Beauchamp v F. W. Woolworth Plc

JurisdictionEngland & Wales
Judgment Date08 April 1987
Date08 April 1987
CourtChancery Division

Chancery Division.

Beauchamp (H.M. Inspector of Taxes)
and
F.W. Woolworth plc

Mr. Alan Moses (instructed by the Solicitor of Inland Revenue) for the Crown.

Mr. Stephen Oliver Q.C. and Mr. William Massey (instructed by Messrs. Lovell White & King) for the company.

Before: Hoffmann J.

The following cases were referred to in the judgment:

B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia ELR[1966] A.C. 224

European Investment Trust Co. Ltd. v. Jackson (H.M.I.T.) TAX(1932) 18 T.C. 1

Pattison (H.M.I.T.) v. Marine Midland Ltd. ELR[1982] Ch. 145

Scottish North American Trust Ltd. v. Farmer TAX(1911) 5 T.C. 693

Strick (H.M.I.T.) v. Regent Oil Co. Ltd. TAX(1965) 43 T.C. 1

Ward (H.M.I.T.) v. Anglo-American Oil Co. Ltd. TAX(1934) 19 T.C. 94

This was an appeal by the Crown from a decision of Special Commissioners that exchange losses incurred on the repayment of loans from Swiss banks as a result of the depreciation of sterling, were deductible in computing the taxpayer company's liability to corporation tax.

The company borrowed 50m Swiss francs in 1971 and a further 50m in 1972. Each loan was for a term of five years, repayable earlier at the option of the company subject to payment of a premium. Under the exchange control regulations then in force, Bank of England consent was required which was given for a minimum period of five years. When the money was received by the company it was immediately converted into sterling and became available for use generally in the company's business in the UK. When the company purchased Swiss francs to repay the first loan six months early (with the consent of the Bank of England), and to repay the second loan on the due date, the value of sterling had depreciated to the extent that losses of some £11.4m were realised.

The question was whether, in computing its profits for tax purposes, the company was entitled to deduct the losses. That depended on whether the loans were on revenue or capital account. The Special Commissioners, relying on evidence that the loans had been obtained with the object of overcoming a temporary shortage of cash, decided that they were on revenue account.

The Crown appealed contending that the loans were on capital account; all the indications, including the five year term, were that they were accretions to capital and not a mere temporary accommodation. The company contended that the fact that the loans were for a five year term was not inconsistent with money being used for revenue expenses; the money - a small amount in terms of the company's turnover - had been used to maintain liquidity in its day-to-day business.

Held, allowing the Crown's appeal:

1. The loans could not reasonably be regarded as anything other than accretions to the company's capital. A loan for a fixed term of five years could not be described as a temporary accommodation. Five years was a substantial period.

2. In attaching importance to what the taxpayer company was seeking to do rather than to what it actually did, the Commissioners misdirected themselves. If there was no fixed term for repayment or the term was of a borderline nature, the use to which the money was put might throw some light on whether or not it was an accretion to capital, but this was not a doubtful case. The Commissioners' decision was erroneous in law and the appeal would be allowed.

CASE STATED

1. On 20-23 July 1981 the Commissioners for the special purposes of the Income Tax Acts heard appeals by F.W. Woolworth plc ("the company") against assessments to corporation tax for the following accounting periods:

£

31 December 1973

200,000

31 January 1974

20,000

31 January 1975

18,000,000

31 January 1976

23,000,000

31 January 1977

17,000,000

31 January 1978

20,000,000 (main assessment)

20,000,000 (further assessment)

2. Shortly stated the questions for the Commissioners' decision were (1) whether in computing its profits for corporation tax purposes, the company was entitled to deduct the amount of losses on foreign exchange incurred in connection with the repayment of loans which it had obtained in foreign currency, and (2) if so, whether those losses should be allowed on an "accrued" or a "realised" basis.

3. [Paragraph 3 listed the witnesses who gave evidence before the Commissioners.]

4. [Paragraph 4 listed the documents put in evidence before the Commissioners.]

5. At the close of the hearing the Commissioners reserved their decision and gave it in writing on 19 November 1981, allowing the company's appeals in principle. The written decision set out the facts which seemed to the Commissioners material to the issues before them, the contentions of the parties and the reasons for their conclusions.

6. The following cases were cited in argument in addition to those referred to in the decision:

Anglo-Continental Guano Works v. Bell TAX(1894) 3 T.C. 239

I.R. Commrs. v. Pullman Car Co. Ltd. TAX(1954) 35 T.C. 221

Owen (H.M.I.T.) v. Southern Railway of Peru Ltd. TAX(1956) 36 T.C. 602

7. Agreed figures to give effect to the decision in principle were not reported until 5 September 1983. In the meantime Mr. H.H. Monroe Q.C., with whom Mr. R.H. Widdows heard the appeals, had died. On 14 September 1983 Mr. Widdows determined the appeals by adjusting the assessments in accordance with the agreed figures as follows:

Accounting Period

£

31 December 1973 reduced to

33,359

31 January 1974 reduced to

2101

31 January 1975 reduced to

14,091,485

31 January 1976 reduced to

17,120,069

31 January 1977 increased to

17,435,652

31 January 1978 confirmed at

20,000,000

31 January 1978 reduced to

10,804,419

8. The Revenue immediately after the determination of the appeals declared dissatisfaction therewith as being erroneous in point of law and on 13 October 1983 required the Commissioners to state a case for the opinion of the High Court pursuant to the Taxes Management Act 1970, Taxes Management Act 1970 section 56sec. 56.

9. The question of law for the opinion of the court is whether, on the facts found, the Commissioners erred in law in holding that the company's exchange losses were to be treated as revenue expenses of its trade.

DECISION

1. The issue in this case is whether, in computing its profits for corporation tax purposes, the appellant company can deduct certain losses which it incurred in connection with the repayment of foreign loans by reason of the fall in the value of sterling against other currencies, in particular the Swiss franc. This issue turns on whether the loans in question represented long-term, or permanent, borrowing to provide resources with which to extend the company's trade or merely temporary facilities obtained for ordinary trading purposes in the course of the company's trade. It arises on appeals against assessments for accounting periods covering the years 1973-78 inclusive, the details of which are not material to this decision.

Facts

2. The transactions out of which the losses arose are described in an agreed statement of facts which was put before us with supporting documents. For present purposes they can sufficiently be summarised as follows:

  1. (i) The company, a publicly quoted company, was at all material times a subsidiary of an American corporation which owned 52.7 per cent of its issued share capital and was resident for exchange control purposes in the Scheduled Territories. It runs a well-known chain of retail shops selling a variety of goods throughout the UK. On 23 June 1971 the company raised from a consortium of Swiss banks a loan of 50m Swiss francs carrying interest at seven per cent repayable at par after five years or earlier, at the company's option, on payment of a premium ("the first loan"). A further loan of the same amount, but carrying interest at six per cent, ("the second loan") was raised in February 1972.

  2. (ii) Both loans took the form of the issue and sale by the company to the Swiss banks of bearer notes, under the terms of two note purchase and paying agency agreements. (In the case of the first loan the documents which were in evidence included a note of 50m Swiss francs dated 23 June which recorded that the company owed that sum to two Swiss banks and in the case of the second loan a similar note dated 11 February 1972 recorded that the company owed a similar sum to three Swiss banks. The preamble to both note purchase and paying agency agreements stated that the proceeds were to be "utilised wholly for the purposes of activities of the company's trade". There was no evidence of the extent, if any, to which the loans were "placed" with clients of the banks. In the notes to the company's balance sheets the loans were described as "Swiss Bank Notes (Swiss Francs 50,000,000)".)

  3. (iii) The exchange rate was 9.91 Swiss francs to the pound when the first loan was negotiated and 10.04 Swiss francs to the pound when the second loan was negotiated.

  4. (iv) At the relevant times the following exchange control rules were in force:

    1. (a) Under Exchange Control Notice 4 (3rd issue dated 2 May 1968) the general rule was that the non-resident shareholders' stake in a UK company (by way of equity, loan finance reserves and unremitted profits) had to be maintained to cover the non-resident shareholders' pro rata share of fixed assets.

    2. (b) Under Exchange Control Notice 66 (dated 12 January 1971) consent would be granted for a foreign currency borrowing by a company resident in the Scheduled Territories only if the loan was outstanding for a minimum period of five years, reduced to two years by Supplement No. 2 to that notice dated 19 October 1973 for loans raised after that date.

    3. (c) Under Exchange Control Notice 54 (issued on 24 November 1970) a contract for the forward purchase of foreign currency could only be made with a maturity date not later than six...

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