Ensign Tankers (Leasing) Ltd v Stokes
| Jurisdiction | England & Wales |
| Judge | THE VICE-CHANCELLOR,LORD JUSTICE STUART-SMITH,LORD JUSTICE LEGGATT |
| Judgment Date | 30 January 1991 |
| Judgment citation (vLex) | [1991] EWCA Civ J0130-1 |
| Docket Number | 91/0034 |
| Court | Court of Appeal (Civil Division) |
| Date | 30 January 1991 |
[1991] EWCA Civ J0130-1
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE MILLETT)
Royal Courts of Justice
The Vice-Chancellor
(Sir Nicolas Browne-Wilkinson)
Lord Justice Stuart-Smith
Lord Justice Leggatt
91/0034
MR JOHN GARDINER Q.C. and MR ROGER THOMAS, instructed by the Solicitor of Inland Revenue, appeared for the Appellant (Respondent).
MR CHRISTOPHER McCALL Q.C. and MR LAUNCELOT HENDERSON, instructed by F.D. Macintosh Esq., BTR Industries Ltd, appeared for the Respondent (Appellant).
This is an appeal by the Inland Revenue against the decision of Millett J., who allowed an appeal by the taxpayer company Ensign Tankers (Leasing) Limited ("Ensign") against a decision of the Special Commissioners. The Special Commissioners held that Ensign was not entitled to claim initial allowances under section 41 (1) of the Finance Act 1971 in respect of two transactions related to two films ("Escape to Victory" and "Outland").
Section 41 (1) provides as follows:
"Subject to the provisions of this Chapter, where—
(a) a person carrying on a trade incurs capital expenditure on the provision of machinery or plant for the purposes of the trade, and
(b) in consequence of his incurring the expenditure, the machinery or plant belongs to him at some time during the chargeable period related to the incurring of the expenditure,
there shall be made to him for that period an allowance (in this Chapter referred to as 'a first year allowance') which shall be of an amount determined in accordance with section 42 below".
At the material time, the master negative of a film constituted plant for the purposes of this section. The first year allowance was 100%.
The transactions in question were carried out by two limited partnerships (one for each film) in each of which Ensign was a partner. It is common ground that, for the purposes of section 41, the "person" referred to in that section is the partnership. The questions which arise are (a) was the partnership "a person carrying on a trade", (b) did the film "belong" to the partnership and (c) did the partnership incur expenditure in the purchase of the film?
If the partnerships qualified for first year allowances under section 41, under section 155 of the Taxes Act 1970 the partnership is to be treated for tax purposes as though it were a limited company, but in computing its tax liability no deduction is to be allowed for capital allowances. Instead, under section 155 (2), each partner is entitled in computing his or its profit to take into account its share of the partnership capital allowances. Hence, although the claim to the first year allowances in this case is rightly made by Ensign (both on its own account and in relation to group relief for other companies in the same group) it is of fundamental importance to appreciate that the relevant questions all depend not on the actions and intentions of Ensign alone but on the actions and intentions of the partnership as a body.
The case stated by the Special Commissioners and the judge's judgment are reported at [1989] S.T.C. 705. The judgment is also reported at [1989] 1 W.L.R. 1222. Although there are factual differences between the Escape to Victory and the Outland transactions, it is common ground that those differences are immaterial for present purposes. I will therefore deal exclusively with the Escape to Victory transaction, the outline facts of which I gratefully adopt, often verbatim, from the judge's judgment.
The Facts
At all material times Ensign was a member of the Thomas Tilling Group of companies, which had substantial group profits. Mr Whitfield was the Managing Director of Ensign. He was a Chartered Accountant and a member of the Group's treasury committee. He was also the Group's tax controller and was principally concerned with the financial and fiscal aspects of the Group's activities. Prior to 1980 Ensign was profitably engaged in the short-term leasing of plant and machinery and the provision of non-recourse finance in connection with the purchase and leasing of oil drilling rigs.
In 1980 the Inland Revenue issued a statement that first year allowances were to be available for expenditure in connection with the making of films.
Escape to Victory was a full-length motion picture directed by John Houston and starring Michael Caine, to be shot on location in Hungary. It was to be produced by Lorimar Productions Incorporated ("LPI"), a Californian company engaged in the production of films, and to be distributed by Lorimar Distribution International Incorporated ("LDII"), an associated company of LPI. By March 1980 LPI had made all the arrangements necessary for the making of the film. The estimated cost of producing the film was just under $13 million. LPI had secured the necessary finance which was to be provided by means of a revolving credit from Chemical Bank on the security (inter alia) of the film. Principal photography began on 26th May 1980.
A Mr Wilde on behalf of his employer, the merchant bank Guinness Mahon & Co. Ltd., had devised a scheme whereby United Kingdom investors could take advantage of first-year allowances in relation to films. Mr Wilde had also negotiated with LPI in early 1980 the terms on which his scheme could be used for investment in Escape to Victory. The advantages of the scheme to LPI were that it provided cheaper finance and to investors that it made available to them first-year allowances in respect of the film. These first-year allowances could be used as a tax shelter against other profits. Mr Wilde marketed his scheme in the United Kingdom as a tax deferral scheme, charging a fee of 7% payable to Guinness Mahon. Mr Wilde brought the scheme to Mr Whitfield, who recommended it to the treasury committee and the Group main board.
The scheme was implemented all on one day, 14th July 1980. The basic document was a partnership agreement made between Victory Film Productions Limited ("Victory Productions") as general partner and five other companies, of which Ensign was one. The other companies were not connected with Ensign but, as I understand the position, were also purchasers of the scheme from Guinness Mahon. That agreement established the Victory Partnership, the objects of which were "to engage in the production making and/or acquisition exploitation and distribution of full length cinematographic films and all ancillary rights on a commercial basis and with a view to profit". The initial capital of the partnership was $3,250,000 (25% of 13m), all of which was contributed by the limited partners. Ensign's contribution was $2,375,000. The partnership was a limited partnership, Victory Productions alone having the conduct and management of the business. Victory Productions was a company beneficially owned by LPI. Its principal director was Mr Wilde, who had devised the scheme.
On the same day, 14th July 1980, and in the course of the same meeting, sixteen further documents were entered into between eight different parties. The most important of these were a loan agreement made between LPI as lender and Victory Partnership by its general partner, Victory Productions, as borrower, a production services agreement made between the same parties, and a distribution agreement made between Victory Partnership as producer and LDII as distributor. The effect of the various transactions was as follows:
1. LPI agreed to lend Victory Partnership the additional $9,750,000 (75% of $13m) it needed to meet the budgeted cost of making the film ("the production loan") and any further money needed to complete the film in case it ran over budget ("the completion loan"). Both loans were non-recourse loans, that is to say they were repayable exclusively out of the receipts of the film without recourse to Victory Partnership or its general or limited partners or their other assets.
2.Victory Partnership acquired the uncompleted film for $4,780,951, being the cost of making it to date. LPI agreed to complete the manufacture of the film for and on behalf of Victory Partnership substantially in accordance with the approved budget. Victory Partnership agreed to pay LPI the balance of the approved budget for doing so. Any finance needed in excess of the approved budget would be provided for by LPI in accordance with the terms of the completion loan. LPI assigned to Victory Partnership all its rights in the film, including the ownership of that part of the film which had already been made.
2. Victory Partnership retained the ownership of the master negative, but granted to LDII in perpetuity an exclusive licence to distribute and exploit the film outside the United Kingdom. LDII was to charge distribution fees at what the Commissioners accepted were near market rates and to retain the gross receipts until it had recouped its distribution expenses and the shares of profit payable to members of the cast and other participators in the film. Victory Partnership appointed Firrilee Limited, another LPI company, its sole and exclusive agent to distribute and exploit the film in the United Kingdom.
4. The net receipts of the film were payable to Victory Partnership and were divisible (a) as to 25% to Victory Partnership and as to 75% to LPI in repayment of the production loan until Victory Partnership should have recouped its capital outlay of $3,250,000, described as "the break even point", at which time LPI would have recovered a sum equal to the production loan of $9,750,000 but without interest; thereafter (b) as to 100% to...
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