Bolton v International Drilling Company Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 29 November 1982 |
| Date | 29 November 1982 |
| Court | Chancery Division |
Chancery Division.
Mr. R. Carnwath (instructed by the Solicitor of Inland Revenue) for the Crown.
Mr. Stewart Bates Q.C. and Mr. J. M. Tallon (instructed by Messrs. Lovell, White & King) for the taxpayer company.
Before: Vinelott J.
Corporation tax - Capital allowances - Payment to secure release of option to purchase granted over taxpayer company's asset - Whether capital or revenue - Whether expenditure on provision of an asset - Whether payment qualified for initial allowance or writing-down allowance - Capital Allowances Act 1968 section 18 subsec-or-para (1)Capital Allowances Act 1968, sec. 18(1);Capital Allowances Act 1968 section 19 subsec-or-para (1)19(1).
These were appeals from two decisions of the Special Commissioners. The taxpayer company appealed against the decision that a payment, made to secure the release of an option to acquire a drilling barge owned by it, was of a capital nature. Alternatively, the company claimed that the Commissioners had been incorrect in their finding that the expenditure did not qualify for an initial allowance. The Crown appealed against the Commissioners' finding that the expenditure did, however, qualify for a writing down allowance under Capital Allowances Act 1968 section 19 subsec-or-para (1)sec. 19(1) of the Capital Allowances Act.
The taxpayer company, a subsidiary of a large offshore drilling and exploration company, contracted to build and supply a drilling barge and equipment for the use of another company (Amoco). Contained within the contract was a provision that Amoco had an option to acquire the barge and ancillary equipment at the end of the contract.
The taxpayer company wished to stay in the business of drilling in the North Sea but had no completed barge, other than the one covered by that option. It was clear that the option would be exercised by Amoco if the option arrangement was not terminated. Accordingly, the taxpayer company endeavoured to obtain a release from the option term. After some negotiation, Amoco agreed to accept a payment of US$1,275,000 to release the taxpayer from the option. The taxpayer claimed that the payment was of a revenue nature as it was made to protect an asset which would otherwise have been lost to it, rather than being a payment to improve or acquire an asset. Alternatively, it was claimed that the payment qualified for an initial allowance under Capital Allowances Act 1968 section 18 subsec-or-para (1)sec. 18(1) of the Capital Allowances Act. (The Commissioners had found that the qualifying condition in Capital Allowances Act 1968 section 18 subsec-or-para (1)sec. 18(1)(b) that the plant must belong to the taxpayer "in consequence of… incurring the expenditure" was not satisfied, because the payment was not the sole or main cause of the assets remaining in the ownership of the company. Also the Commissioners considered that the words "belong to" in the context of Capital Allowances Act 1968 section 18 subsec-or-para (1)sec. 18(1)(b)meant "is acquired beneficially by" rather than "or continues to belong to".)
The Crown contended that the payment was of a capital nature. On the question of allowances under the Capital Allowances Act, the Crown submitted that the only expenditure incurred by the taxpayer company on the provision of the drilling barge and equipment was the cost of construction. The payment in question was expenditure to ensure that an asset which the company had already provided itself with was not taken away.
Held, taxpayer's appeal dismissed, and the Crown's cross appeal dismissed.
1. The payment was made to secure the income-earning potential of the barge and equipment to the advantage of the taxpayer company. As such, it was a capital payment which secured an enduring advantage to that company.
2. It is accepted that the option to purchase the barge and equipment would have been exercised but for the agreement to release the option in return for the payment by the taxpayer company. It was as a consequence of that payment that the barge and equipment belonged to the taxpayer company and not to Amoco. Accordingly the payment was expenditure on the provision of the barge and equipment and the company is entitled to an initial allowance in respect of it.
Vinelott J.: These are appeals from two decisions of the Special Commissioners. In their first decision they held that certain expenditure by International Drilling Co. Ltd. (which I will abbreviate to "IDC") was capital and not revenue expenditure. In their second decision they held that this expenditure did not qualify for an initial allowance under the Capital Allowances Act 1968 section 18Capital Allowances Act 1968,sec. 18 but that it did qualify for a writing down allowance under Capital Allowances Act 1968 section 19sec. 19 of that Act. IDC appeal against the first decision and, in the alternative, against the decision that the expenditure did not qualify for an initial allowance. The Revenue appeal against the decision that the expenditure did nevertheless qualify for a writing down allowance.
The facts relevant to the first decision can be briefly stated. IDC is a company incorporated in the United Kingdom. In 1964 it became a subsidiary of a company called Offshore Company (which I will abbreviate to "Offshore"), a company organised under the laws of Delaware in the United States of America. Offshore is one of the leading companies engaged in offshore exploration and drilling for oil in many different parts of the world; it was one of the pioneers in offshore drilling. Amoco (UK) Petroleum Ltd. (which I will abbreviate to "Amoco") is a company incorporated in the United Kingdom and is a member of a group headed by Standard Oil Company of Indiana.
In 1964 Amoco invited IDC to tender for the supply of a fully manned jack-up drilling barge with other ancillary equipment. IDC's tender was not at first accepted, but negotiations between Amoco and another company which had put in a tender broke down and Amoco offered to enter into a contract with IDC on terms similar to those which had been under negotiation with that other company.
One of the terms of the proposed agreement was that Amoco should have an option to acquire the barge and ancillary equipment at the end of the contract. I should add that Amoco was acting for a consortium of which it was a leading member and which had acquired a licence to drill for oil and gas in an area of the North Sea. IDC had no foothold in North Sea oil exploration and was anxious to enter this field. It accepted Amoco's terms, including the option, and on 4 January 1965 entered into a contract with Amoco under which: (a) IDC agreed to furnish a drilling barge with ancillary equipment, facilities and services for the term of the contract for the drilling of oil and gas in any area of the North Sea where Amoco and its co-licensees held licences to drill. It agreed that the drilling barge, later named the Orion, would be constructed in the United Kingdom. (b) IDC gave Amoco an option to purchase the Orion and the ancillary equipment at a price equal to the cost to IDC of providing the Orion and ancillary equipment, plus interest at an agreed rate, for the period whilst Orion was being constructed, on moneys borrowed to finance its construction, less straight line depreciation from the date when Orion should be first positioned on location (that date, which I will call "the operative date", was in fact 3 September 1966) to the date of completion of the transfer of the Orion and the ancillary equipment to Amoco, plus the sum of US dollars 600,000. The option was exercisable at any time within a period commencing one year after the operative date by notice given at least 90 days notice prior to the date fixed for the sale and at least 120 days before the expiry of the period of three years after the operative date. The option provision was silent as to the last date on which, if it was exercised, the purchase and sale should take place. The only express requirement was that that date was to be not...
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