Ensign Tankers (Leasing) Ltd v Stokes

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLord Keith of Kinkel,Lord Brandon of Oakbrook,Lord Templeman,Lord Goff of Chieveley,Lord Jauncey of Tullichettle
Judgment Date12 Mar 1992
Judgment citation (vLex)[1992] UKHL J0312-2

[1992] UKHL J0312-2

House of Lords

Lord Keith of Kinkel

Lord Brandon of Oakbrook

Lord Templeman

Lord Goff of Chieveley

Lord Jauncey of Tullichettle

Ensign Tankers (Leasing) Limited
(Original Appellant and Cross-Respondents)
and
Stokes (Her Majesty's Inspector of Taxes)
(Original Respondent and Cross-Appellant)
Lord Keith of Kinkel

My Lords,

1

I have read the speech to be delivered by my noble and learned friend Lord Templeman and I agree with it. For the reasons he gives I would allow this appeal and make the orders for remit to the Commissioners and for costs which he proposes.

Lord Brandon of Oakbrook

My Lords,

2

I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Templeman. I agree with it and for the reasons which he gives I would dispose of the appeal and cross-appeal in the manner proposed by him.

Lord Templeman

My Lords,

3

This appeal is concerned with a tax avoidance scheme, a single composite transaction whereunder the tax advantage claimed by the taxpayer is inconsistent with the true effect in law of the transaction. In the present case the taxpayer claims for itself and its partners capital allowances for expenditure of $14,000,000.00 although the partners were never liable to spend more than $3,250,000.00 of their own money.

4

By section 41 of the Finance Act 1971 Parliament sought to encourage a British trader to spend capital on machinery or plant for the purposes of his trade. The encouragement took the form of allowing the trader in the computation of his income tax or corporation tax to deduct the expenditure from his profits in the year of expenditure.

"… 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 …"

Section 41(1) is in the following terms:—
5

In 1980 the master negative of a commercial film constituted plant for the purposes of this section and the first year allowance was 100 per cent.

6

In March 1980 Lorimar Productions Incorporated ("LPI"), a Californian company engaged in the production of films, embarked on the production of "Escape to Victory." By an agreement dated 6 June 1980 Chemical Bank agreed to provide finance to make the film in the form of a revolving loan credit up to a maximum of $11,500,000.00 repayable by LPI.

7

Guinness Mahon, a merchant bank specialising in the manufacture of tax avoidance schemes persuaded the appellant Ensign (Leasing) Ltd. and four other British companies to participate in a scheme whereby they would contribute $3,250,000.00 to the cost of making the film "Escape to Victory" in return for 25 per cent of the net receipts from the exploitation of the film and whereby, so they were advised, they would be entitled to a first year allowance equal to the total cost of the film. The scheme procured for LPI the sum of $3,250,000.00 plus various substantial production and distribution fees and interest and 75 per cent of the net receipts from the exploitation of the film. The scheme was a single composite transaction embodied in 17 documents all of which are dated 14 July 1980. The appellant accepts that all the documents which constituted the scheme must be read as a whole. For present purposes some only of the documents need to be considered.

8

A Partnership Agreement was made between Victory Films Productions Ltd., ("Victory Productions") as general partner and the five British companies as limited partners. The partnership was called "Victory Partnership" and its objects were to carry on in the United Kingdom the business of making and distributing films. The capital of the partnership was $3,250,000.00 contributed by the limited partners including $2,375,800.00 contributed by the appellant. Under the Limited Partnerships Act 1907 and by the express terms of the partnership agreement the limited partners were not liable for the debts and obligations of the partnership beyond the capital they had contributed and were not entitled to take part in the management of the partnership or to bind the partnership. The management of the partnership was in the hands of Victory Productions which was a wholly owned subsidiary of LPI.

9

By a Rights Agreement, LPI granted Victory Partnership in consideration of $1.00 the exclusive licence to make and exploit the film "Escape to Victory" throughout the world for the entire period of copyright.

10

By clause 6 of a Production Services Agreement, LPI agreed to make the film "Escape to Victory" in Hungary or elsewhere as LPI should decide in accordance with an Approved Budget of $12,996,502.00 but on behalf of Victory Partnership. By clauses 6 and 17 the Approved Budget included the sum of $4,780,951.00 which had already been spent by LPI in making the film. By clause 7, Victory Partnership agreed to provide the finance required for the Approved Budget and LPI agreed to provide the finance required to complete the film if the costs exceeded the Approved Budget. By clause 13, LPI assigned to Victory Partnership the film negative which had already been shot and the right to the complete film negative as and when the film was continued and completed.

11

By a Loan Agreement, Victory Partnership agreed to provide $3,250,000.00 towards the cost of the film and LPI agreed to lend Victory Partnership $9,750,00.00 ("the production loan") required to provide the balance of the cost of the Approved Budget and also to lend to Victory Partnership the amount required ("the completion loan") to complete the film if, in the event which happened, the film cost more than $13,000,000.00. Clause 1.2 of the Loan Agreement required Victory Partnership to maintain a current account ("the Scheme Current Account") with a bank designated by LPI, and to pay into that account all advances by LPI. Withdrawals from the Scheme Current Account required the concurrence of a person designated by LPI. The Scheme Current Account was maintained with Guinness Mahon. The film cost $14,000,000.00 so that the production loan of $9,750,000.00 was supplemented by the completion loan of $1,000,000.00. By clause 1.7 it was agreed that until Victory Partnership had received the sum of $3,250,000.00 from 25 per cent of the net receipts from the exploitation of the film, an amount equal to 75 per cent of the net receipts should be applied towards repayment of the production loan. Thereafter all the net receipts were to be applied in repayment of the production loan and the completion loan and interest thereon. Clause 1.11 of the loan agreement, however, entitled "non recourse loan", freed and discharged Victory Partnership and all the partners of Victory Partnership from any liability to repay the production loan or the completion loan or interest or any other monies which became due to LPI under the terms of the Loan Agreement.

12

By a Distribution Agreement and by an UK Agency (Firrilee) Agreement, Victory Partnership vested in Lorimar Distribution International Inc. and Firrilee Ltd. ("the distributors"), two wholly owned subsidiaries of LPI, the exclusive right to distribute and exploit the film "Escape to Victory" throughout the world in perpetuity. The distributors were authorised to pay the costs of distributing and exploiting the film and to retain percentage fees out of the receipts from the exploitation of the film. By clause 11 the distributors were directed to pay 100 per cent of the net receipts from the exploitation of the film to Victory Partnership until Victory Partnership had received an amount equal to the production loan and the completion loan plus interest at the rate prescribed by the loan agreement. Thereafter the distributors were to retain 75 per cent of the net receipts and to pay 25 per cent to Victory Partnership. In the event the net receipts from the exploitation of the film have so far amounted to $12,000,000.00, that is $2,000,000.00 less than the cost of the film.

13

By a letter addressed by Victory Partnership to and accepted by the distributors and agreed and accepted by LPI, the provision in clause 11 of the Distribution Agreement providing for 100 per cent of the net receipts from the exploitation of the film to be paid to Victory Partnership was replaced by an irrevocable authority and direction to the distributors to pay 25 per cent of the net receipts to Victory Partnership and to pay 75 per cent of the net receipts to LPI until Victory Partnership had received $3,250,000.00. Thereafter 100 per cent of the net receipts from the exploitation of the film were to be paid to LPI until LPI had received an amount equal to the production loan, the completion loan and interest and other monies payable under the loan agreement. Thereafter 75 per cent of the net receipts were to be retained by the distributors and 25 per cent were to be paid over to Victory Partnership.

14

By a Waiver and Consent, Chemical Bank which, as will appear, was to receive the benefit of the payment of $3,250,000.00 by Victory Partnership in reduction of its loan to LPI, agreed to the documents I have outlined and thereby reduced its security to the amounts of the net receipts from the exploitation of the film from time to time payable to LPI.

15

On 24 July 1980 the Scheme Current Account was duly opened with Guinness Mahon in the name of Victory Partnership. On 25 July 1980 $3,250,000.00 was credited to that account from the limited partners of Victory Partnership in the amounts of their contributions to the partnership capital. That sum was remitted to LPI...

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