the Property which was confined to the Property and 34 Panorama Road; and

(i)

PSSL also looked at acquiring another property but was unable to agree terms with the owner of that property;

(12)

a spreadsheet dated 19 June 2017 prepared on behalf of the company postulated that the owners of 30 to 38 Panorama Road would be able to make a gross profit of £2,473,689 on the re–development of those properties, which equated to a profit of 26.6% on the cost of the land and the re–development;

(13)

a spreadsheet dated 5 June 2017 prepared on behalf of the company postulated that the owners of the Property and 34 Panorama Road would be able to make a gross profit of £2,299,060 on the re–development of those properties, which equated to a profit of 23.1% on the cost of the land and the re–development;

(14)

the following information can be determined from the accounts of the company (although, as we have already observed in paragraph 9 above, we have some misgivings about the reliability of the accounts):

(a)

the directors’ report for each of the 2017 AP and the 2018 AP stated that the principal activity of the company was property development. No statement as to the company’s principal activity was made in the directors’ report for the 2016 AP;

(b)

in the 2016 AP, the company made a loss of £480 which was attributable to expenditure on audit and accountancy services;

(c)

in the 2017 AP, the company made an after–tax profit of £127,897 and that included rental income of £53,790 and administrative expenses of £39,986 of which £1,400 was attributable to expenditure on audit and accountancy services and £14,457 was attributable to legal and professional fees;

(d)

in the 2018 AP, the company made an after–tax profit of £2,518 and that included rental income of £40,826 and administrative expenses of £22,257 of which £2,500 was attributable to expenditure on audit and accountancy services and £19,649 was attributable to legal and professional fees;

(e)

the rental income described in paragraphs 11(14)(c) and 11(14)(d) above was the only income derived by PSSL in the 2017 AP and the 2018 AP;

(f)

in the 2017 AP, the company re–valued the Property from £602,027 to £1,200,000 and the Property remained at that value in the accounts for the 2018 AP;

(g)

at the end of the 2017 AP, the company had debtors of £281,449 and bank borrowings of £424,383;

(h)

at the end of the 2018 AP, the company had debtors of £1,329,241 (which included an interest-free loan of £600,000 to an affiliated company called Battered Sole Limited (“BSL”)) and bank borrowings of £1,484,970; and

(i)

the company wrote down its investment in Leopold from its original cost of £431,253 to nil in its accounts for the 2017 AP;

(15)

a breakdown of the legal and professional fees for each of the 2017 AP and the 2018 AP revealed that:

(a)

all but £300 of the legal and professional fees of £14,457 which were incurred by the company in the 2017 AP were for legal services; and

(b)

of the legal and professional fees of £19,649 which were incurred by the company in the 2018 AP, £1,793.10 were for architectural and planning services;

(16)

the unchallenged evidence of SW was that the rental income derived by PSSL was an insufficient return on the capital which it had invested in the Property and that the company needed to carry out the re–development of the Property in order to earn an acceptable return on that capital;

(17)

on 18 June 2018, the company disposed of its shares in Leopold to SW for £1;

(18)

on 22 June 2018, the Appellants agreed to sell their shares in PSSL to BSL and completion of the sale occurred on the date of the contract;

(19)

on the same day, SW agreed to sell his 100 ordinary B shares and 66 of his 400 C ordinary shares in PSSL to BSL and completion of the sale occurred on the date of the contract;

(20)

on 25 June 2018, PSSL borrowed £1,484,970 from a new bank and used most of the proceeds of the loan to repay its existing bank debt of £434,527.58, to make the loan of £600,000 to BSL referred to in paragraph 11(14)(h) above and to make a loan of £300,000 to SW and his wife;

(21)

SW subsequently claimed entrepreneurs’ relief in respect of his disposal to BSL and the Respondents have not challenged that claim; and

(22)

following the disposals mentioned in paragraphs 11(18) and 11(19) above, the company continued to seek planning permission for its re–development of the Property but no such planning permission has yet been forthcoming. As recently as 5 December 2024, the new head of planning at the relevant council inspected the Property in connection with the latest proposal to re–develop the Property along with 34 Panorama Road.

discussion

Introduction

12.

Unless otherwise specified, each reference in this decision to a statutory provision is to a provision in the TCGA.