Barclays Mercantile Industrial Finance Ltd v Melluish
| Jurisdiction | England & Wales |
| Judgment Date | 14 February 1990 |
| Date | 14 February 1990 |
| Court | Chancery Division |
Chancery Division.
Vinelott J.
Mr Graham Aaronson QC and Mr Kevin Prosser (instructed by Brecher & Co) for the taxpayer.
Mr Christopher McCall QC and Mr Alan Moses (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Ensign Tankers (Leasing) Ltd v Stokes (HMIT) TAX[1989] BTC 410
McVeigh (HMIT) v Arthur Sanderson & Sons Ltd TAX(1968) 45 TC 273
Munby v Furlong (HMIT) TAX(1977) 50 TC 491
Luke v IR Commrs ELR[1963] AC 557
Street v Mountford ELR[1985] AC 809
Corporation tax - Capital allowances - Expenditure on films - Leasing - Taxpayer acquired master negatives of films which it had acquired and leased back to distribution companies - Distribution companies licensed rights world-wide on territorial basis - Whether taxpayer entitled to first-year allowance for cost of acquiring master negatives -Finance Act 1971 schedule 8 subsec-or-para 3Finance Act 1971, Sch. 8, para. 3(1)(c) (as amended); Finance Act 1972,Finance Act 1972 section 68 subsec-or-para (3) section 68 subsec-or-para (5) section 68 subsec-or-para (7)sec. 68(3), (5), (7)Finance Act 1980 section 64 subsec-or-para (1) section 64 subsec-or-para (2)Finance Act 1980, sec. 64(1), (2)(a).
This was an appeal against a decision of the special commissioners that a leasing company was precluded by the anti-avoidance provisions of theFinance Act 1980 section 64 subsec-or-para (2)Finance Act 1980, sec. 64(2)(a), from claiming capital allowances in respect of the cost of the master prints of two films which it had acquired from film production companies and leased back to members of their respective groups.
By agreements taking effect from 15 December 1982 Warner Bros Inc ("WBI"), based in California, sold the master negative of and all rights to the film "Greystoke" to the taxpayer company for £22m which it leased to Warner Bros Distributors Ltd ("WBDL"), a UK company owned by the Warner Bros organisation. The lease was for 12 years certain and from year to year for a further 20 years. The rent for the first 12 years was to be £705,540 per quarter based on assumptions as to projected rates of interest and corporation tax and on the assumption that 100 per cent capital allowances would be available to the taxpayer, with provision in the agreement for recalculating the rent if conditions changed.
WBDL was bound by an existing agreement to distribute in the UK (as defined) all the films to which it had the UK rights through a company ("CEW") jointly owned by the Warner Bros, Columbia and EMI groups. Although the CEW agreement provided otherwise, CEW played substantially the role of WBDL's agent. WBDL's rights to exploit Greystoke in the UK territories fell automatically into the scope of that agreement so that WBDL was left free to exploit the UK television rights and film rights in other parts of the world. WBDL granted distribution rights to three other Warner Bros companies for exploitation of the film in the territories covered by the three companies for 12 years. The consideration payable by the three companies to WBDL during the 12 years was 25 per cent of profits after non-returnable advance payments paid annually as rent were exceeded. The advance payments under those agreements, together amounted to a sum approaching WBDL's liability to the taxpayer for rent of the master negative.
In March 1983 the taxpayer also acquired the master print and rights to another film, "Krull", from Columbia Pictures Corp Inc and entered into a leasing agreement with Columbia Pictures Corp Ltd ("CPCL").
Both films were certified as British films for the purposes of theFinance Act 1972 section 72 subsec-or-para (7)Finance Act 1972, sec. 72(7).
The issue before the special commissioners was whether the taxpayer was entitled to 100 per cent first-year allowance for machinery or plant under the Finance Act 1971 section 41Finance Act 1971, sec. 41 in respect of the cost of acquiring the master negatives of the two films. It was common ground that the master negative of a film was "plant" for the purposes of the 1971 Act.
The Crown contended that the taxpayer was prevented from claiming first-year allowances either because its sole purpose in acquiring the master negatives and leasing them back to the same organisation was to obtain a capital allowance within the Finance Act 1971 schedule 8 subsec-or-para 3Finance Act 1971 Sch. 8, para. 3(1)(c) (as amended by theFinance Act 1972 section 68 subsec-or-para (3)Finance Act 1972, sec. 68(3)), or because the lessees, WBDL and CPCL, did not use the plant for a qualifying purpose, i.e. for the purposes of a trade other than leasing, within the Finance Act 1980 section 64 subsec-or-para (2)Finance Act 1980, sec. 64(2)(a). The Crown argued that distribution rights granted to companies operating in specified territories were "leases".
The taxpayer contended that its purposes in entering into the transactions was to make a profit by leasing, not solely to obtain capital allowances. In any event the films had not been used before their acquisition by the taxpayer from the American producers whose trade was the production of films and the acquisition price was less than the cost of production. Accordingly the Finance Act 1971 schedule 8 subsec-or-para 3Finance Act 1971, Sch. 8, para. 3(1)(c) did not apply by virtue of Finance Act 1972 section 68 subsec-or-para (5)sec. 68(5) or Finance Act 1972 section 68 subsec-or-para (7)(7) of the 1972 Act.
In relation to the Finance Act 1980 section 64Finance Act 1980, sec. 64 the taxpayer contended that the lessees, WBDL and CPCL, used the master negatives for the purposes of their trade of the exploitation of films and that was not a trade of leasing within the meaning of Finance Act 1980 section 64 subsec-or-para (2)sec. 64(2)(a). The grant of distribution rights were not leases of the "plant".
The special commissioners dismissed the appeal on the sole ground that the lessees, WBDL and CPCL, did not use the master negatives for the purpose of their trades within Finance Act 1980 section 64 subsec-or-para (2)sec. 64(2)(a) of the 1980 Act since WBDL and CPCL did not expect to make a profit out of the territorial agreements except in the unlikely event that the films turned out to be "blockbusters". Nor were the agreements for the benefit of the companies themselves but for the benefit of their respective groups as a whole.
Held, allowing the taxpayer's appeal:
1. It would be perverse to deny capital allowances in a situation such as the present which was envisaged by Finance Act 1972 section 68sec. 68, in particular Finance Act 1972 section 68 subsec-or-para (5)subsec. (5), of the 1972 Act.
2. Finance Act 1971 schedule 8 subsec-or-para 3Paragraph 3(1)(c) was aimed at artificial transactions designed to create a tax allowance. Here, the taxpayer's main object was to make a profit by leasing. Although it was probable that the taxpayer would not have been able to offer leases to WBDL and CPCL at acceptable rents unless it could obtain a capital allowance it did not follow that that was the purpose of the transaction.
3. The rent paid by WBDL and CPCL under the leases was substantially covered in the case of WBDL by the advance payments received under the territorial agreements (and in the case of CPCL by other arrangements). Both companies were virtually certain to make a profit on distribution in the UK and hoped for further profits if the films were successful. It could not be right to separate the territorial agreements made by WBDL and CPCL and to categorise them as non-trading transactions merely on the ground that considered in isolation they were unlikely to make a profit. It followed that the territorial agreements were made in the course of the WBDL and CPCL's trade of the exploitation of films withinFinance Act 1980 section 64 subsec-or-para (2)sec. 64(2)(a) of the 1980 Act.
4. In the context of Finance Act 1980 section 64 subsec-or-para (2)sec. 64(2)(a) the territorial agreements entered into by the WBDL and CPCL were not "leases" of plant. The territorial agreements were therefore entered into "otherwise than for leasing" so that the plant was used for a qualifying purpose withinFinance Act 1980 section 64 subsec-or-para (2)sec. 64(2)(a).
1. On the eight days 26 to 29 January and 2 to 5 February 1988 the special commissioners heard the appeals of Barclays Mercantile Industrial Finance Ltd ("BMI") against estimated assessments to corporation tax for its accounting periods 1 January to 31 December 1982 and 1 January to 31 December 1983 in the sums of £100,000 and £1,000,000 respectively.
2. The form of the proceedings-appeals against assessments - disguised their true nature. Were it not that this was a corporation tax case, the appeals would doubtless have been made under Taxes Management Act 1970 section 42sec. 42 of the Taxes Management Act1970, against refusals (in part) by the inspector of BMI's claims to capital allowances for the years in question. The capital allowances of companies are, however, not the subject-matter of "claims" withinTaxes Management Act 1970 section 42sec. 42, and issues relating to such allowances are litigated in the context of appeals against assessments of total profits. The positive amounts of such assessments may sometimes not be in issue: in the present case the parties are agreed that (for reasons unconnected with the allowances in dispute) the assessments for both years should be reduced to nil in any event. BMI is aggrieved with the decision behind the formal determination rather than with the determination itself.
3. BMI carries on a trade of leasing equipment and is a leading company in that field. In 1982 and 1983 it acquired and leased two films ("Greystoke" and "Krull"). The issue for our determination was whether BMI was entitled to 100 per cent first-year...
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