Beauchamp v F. W. Woolworth Plc
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE NOURSE,LORD JUSTICE STUART-SMITH,THE VICE-CHANCELLOR |
| Judgment Date | 28 July 1988 |
| Judgment citation (vLex) | [1988] EWCA Civ J0728-1 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | 88/0657 |
| Date | 28 July 1988 |
[1988] EWCA Civ J0728-1
IN THE SUPREME COURT OF JUDICATURE
COURT OP APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION (REVENUE LIST)
(MR JUSTICE HOFFMAN)
Royal Courts of Justice,
The Vice-Chancellor
Lord Justice Nourse
Lord Justice Stuart-Smith
88/0657
CH 1985 B. 6203
MR ANDREW PARK, Q.C. and MR D. GOY (instructed by Messrs. Lovell White Durrant) appeared on behalf of the Appellant.
MR A. MOSES (instructed by The Solicitor, Inland Revenue) appeared on behalf of the Respondent.
The deductibility of expenditure or losses for income or corporation tax purposes is a much frequented area of dispute between taxpayers and the Inland Revenue, in which the governing principles are settled and familiar. But because the facts of one case are rarely the same as those of any other, the authorities, in giving prominence to considerations occasioned by their particular facts, are often unhelpful in solving the problems which arise in later cases, more especially those which arise in changed commercial conditions.
In the present case we have to decide whether the appellants, F.W. Woolworth PLC, in computing their profits for corporation tax purposes, were entitled to deduct sums amounting to £11.4m, being the amount of losses on foreign exchange incurred in connection with the repayment of loans which they had obtained in foreign currency. It is agreed that the outcome of that question depends on whether the loans were part of the appellants' revenue transactions or accretions to their capital, a question which was decided by the Special Commissioners (Mr R.H. Widdows and the late Mr H.H. Monroe Q.C.) in the former sense and in favour of the appellants, and by Hoffman J. in the latter sense and in favour of the Crown. The appellants now ask us to restore the decision of the Commissioners.
The facts of the case are stated in the decision of the Commissioners, which is set out in full in the report of the decision of Hoffman J. at (1987) STC 279. I can therefore confine myself to the more important of the agreed facts and findings, which were to the following effect:
(1) As a matter of contract the loans, of which there were two, were repayable after five years, or earlier at the appellants' option and on payment of a premium, but the practical effect of the exchange control regulations then in force was that there was little prospect of repayment being allowed before the expiration of five years.
(2) Both loans were raised in order to provide the appellants with cash for the general purposes of their trade, there being a cash shortage at the time of the first loan and no particular shortage at the time of the second, although the cash flow resulting from the appellants' retail operations had proved disappointing.
(3) The actual or anticipated cash shortages were expected to be short-term, and the appellants intended to repay the loans out of profits generated in the course of their trade.
(4) When the foreign currency was received it was immediately converted into sterling and put into the common pool of the appellants' cash resources, whence it went partly to meet expenditure which for tax purposes would be classified as capital expenditure, and partly to meet the day-to-day cash needs of the appellants' business.
Embroiled in the argument in this Court were what were ultimately seen to be two preliminary questions. First, can the Crown claim that the deductions were disallowed by Section 130 (f) of the Income and Corporation Taxes Act 1970 (now Section 74 (f) of the Income and Corporation Taxes Act 1988), or is it restricted simply to a claim for disallowance on general principles? Secondly, is the question whether the loans were revenue transactions or accretions to capital, which is obviously one of fact, nevertheless required by authority to be treated as if it were one of law or, in other words, is this or is it not an Edwards v. Bairstow case? I deal with these preliminary questions in turn.
So far as material, Section 130 of the 1970 Act provided as follows:
"Subject to the provisions of the Tax Acts, in computing the amount of the profits or gains to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of………..
(f) Any capital withdrawn from, or any sum employed or intended to be employed as capital in, the trade, profession or vocation, but so that this paragraph shall not be treated as disallowing the deduction of any interest,………"
The final words, whose effect is expressly to allow the deduction of interest on sums which are caught by paragraph (f), were added by the Finance Act 1969. Mr Park Q.C., for the appellants, traced the statutory ancestors of the provision back to the Schedule D rules in the Income Tax Act 1842, the third of which, so far as material, provided as follows:
"In estimating the Balance of Profits and Gains chargeable under Schedule (D), or for the purpose of assessing the duty thereon, no sum shall be set against or deducted from, or allowed to be set against or deducted from, such Profits or Gains, on account of any sum expended for repairs of premises occupied for the purpose of such trade, manufacture, adventure, or concern….. nor on account of any capital withdrawn therefrom; nor for any sum employed or intended to be employed as capital in such trade, manufacture, adventure, or concern….." (emphasis added). Mr. Park told us that there had been a similar provision in a statute enacted at the turn of the previous century or thereabouts.
Mr Park submitted that the clear intention of Parliament, as appearing from the words "nor on account of" and "nor for" in the 1842 Act, had been to disallow as deductions, and only to disallow, capital withdrawn from a business and sums employed or intended to be employed as capital therein. He said that in those rudimentary and unsophisticated times, had there been no provision to the contrary, it might have been thought, for example, that someone who put capital into a partnership could claim an equivalent amount as a deduction from his share of the profits for tax purposes. However that might be, Mr Park submitted that the words above quoted were incapable of being read as "in connection with" or the like, and were thus incapable of extending to interest on, or expenditure or losses incurred in connection with, the sums expressly mentioned in the provision. The same point was made by Mr J.R. Atkin Q.C. (as he then was) in 1911; see below.
It was in this context that Mr Park invited us to consider the decision of this Court in The European Investment Trust Co. Ltd. v. Jackson (1932) 18 TC, which is on any view a very curious case. The Act then in force was the Income Tax Act 1918, in which Rule 3 had, for the first time, assumed the same form as Section 130 (f) of the 1970 Act, but without the words which were added in 1969. Accordingly, the material provision was one which provided that no sum should be deducted "in respect of" any capital withdrawn from, or any sum employed or intended to be employed as capital, etc. The main business of the appellant company, which was the subsidiary of an American finance company, was the advancing of money on hire purchase for the acquisition of motor cars which were initially bought and owned by the appellant company itself. In order to finance the hire purchase transactions of the appellant company, the American company made advances to it, interest on the advances being paid by reference to the amounts outstanding from day-to-day. The appellant company claimed that the interest on the advances was an allowable deduction under Rule 3 of Schedule D, but that claim was rejected at all three levels of decision. The Case Stated recorded that it had been contended on behalf of the appellant company that it was a finance company dealing in money, that the interest paid by it on the advances was deductible as an outgoing for the purposes of its business, and that the advances were short loans.
The General Commissioners considered that the interest was not an admissible deduction "as the monies advanced…. were, in our opinion, monies employed, or intended to be employed, as capital in the trade". That suggests that they assumed that the status of the interest as a deductible item was governed by the status of the advances. The same assumption appears to have been made by Finlay J. in the High Court and all three members of this Court. Indeed, in none of the three judgments in this Court is interest mentioned in any relevant way, far less is there a suggestion that it might have stood on a different footing from the advances themselves. There is one passage in the judgment of Finlay J. at first instance, which must be quoted. At 18 TC, p. 9, having referred to paragraph (f) of Rule 3, and also to paragraph (1) which disallowed any annual interest or any annuity or other annual payment payable out of profits or gains, he said:
"To my mind, it is not necessary to form here a definite opinion upon the much vexed question of whether this is or is not annual interest: the real point in the case, I think, is whether it forms a valid deduction in arriving at the profits or gains; that is to say, whether it is a sum expended in order to earn profits. It is, of course, thoroughly well established by a long line of cases that it is not deductible if it is in truth the interest on capital".
With regard to that last sentence, Mr Park, with all his immense experience and learning in these matters, has told us that he knows of no long line of cases which...
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