The Court of Appeal has allowed the pension funds’ appeal in Trustees of British Telecom Pension Scheme & Others v Clark. It was persuaded that there were substantial grounds for the Special Commissioners’ conclusion (overturned by the High Court) that the funds’ sub-underwriting activities formed an integral part of their investment process and took their colour from that process. This being so, the Commissioners’ finding of fact could not be disturbed, and the underwriting income was covered by statutory exemption.
Delivering the leading judgement, Robert Walker LJ refused to attempt to lay down even tentative guidelines of general application to pension schemes, as the case turned on its particular facts. However, he made some helpful general comments about the criteria of trading.
- Frequency of transactions cannot by itself determine that the taxpayer is trading, since an investor may change his investments frequently (as the trustees did in this case) without the investments losing their character.
- If the legal or commercial characteristics of a transaction point unequivocally to trading, the trader’s subjective purpose cannot change the character of the transaction; but the character of the transaction may be ambiguous until resolved by reference to purpose.
- The trustees’ activities had features indicative of a trade - but, in the case under review, the acceptance of risk for reward, together with frequency, did not point unequivocally to trade.
The Court of Appeal’s refusal to treat the case before them as a test case binding on other pension funds underwriting share issues means that funds will still be exposed to income tax if their underwriting income is trading income, and that whether a fund’s underwriting activities amount to trading will need to be considered case by case on the facts. For further information, speak to your usual KPMG tax contact.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
