Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Park |
| Judgment Date | 22 July 2002 |
| Neutral Citation | [2002] EWHC 1527 (Ch) |
| Docket Number | Case No: CH/2001 /APP/828 |
| Court | Chancery Division |
| Date | 22 July 2002 |
[2002] EWHC 1527 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London WC2A 2LL
The Honourable Mr Justice Park
Case No: CH/2001 /APP/828
Graham Aaronson QC and Malcolm Gammie QC (instructed by Denton Wilde Sapte) for the appellant
David Goy QC and David Ewart (instructed by The Solicitor of Inland Revenue) for the respondent
Hearing dates : 11-14 and 17 June 2002
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this judgment and that copies of this version as handed down may be treated as authentic.
Mr Justice Park
Abbreviations, Dramatis Personae, etc
| 1. BGE | Bord Gais Eireann (the Irish Gas Board) |
| BGE(UK) | BGE(UK) Limited, a wholly owned subsidiary of BGE |
| BZW | Barclays de Zoete Wedd Limited |
| BMBF | Barclays Mercantile Business Finance Limited, the appellant company |
| Barclays IoM | Barclays Finance Company (Isle of Man) Limited |
| Deepstream | Deepstream Investments Limited |
Overview
This is a corporation tax appeal from a decision of the Special Commissioners (Mr Everett and Mr Cornwell-Kelly), dated 18 October 2001, delivered after a hearing which lasted for five days in July 2001. The point at.issue is whether the appellant company, BMBF, is or is not entitled to capital allowances for expenditure of somewhat over £91m (which I shall round off to £91m for the purposes of this judgment). BMBF contends that the expenditure was, within the meaning of section 24(1) of the Capital Allowances Act 1990, incurred on the provision for the purposes of its trade of an item of machinery or plant, namely a natural gas pipeline between Scotland and the Irish Republic. BMBF entered into contracts for it to purchase the pipeline from BGE (the Irish Gas Board) for the sum which I am rounding off as £91m, and there were bills of sale transferring the ownership of the pipeline to it. BMBF then entered into a lease agreement with BGE leasing the pipeline back to BGE on finance lease terms. BMBF has an established trade which includes finance leasing on a large scale, and it contends that it is entitled to capital allowances for expenditure of £91m on the pipeline. The Special Commissioners held that account had to be taken of the entire series of operations of which the purchase contracts and finance lease were only parts. When that was done the Commissioners' conclusion was that BMBF had not incurred expenditure of £91m on the pipeline. They therefore dismissed BMBF's appeal.
I agree with the result reached by the Special Commissioners, for reasons which I will explain in the judgment which follows.
I record that before me Mr Graham Aaronson QC and Mr Malcolm Gammie QC appeared for BMBF, and Mr David Goy QC and Mr David Ewart appeared for the respondent Inspector of Taxes.
The critical statutory provision
This case turns upon section 24(1) of the Capital Allowances Act 1990, which was the relevant statute in force at the time when the events occurred. It provided as follows:
"24(1) Subject to the provisions of this Part, where –
(a) a person carrying on a trade has incurred capital expenditure on the provision of machinery or plant wholly and exclusively for the purposes of the trade, and
(b) in consequence of his incurring that expenditure, the machinery or plant belongs or has belonged to him,
allowances and charges shall be made to and on him in accordance with the following provisions of this section."
BMBF contends that that subsection applies to it with reference to expenditure on the pipeline. The arguments arise under paragraph (a), the requirements of which, and the extent to which they are or are not in issue in this case, can be analysed as follows.
i) BMBF had to be carrying on a trade. There is no dispute about this. It was. Its main activity, as the Special Commissioners found, was the provision of asset-based finance, and the Revenue accept that the generality of that activity constituted a trade. That does not mean that every transaction which BMBF entered into was necessarily part of its trade. But the requirement that it was carrying on a trade was satisfied.
ii) BMBF must have incurred expenditure. There is a dispute about this. BMBF's case is that it incurred expenditure of £91m. One of the Revenue's arguments (not its main argument) is that on grounds of the circularity of payments, BMBF did not in reality incur any expenditure at all.
iii) If BMBF did incur the expenditure of £91m,the expenditure had to be capital expenditure. There is no dispute about this. The Revenue accept that, if BMBF did incur the expenditure, it was capital expenditure, not revenue expenditure.
iv) The parts of the pipeline which BMBF purchased must have been machinery or plant. There is no dispute about this. They were.
v) The capital expenditure of £91m, if incurred at all, had to be incurred on the provision of the pipeline. This is the main area of dispute. BMBF contends that the expenditure was on the provision of the pipeline. The Revenue's main argument is that it was not. The Special Commissioners agreed. In their decision they wrote: '.. the payment of money by BMBF, even if it is said to have involved BMBF incurring expenditure, cannot be said to have been expenditure on the pipeline'.
vi) If BMBF did incur capital expenditure of £91m on the provision of the pipeline, it must have done that wholly and exclusively for the purposes of its trade referred to in (i) above. This also is disputed. BMBF contends that the requirement is satisfied, but the Revenue submit that BMBF's transaction in the pipeline was not a trading transaction at all.
The companies involved
Seven different companies were involved in one way or another in the events and transactions which gave rise to the Revenue's decision to refuse capital allowances to BMBF. Four of them were members of the Barclays group, namely: (1) BMBF, the appellant; (2) Barclays Bank PLC, the main banking company in the group, sometimes referred to in its roles in this case as Barclays Group Treasury; (3) Barclays IOM, an Isle of Man subsidiary of the group; and (4) BZW. BZW was not a party to any of the individual transactions, but through its Structured Finance Division it devised and organised the entire structure. The policy within the Barclays group is that transactions between group members should be conducted on arm's length terms, and that policy was followed for the transactions which this case is about. The three other companies involved in the events were BGE, BGE(UK), and Deepstream. BGE is the Irish Gas Board, a statutory body in the Republic of Ireland. BGE(UK) is a United Kingdom company, wholly owned by BGE. Deepstream is a Jersey company owned by a charitable trust. I do not know why in this case it was thought necessary or desirable that Deepstream should not be owned by a Barclays company, but no doubt there was a reason. Deepstream was managed by a company in the Barclays group, and de facto I think that it can be regarded as one of the Barclays participants in the entire structure.
Finance leasing
A major part of BMBF's activity of providing asset-based finance is, and was at the material time, entering into finance leases. I believe that the basic concept of a finance lease is now widely known. Finance leases have come before the courts on many occasions, sometimes in tax cases, sometimes not. Anyone who is sufficiently interested in this case to be a reader of this judgment will almost certainly be familiar with finance leasing. In the circumstances I will not give a general description of how finance leases are customarily structured. As it seems to me the stage has passed when a judge needs to do that in order to enable his judgment to be followed. I should, however, specifically note that the obtaining of capital allowances for the leasing company's expenditure on acquiring the machinery or plant is fundamental. The lease rates are set at levels which assume that the lessor (or companies grouped with it) will benefit from the allowances. If the allowances are not obtained after all, the transaction ceases to make financial and commercial sense. The finance lease will still provide for the leasing company to make its margin, because a rental adjustment clause will provide for the rents to be increased. However, if they are increased the finance lease is no longer advantageous to the lessee: the lessee will find that, instead of it having secured finance at advantageous rates, once the rental adjustment clause has been put into effect the rates are disadvantageous. In practice the termination provisions in the lease will be operated, and the finance lease will be unwound.
BMBF's case is that it bought the pipeline from BGE and exploited it in the course of its trade by leasing it back to BGE on a finance lease. It says that the generality of its finance leasing business is undoubtedly undertaken in the course of the trade which the Revenue accepts that it carries on; that it qualifies for and receives capital allowances on expenditure which it incurs on buying machinery or plant for finance leasing; and that this case is no different in principle from the rest of its finance leasing business. The Revenue's case is that, while it entirely accepts (1) that BMBF carries on a trade, (2) that finance leasing transactions are capable of being trading transactions which qualify for capital allowances, and (3) that the general tax treatment of BMBF has been that its purchases of machinery or plant for finance leasing do indeed qualify for capital allowances, nevertheless this case is different and exceptional: when all the detailed transactions which surrounded the...
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