Britax International GmbH v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | Lord Justice Jonathan Parker,Lord Justice Longmore,Lord Justice Peter Gibson |
| Judgment Date | 31 May 2002 |
| Neutral Citation | [2002] EWCA Civ 806 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3 2001 2678 |
| Date | 31 May 2002 |
[2002] EWCA Civ 806
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT CHANCERY DIVISION
(THE VICE-CHANCELLOR)
Royal Courts of Justice
Strand,
London, WC2A 2LL
Lord Justice Peter Gibson
Lord Justice Jonathan Parker and
Lord Justice Longmore
Case No: A3 2001 2678
Mr John Walters QC and Ms Claire Simpson (instructed by Messrs Eversheds of Birmingham) for the Appellant
Mr Rabinder Singh QC and Ms Karen Steyn(instructed by Solicitor of the Inland Revenue) for the Respondents
Introduction
This is an appeal by Britax International GmbH ("Britax") against an order made by Sir Andrew Morritt V-C on 22 November 2001 on the hearing of preliminary issues in proceedings between Lloyds UDT Finance Ltd (now called Lloyds TSB Asset Finance Division Ltd) ("Lloyds") as claimant and Standard Chartered Bank and four other companies in the Standard Chartered group ("SCB") as defendants, to which proceedings Britax was joined as a defendant under Part 20 of the Civil Procedure Rules. The Commissioners of Inland Revenue, the respondents to this appeal, were subsequently added as defendants.
The issue in the appeal is as to the true construction of section 35(2) in Chapter III of Part II of the Capital Allowances Act 1990 ("the 1990 Act") (as amended). Section 35(2) restricts the extent to which expenditure on the "hiring" of an "expensive motor car" (that is to say, a car the retail price of which when new exceeds a specified sum, currently £12,000) is deductible in computing the profits of a trade for tax purposes. The issue is whether (as Britax contends) "hiring" in the context of section 35(2) is limited to contracts of hire under which the hirer is the end-user, in the sense that he (or, in the case of a company, its servants or agents) enjoys the physical use of the car: or whether (as the Revenue contends) it applies to all contracts of hire, whether or not the hirer may in turn have entered into a contract of sub-hire to a third party end-user.
The facts
The relevant facts are non-contentious and may be shortly stated.
Autolease Ltd (formerly Britax Autolease Ltd) ("Autolease") carries on the business of hiring motor vehicles to members of the public (including corporate customers). It acquires the necessary rights to enable it to do so under finance leases of the vehicles in question granted by a funder. The funder acquires, and retains ownership of, the vehicles. The rentals under the finance leases are geared to recovery of the funder's costs of acquiring the vehicle, plus finance charges. Thus, the finance lease serves not only to transfer rights in the vehicles to Autolease: it also provides a mechanism by which Autolease's business is funded. For obvious reasons, this mechanism for the provision of finance is known commercially as "back-to-back" funding. It is a common method of funding where the contract-hire company is not, or is not associated with, a bank. At the material time Autolease was not associated with a bank (although it has since become part of Lloyds). Not all the vehicles leased to Autolease under finance leases are in turn hired out to third parties; some are retained for use by directors or employees of Autolease.
Autolease entered into finance leases with a number of funders, including Lloyds. At the hearing before the Vice-Chancellor the parties were content to take the arrangements for finance leases between Lloyds and Autolease as typical for this purpose, and accordingly the argument before the Vice-Chancellor and on this appeal has focused on those arrangements. The relationship between Lloyds and Autolease in relation to the grant of finance leases is governed by an agreement dated 26 July 1996 and entered into between (1) United Dominions Trust Ltd (now part of Lloyds), (2) Autolease and (3) Autolease Fleets Ltd ("Fleets"), an associated company of Autolease. The agreement is entitled "Master Purchase, Lease and Disposal Agreement" (I will refer to it hereafter as "the Master Agreement"). As its title implies, the Master Agreement regulates (a) the purchase of vehicles by the lessor; (b) the leasing of the vehicles to Autolease; and (c) the disposal of vehicles which are no longer required by Autolease. Autolease in turn hires out vehicles acquired pursuant to the Master Agreement to third parties under a Master Contract Hire Agreement, the terms of which are not material for present purposes.
In paragraphs 5 to 8 of his judgment the Vice-Chancellor describes the operation of the Master Agreement, as follows:
"5. …. The role of Fleets was to carry out the initial purchase of the vehicle and its sale to UDT and its subsequent disposal at the end of the financing period. Clause 1 of the Master Agreement dealt with the acquisition of the vehicle. The system was for Autolease to notify UDT of the vehicles it wished Fleets to buy and for Fleets to sell them to UDT so that UDT might lease them to Autolease. Following UDT's acceptance in principle of the proposed purchase and lease Autolease provided UDT with (1) a VAT invoice from Fleets in respect of the specific vehicle, (2) a schedule showing details of that vehicle, the period of the lease and the rent to be paid in respect of it by Autolease to UDT, (3) a sub-hiring agreement in respect of that vehicle executed by a third party and (4) a copy of a signed acknowledgement of delivery of the vehicle. On receipt of those documents UDT reimbursed Fleets the cost of the vehicle. By clause 2 warranties from UDT which might otherwise arise were excluded.
6. The rent payable by Autolease to UDT was that shown in the schedule referred to in paragraph 5(2) above as provided in clause 3 of the Master Agreement. Punctual payment of such rent was of the essence of the agreement. Clause 4 dealt with delivery and Clause 5 with the risk in the vehicles.
7. Clause 6 dealt with the use of the vehicles. Subject to clause 7 Autolease was obliged to keep the vehicle in its possession, to maintain it in a proper condition and to allow UDT a reasonable opportunity to inspect it. By clause 7 Autolease was permitted to let the vehicle to third parties for a fixed period on the terms of a hiring agreement in substantially the form of that which had been approved by UDT from time to time. Clause 8 dealt with expenses and other outgoings.
8. Clause 9 stipulated that nothing therein contained should be construed to imply that title to the vehicle passed to Autolease at any time. Autolease was not permitted to purport to be the owner, to sell or offer for sale, assign, pledge, charge or otherwise encumber either the vehicle or the benefit of the agreement between UDT and Autolease. Clause 10 enabled UDT to terminate the Master Agreement in certain specified events. Clause 11 dealt with the payments to be made by Autolease in consequence of any such determination. Clause 12 gave power to Autolease to terminate on early repayment of all sums due to UDT and made provision for the agency of Fleets for the disposal of the vehicle at the conclusion of the agreement with UDT in respect of that vehicle. Clause 14 reiterated the prohibition on Autolease from assigning or charging any of its rights under the agreement."
In August 1998 Britax, as the then owner of Autolease, sold Autolease to SCB. In August 2000 SCB in turn sold Autolease to Lloyds. In each case, the vendor gave to the purchaser a warranty in similar terms relating to the tax liability of Autolease. The issue as to the true construction of section 35(2) arises in the context of these warranties; the specific issue being as to the correct application of section 35(2) to the trading operations of Autolease for the accounting period ended 31 December 1999.
Chapter III of Part II of the 1990 Act
The Chapter is headed "Expensive Motor Cars". It consists of three sections: sections 34, 35 and 36. Section 34 (as amended) restricts any writing-down allowance which would otherwise be available in respect of capital expenditure on the provision of a motor car to which Chapter III applies. The relevant provisions of sections 35 and 36 (as amended), as they applied to Autolease's trading operations for the period ended 31 December 1999, were as follows:
"35 Contributions to expenditure, and hiring of cars
(1) ….
(2) Where, apart from this subsection, the amount of any expenditure on the hiring of a motor car the retail price of which when new exceeds £12,000 would be allowed to be deducted in computing for the purposes of tax the profits of any trade, that amount shall be reduced in the proportion which £12,000, together with one half of the excess, bears to that retail price; but this subsection shall have effect subject to subsection (3) below.
(2A) ….
(3) Subsection (2) above shall not apply where the hiring is under a hire-purchase agreement under which there is an option to purchase exercisable on the payment of a sum equal to not more than 1 per cent of the retail price of the motor car when new.
(4) In subsection (3) above "hire-purchase agreement" has the meaning given by section 784(6) of [the Income and Corporation Taxes Act 1988].
36 Definition of "motor car", etc
(1) In this Part "motor car" means any mechanically propelled road vehicle other than –
(a) ….
(b) ….
(c) subject to subsections (2) and (4) below, a vehicle provided wholly or mainly for hire to, or for the carriage of, members of the public in the ordinary course of a trade.
(2) Subsection (1)(c) applies to a vehicle only if –
(a) the following conditions are satisfied –
(i) the number of...
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