BMBF (No 24) Ltd v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | Lord Justice Chadwick :,Lord Justice Rix,Lord Justice Simon Brown |
| Judgment Date | 06 November 2003 |
| Neutral Citation | [2003] EWCA Civ 1560 |
| Docket Number | Case No:A3/2002/2635 |
| Court | Court of Appeal (Civil Division) |
| Date | 06 November 2003 |
[2003] EWCA Civ 1560
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE ETHERTON)
lord Justice Simon Brown
Lord Justice Chadwick And
Lord Justice Rix
Case No:A3/2002/2635
Mr John Gardiner QC and Mr Jonathan Peacock QC (instructed by Slaughter and May, One Bunhill Row, London EC1Y 8YY) for the Appellant
Mr Brian Green QC and Mr David Ewart (instructed by Solicitor of Inland Revenue, Somerset House, London WC2R 1LB) for the Respondents
1. This is an appeal from the order made on 26 November 2002 by Mr Justice Etherton on an appeal by BMBF (No 24) Limited under section 56A of the Taxes Management Act 1970 against the decision of the special commissioners (Mr Theodore Wallace and Dr Nuala Brice) dated 12 December 2001 on an appeal by the taxpayer against the rejection by the Commissioners of Inland Revenue of a claim for writing-down allowances under section 24 of the Capital Allowances Act 1990. The appeal raises questions of some general importance as to the effect of section 42 of the Act in the context of finance leasing arrangements of plant and machinery to be used by non-residents for the purposes of a trade carried on outside the United Kingdom. Permission to appeal was granted by this Court on 27 February 2003.
The underlying facts
2. BMBF (No 24) Limited ("BMBF 24") is a special purpose vehicle wholly owned by Barclays Mercantile Business Finance Limited, a subsidiary of Barclays Bank plc. Caterpillar Inc ("CI") is the manufacturer of heavy plant and earth-moving equipment at factories in Illinois, United States of America. Caterpillar International Leasing LLC ("CIL"), a limited liability company incorporated in Delaware, is a wholly owned subsidiary of CI. CIL is registered in the United Kingdom as an overseas company and is resident in the United Kingdom for tax purposes.
3. In late 1995 CI, CIL and BMBF 24 entered into arrangements the purpose of which was to enable CI to raise funds on the security of plant and machinery ("the equipment") on favourable terms by taking advantage of the availability of writing-down allowances under United Kingdom tax legislation. In broad terms the arrangements involved the acquisition of the equipment by BMBF 24, the grant of a finance lease by BMBF 24 to CIL and the grant of an operating lease by CIL to CI. The intended effect of the arrangements was that the availability of writing-down allowances to BMBF 24 would enable that company to offer more favourable rental terms under the finance lease than it would otherwise have done; so enabling CI to obtain finance on advantageous terms.
4. The equipment – which comprised cranes and hoists, factory furniture, production machinery and storage, handling and distribution equipment – was in use by CI for the purposes of its business in the United States. Although the equipment was capable of being removed from CI's premises in Illinois, it was not intended that it should be; and, in fact, it was not removed. In November 1995 the equipment was inspected and appraised by an independent valuer, Mentor Valuations Inc of Chicago. On 14 December 1995 CI transferred title to the equipment to CIL. On 15 December 1995 Mentor issued a formal valuation letter, valuing the equipment at US$255 million.
5. On 18 December 1995 CI, CIL, BMBF 24 and others entered into the following transactions:
(1) CIL agreed to sell and BMBF 24 agreed to purchase the equipment at a price of £165 million and otherwise upon the terms of an acquisition agreement of that date. BMBF 24 paid the sum of £165 million payable to CIL under that agreement on the same day.
(2) BMBF 24 agreed to lease the equipment to CIL for a period of 30 years and 19 days upon the terms of a standard finance lease ("the headlease") bearing that date. The headlease provided for the payment of rent, escalating throughout the duration of the term, at levels which would amortise the lessor's investment over the term.
(3) Depository (Bermuda) Limited ("DBL"), a subsidiary of CI, placed approximately £146 million on deposit with Barclays Bank plc upon the terms of a deposit agreement and deed of assignment to which DBL, Barclays and BMBF 24 were parties. Interest was payable by Barclays to DBL on the deposit. DBL assigned the deposit to BMBF 24 as security for CIL's obligations under the headlease.
(4) By a guarantee and indemnity agreement, CI guaranteed to BMBF 24 the obligations of CIL under the headlease and of DBL under the deposit agreement and deed of assignment.
(5) CIL and CI entered into an operating lease ("the sublease") under which CIL let the equipment to CI for a period of 11 years. The sublease was on the standard terms of an operating lease and provided for even rental payments over the term. BMBF 24 consented to the letting by CIL to CI on the terms of the sublease; and it was agreed between BMBF 24 and CIL (by letter dated 18 December 1995) that CIL could enter into further subleases of the equipment with the prior written consent of BMBF 24, such consent not to be unreasonably withheld if certain specified conditions were satisfied.
(6) DBL granted BMBF 24 a put option under which DBL could be required to purchase the equipment at an option price in the event that, on the premature termination of the headlease, CIL failed to pay to BMBF 24 the termination payment for which the headlease provided.
Sections 24 and 42 of the Capital Allowances Act 1990
6. The Capital Allowances Act 1990 ("CAA") consolidates earlier statutory provisions relating to capital allowances. Part II of the Act, in which both section 24 and 42 appear, is directed to allowances and charges in respect of plant and machinery. Section 24 CAA contains the basic rules in relation to writing-down allowances. Subsections (1) and (2) are in these terms, so far as material:
"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.
(2) Subject to subsection (3) below, for any chargeable period for which a person within subsection (1) above has qualifying expenditure which exceeds any disposal value to be brought into account in accordance with subsection (6) below, there shall be made to him —
(a) unless the period is the chargeable period related to the permanent discontinuance of the trade, an allowance ("a writing-down allowance") equal to—
(i) 25 per cent. of the excess, or
(ii) …
(b) if the period is the chargeable period related to the permanent discontinuance of the trade, an allowance ("a balancing allowance") equal to the whole of the excess."
Subsection (3) – to which subsection (2) is made subject —is not in point in the present case.
7. Section 42 CAA restricts the application of section 24 in the cases to which it applies. Subsection (1) is in these terms, so far as material:
"42(1) This section has effect with respect to expenditure on the provision of machinery or plant for leasing where the machinery or plant is at any time in the requisite period used for the purpose of being leased to a person who –
(a) is not resident in the United Kingdom, and
(b) does not use the machinery or plant exclusively for earning such profits or gains as are chargeable to tax …
and where the leasing is neither short-term leasing nor the leasing of a ship, aircraft or transport container which is used for a qualifying purpose by virtue of section 39(6) to (9)."
In that context, "short-term leasing" is defined in section 40 CAA. It is common ground that neither the leasing under the headlease nor the leasing under the sublease is "short-term leasing" for the purposes of sections 40 and 42 CAA. "Qualifying purpose" is defined in section 39 CAA. It will be necessary to examine the provisions of that section in some detail later in this judgment. At this stage it is sufficient to note that while section 39(1) to (5) apply to plant and machinery generally, section 39(6) to (9) contain special provisions applicable only to ships, aircraft and containers. The "requisite period" is defined by section 40(4) CAA. In the present context (where the expenditure is 'new expenditure' for the purposes of section 50(3)) it is the period of ten years beginning with the date on which the machinery or plant is first brought into use by the person who incurred the expenditure.
8. Section 42(3) CAA provides that no balancing allowances or writing-down allowances shall be available in respect of expenditure falling within section 42(1) if the circumstances are such "that the machinery or plant in question is used otherwise than for a qualifying purpose" and the case falls within one or other (or more than one) of the following five paragraphs – that is to say, paragraphs (a) to (e) of section 42(3).
9. It is pertinent to note that (conceptually, at least) the words "for a qualifying purpose" in the phrase "machinery or plant in question … used otherwise than for a qualifying purpose" in section 42(3) CAA are wider in scope than the words "for a qualifying purpose by virtue of section 39(6) to (9)" which appear in section 42(1). The effect of the words in section 42(1)...
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