Ametalco UK v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 12 August 1996 |
| Date | 12 August 1996 |
| Court | Special Commissioners (UK) |
special commissioners decision
Mr THK Everett and Mr PMH Horsfield.
Graham Aaronson QC, instructed by Church Adams Tatham, solicitors, for the taxpayer.
Ian Glick QC, instructed by the Solicitor's Office, Inland Revenue.
Corporation tax - Taxation of "Sales at an undervalue or overvalue" - Extended application to provision of, inter alia, "business facilities" - Interest-free loans made by UK resident company to a non-resident associated company - Loans amounted to "business facilities" - Appeal dismissed - Income and Corporation Taxes Act 1988 section 770 subsec-or-para (1) section 773 subsec-or-para (4)Income and Corporation Taxes Act 1988, ss. 770(1), 773(4).
Ametalco UK ("AUK") and Ametalco Ltd ("AL") appeal against a series of corporation tax assessments covering the years 1988-1993.
We are asked for a decision in principle only and the issue is whether AUK and AL are liable to corporation tax on notional interest imputed to funds which AUK and AL had transferred (or allowed to be transferred) to its United States' associated company Ametalco Inc. ("Inc").
The Inland Revenue claims the right to charge tax on such notional interest under the provisions of section 770 Income and Corporation Taxes Act 1988 and have issued directions to that effect pursuant to subsection 770(2)(d). Pursuant to those directions the Inspector has issued a further assessment for one accounting period (4 August to 31 October 1988) and has adjusted assessments for seven other periods (from 1 November 1989 to 31 December 1993 inclusive).
We heard oral evidence from Mr Sidney Herbert Phillips, who was financial director of AUK until 1 August 1988. He left the employment of AUK at the end of August 1988. His connection with the company having ceased in August 1988 his knowledge of the facts in relation to these appeals was very limited. Accordingly, a short statement of facts was agreed between the parties and, as amended at the hearing, reads as follows:-
1. AUK (registered number 784017) is an unlimited company. From 17 October 1989 to 12 June 1991 it was called Ametalco. Prior to 17 October 1989 it was called Ametalco Ltd and was a limited company.
2. AL (registered number 765943) was at all material times prior to 12 June 1991 called Amax International Ltd.
3. The assessments under appeal are those covering the following accounting periods:
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(a) For AUK
Period 4 August 1988 to 31 October 1988
Year ended 31 December 1989
Year ended 31 October 1990
Year ended 31 October 1991
(b) For AL
Year ended 31 October 1991
Period 1 November 1991 to 31 December 1991
Year ended 31 December 1992
Year ended 31 December 1993
4. The following facts are agreed only for the purposes of determining the question of principle arising in these appeals. Namely whether section 770(1) of the Income and Corporation Taxes Act 1988 as extended by section 773(4) applies to sums advanced by AUK and AL in the periods and years under appeal.
5. AUK and AL were at all material times subsidiaries of and under the control of an American Corporation Cyprus Amax Minerals Company, previously called Amax Inc. ("Amax").
6. Until 3 August 1988 AUK carried on only the trades of metal trading and metal agency trading. On 3 August 1988 it ceased trading. Since 1 June 1991 it has been dormant.
7. At all material times AL was a UK holding company for Amax subsidiaries. It did not trade. The Crown does not contend that AL ever had a money lending business.
8. Inc. is an American Corporation which at all material times after 1985 traded in the United States as a metal broker and merchant. It also at all material times was a subsidiary of and under the control of Amax.
9. For much of the time between the end of 1986 and 20 March 1991 AUK had surplus funds which, at the request of Amax, it advanced, interest-free, to Inc. to be used by Inc. in its trade. AUK did not distribute the surplus funds to its shareholders because it was subject to a large contingent liability, having been joined as a third party in part of the tin litigation. There were also times during the period prior to 3 August 1988 when funds of Inc. were advanced, interest-free, by Inc. to AUK to be used by AUK in its trade.
10. On 20 March 1991 all the assets and liabilities of AUK were transferred to AL and thereafter moneys remained outstanding from Inc. to AL until 9 November 1993. Moneys so lent by AL were advanced for the purposes of Inc's trade.
11. The schedule of balances annexed to this decision sets out moneys owing to AUK or AL from Inc. or to Inc. from AUK at various dates between 31 December 1986 and 9 November 1993.
Before we come to deal with the main issues in these appeals we must record that a procedural issue exists between the parties.
Mr Aaronson for the taxpayers contends that, on the assumption that the directions made by the Inland Revenue pursuant to subsection 770(2)(d) were made lawfully, the Inspector had no power to adjust existing assessments pursuant to the direction. According to Mr Aaronson he should have issued new additional assessments (and, if he was out of time to do so, then no adjustment could be made lawfully).
Mr Aaronson made that submission before us as a formal matter of record, so as to preserve his right to raise the argument in the Court of Appeal or the House of Lords. This is because the recent decision of the Court of Appeal in Glaxo Group Ltd v IRC [1996] BTC 59 upheld the Inland Revenue's right to adjust existing assessments.
We now turn to the main issues before us.
These provide as follows:
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770 Sales etc at an undervalue or overvalue
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(2) Subject to the provisions of this section…, where any property is sold and -
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(a) the buyer is a body of persons over whom the seller has control or the seller is a body of persons over whom the buyer has control or both the buyer and the seller are bodies of persons over whom the same person or persons has or have control; and
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(b) the property is sold at a price ("the actual price") which is either -
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(i) less than the price which it might have been expected to fetch if the parties to the transaction had been independent persons dealing at arm's length ("the arm's length price"), or
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(ii) greater than the arm's length price,
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-
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(3) then, in computing for tax purposes the income, profits or losses of the seller where the actual price was less than the arm's length price, and of the buyer where the actual price was greater than the arm's length price, the like consequences shall ensue as would have ensued if the property had been sold for the arm's length price
(4) Subsection (1) above shall not apply -
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(a) in any case where -
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(i) the actual price is less than the arm's length price, and
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(ii) the buyer is resident in the United Kingdom and is carrying on a trade there, and
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(iii) the price for the property falls to be taken into account as a deduction in computing the profits or gains or losses of that trade for tax purposes; or
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(b) in any case where -
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(i) the actual price is greater than the arm's length price, and
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(ii) the seller is resident in the United Kingdom and is carrying on a trade there, and
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(iii) the price of the property falls to be taken into account as a trading receipt in computing the profits or gains or losses of that trade for tax purposes; or
(c) …
(d) in relation to any other sale, unless the Board so direct.
(5) Where a direction is given under subsection (2)(d) above all such adjustments shall be made, whether by assessment, the payment of tax or otherwise, as are necessary to give effect to the direction.
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773 Interpretation of sections 770 and…
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(2) …
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(3) …
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(4) …
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(5) Sections 770,…shall, with the necessary adaptations, have effect in relation to lettings and hirings of property, grants and transfers of rights, interests or licences and the giving of business facilities of whatever kind as they have effect in relation to sales, and the references in those sections to sales, sellers, buyers and prices shall be deemed to be extended accordingly.
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The provisions of 770 and 773(4) were first enacted in the Finance Act 1951 as section 37. The wording has changed little over the years but what appeared as two separate sections in the 1988 Act was previously contained in a single section, namely section 37, in the Finance Act 1951.
These statutory provisions are clearly tax avoidance provisions, which appear to us to be mainly designed to prevent the avoidance of United Kingdom taxation by means of transactions at artificial prices entered into with associated companies, in particular with associated companies outside the UK.
We should record here that Mr Aaronson attempted to introduce extracts from Hansard under the rules first promulgated in Pepper v Hart65 TC 421 as developed by Lord Browne-Wilkinson in his speech inMelluish v B.M.I. [1995] BTC 381 at 393. Having admitted the extracts de bene esse we derived little assistance from them.
In addition, although we accept that the term "business facilities" in S.773(4) may be ambiguous and that the construction of this expression is fundamental to the dispute, we do not consider that the Hansard passages are admissible as an aid to construction since they do not seem to us to provide "clear statements…directed to the very point in question in the litigation"; (per Lord Browne-Wilkinson [1995] BTC at 393).
I Looking at the statutory provisions and acknowledging that "business facilities" may be an ambiguous term, it seems to us impossible, on any construction, to give the provisions an entirely satisfactory and consistent modus operandi. Even when dealing with straightforward purchases and sales difficulties and anomalies are likely...
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