Ensign Tankers (Leasing) Ltd v Stokes

JurisdictionEngland & Wales
Judgment Date14 July 1989
Date14 July 1989
CourtChancery Division
[CHANCERY DIVISION] ENSIGN TANKERS (LEASING) LTD. v. STOKES (INSPECTOR OF TAXES) 1989 June 15, 16, 19, 20, 21, 23; July 14 Millett J.

Revenue - Corporation tax - Capital allowances - Transactions carried out to obtain fiscal advantage - Company entering into limited partnerships to acquire master negatives of films - Expenditure by partnerships to acquire exclusive rights to completed films - Whether partnerships trading - Whether capital expenditure incurred by partnerships - Whether company entitled to first-year allowances - Finance Act 1971 (c. 68), s. 41(1)

During 1980 the taxpayer company, a member of a group of companies, embarked on a series of transactions so as to obtain fiscal advantages for the benefit of the group. It entered into two limited partnerships that were set up to finance production and to exploit two cinematographic films that were in the course of being made. Its purpose in so doing was to claim first-year allowances under section 41(1) of the Finance Act 1971F1 in respect of its share of the capital expenditure incurred by the partnerships on acquiring the master negatives of the film. The partnership that negotiated the transactions relating to the first film entered into an agreement whereby it contributed U.S. $3.2m. (of which U.S. $2.3m. represented the taxpayer company's contribution), being an amount that represented 25 per cent. of the estimated cost of producing the film, and undertook to meet the entire cost of the production company in return for acquiring the ownership rights of the film. Further a loan agreement was entered into by the partnership whereby the production company lent to the partnership amounts sufficient to meet all the budgeted costs of completing the film and agreed to make any further loans to the partnership of amounts needed to complete the film should it overrun its budget. The loans were non-recourse loans, being repayable only out of the receipts of the films. Transactions of a similar kind were negotiated by the partnership in respect of the second of the two films. The partnerships did not involve themselves in any way with the films but appointed agents to act exclusively for them in distributing and exploiting them. On completion of production both films ran over the estimated budgets and neither proved to be financially successful. The taxpayer company appealed against assessments to corporation tax made on it for accounting periods ending December 1980 and December 1981 and against the refusal of the inspector of taxes to allow it relief for losses founded on its claim to first-year allowances on its percentage of the capital expenditure incurred by the partnerships on the two films. The inspector's case for refusing that claim was that neither partnership had carried on a trade, that the master negatives of the films did not “belong” to the partnerships and that in any event they had not “incurred” any capital expenditure in respect of them with the result that the taxpayer company did not qualify for the allowances under section 41(1) of the Act of 1971. The special commissioners dismissed the taxpayer company's appeal holding that the transactions entered into by the two partnerships had fiscal motives as their paramount object and as such were not trading transactions with the consequence that neither partnership could be said to be trading. They further recorded findings that the relevant transactions were preordained as a series of transactions or a single composite transaction which contained steps inserted without any commercial or business purpose other than the avoidance of tax.

On appeal by the taxpayer company: —

Held, allowing the appeal, (1) that the issue for the commissioners, being one of fact, was whether the limited partnerships, and not the taxpayer company, were carrying on a trade when transacting for the acquisition of the master negatives; that the facts found by the commissioners established that although the transactions were deliberately structured to obtain tax advantages and were financed by investors who were motivated by fiscal considerations rather than by any prospects of making commercial profits, they were, albeit speculative, commercial transactions entered into by the partnerships with a view to profit; that, in concluding as they had, the commissioners had misdirected themselves and their conclusions could not be supported, and that the only true and reasonable conclusion on the facts was that the partnerships were trading (post, pp. 1231H–1232A, 1234A–B, 1237F–G, H–1239D, 1243G).

Lupton v. F.A. & A.B. Ltd. [1972] A.C. 634, H.L.(E.); Thomson v. Gurneville Securities Ltd. [1972] A.C. 661, H.L.(E.) and Overseas Containers (Finance) Ltd. v. Stoker [1989] 1 W.L.R. 606, C.A. applied.

(2) That the facts found by the commissioners did not support the contentions made by the Crown that the master negatives never “belonged” to the partnerships, that only 25 per cent. of the expenditure was “incurred” by the partnerships on the provision of plant and that the transactions had no commercial purpose other than the avoidance of tax and should thus be disregarded; and that, accordingly, the only conclusion open to the commissioners was that the taxpayer company's claim for first-year allowances fell within the provisions of section 41(1) of the Finance Act 1971 (post, pp. 1240A–D, H–1241C, G–1242B, 1243D–G, G).

W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300, H.L.(E.); Furniss v. Dawson [1984] A.C. 474, H.L.(E.) and Craven v. White [1989] A.C. 398, H.L.(E.) distinguished.

The following cases are referred to in the judgment:

Church of England Building Society v. Piskor [1954] Ch. 553; [1954] 2 W.L.R. 952; [1954] 2 All E.R. 85, C.A.

Coates v. Arndale Properties Ltd. [1984] 1 W.L.R. 1328; [1985] 1 All E.R. 15, H.L.(E.)

Craven v. White [1989] A.C. 398; [1988] 3 W.L.R. 423; [1988] 3 All E.R. 495, H.L.(E.)

Finsbury Securities Ltd. v. Inland Revenue Commissioners [1966] 1 W.L.R. 1402; [1966] 3 All E.R. 105; 43 T.C. 591, H.L.(E.)

Furniss v. Dawson [1984] A.C. 474; [1984] 2 W.L.R. 226; [1984] 1 All E.R. 530; 55 T.C. 324, H.L.(E.)

Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1; 19 T.C. 490, H.L.(E.)

Lupton v. F.A. & A.B. Ltd. [1972] A.C. 634; [1971] 3 W.L.R. 670; [1971] 3 All E.R. 948; 47 T.C. 580, H.L.(E.)

Newton v. Commissioner of Taxation of Commonwealth of Australia [1958] A.C. 450; [1958] 3 W.L.R. 195; [1958] 2 All E.R. 759, P.C.

Overseas Containers (Finance) Ltd. v. Stoker [1989] 1 W.L.R. 606, C.A.

Ramsay (W. T.) Ltd. v. Inland Revenue Commissioners [1982] A.C. 300; [1981] 2 W.L.R. 449; [1981] 1 All E.R. 865; 54 T.C. 101, H.L.(E.)

Thomson v. Gurneville Securities Ltd. [1972] A.C. 661; [1971] 3 W.L.R. 692; [1971] 3 All E.R. 1071; 47 T.C. 633, H.L.(E.)

The following additional cases were cited in argument:

Baker v. Cook [1937] 3 All E.R. 509; 21 T.C. 337

F. S. Securities Ltd. v. Inland Revenue Commissioners [1965] A.C. 631; [1964] 1 W.L.R. 742; [1964] 2 All E.R. 691; 41 T.C. 666, H.L.(E.)

General Motors Acceptance Corporation (U.K.) Ltd. v. Inland Revenue Commissioners (1986) 59 T.C. 651, C.A.

Griffiths v. J. P. Harrison (Watford) Ltd. [1963] A.C. 1; [1962] 2 W.L.R. 909; [1962] 1 All E.R. 909; 40 T.C. 281, H.L.(E.)

Inland Revenue Commissioners v. Livingstone (1926) 11 T.C. 538, Ct.Sess.

Mills v. Inland Revenue Commissioners [1975] A.C. 38; [1974] 2 W.L.R. 325; [1974] 1 All E.R. 722; 49 T.C. 367, H.L.(E.)

Ransom v. Higgs [1974] 1 W.L.R. 1594; [1974] 3 All E.R. 949; 50 T.C. 1, H.L.(E.)

Reed v. Nova Securities Ltd. [1985] 1 W.L.R. 193; [1985] 1 All E.R. 686; 59 T.C. 516, H.L.(E.)

Stokes v. Costain Property Investments Ltd. [1983] 1 W.L.R. 1406; [1983] 2 All E.R. 681; [1984] 1 W.L.R. 763; [1984] 1 All E.R. 849; 57 T.C. 688, C.A.

Tesco Supermarkets Ltd. v. Nattrass [1972] A.C. 153; [1971] 2 W.L.R. 1166; [1971] 2 All E.R. 127, H.L.(E.)

Wood Preservation Ltd. v. Prior [1969] 1 W.L.R. 1077; [1969] 1 All E.R. 364; 45 T.C. 112, C.A.

CASE STATED by the Commissioners for the Special Purposes of the Income Tax.

The taxpayer company, Ensign Tankers (Leasing) Ltd., appealed against two estimated assessments to corporation tax, each in the sum of £5,000, for the accounting periods ended 31 December 1980 and 31 December 1981. It also appealed against refusals by the inspector of taxes of its claims to relief for losses pursuant to section 177(2) of the Income and Corporation Taxes Act 1970. The taxpayer company was a member of the Thomas Tilling group of companies. Seventeen associated companies were parties to the appeals before the commissioners as claimants of group relief in respect of alleged trading losses of the taxpayer company pursuant to section 264(1) of the Act of 1970. The question for the commissioners' decision was whether the taxpayer company was entitled to first-year allowances under section 41(1) of the Finance Act 1971 in relation to the master prints of two cinematograph films entitled “Escape to Victory” and “Outland” by virtue of it becoming a limited partner in two several limited partnerships which entered into various transactions relating to the production and exploitation of those two films. Having found that neither of the partnerships played any significant role in relation to the commercial production or exploitation of the films, the commissioners concluded that neither was trading and dismissed the appeal. In addition the commissioners made findings of fact that the relevant transactions entered into by the two partnerships were preordained as a series of transactions or a single composite transaction and further that the creation of the two partnerships served no commercial or business purpose apart from the avoidance of tax.

The taxpayer company appealed.

The facts are set out in the judgment.

John Gardiner Q.C. and Roger Thomas for the taxpayer company.

Francis Ferris Q.C. and Alan Moses for the Crown.

Cur. adv. vult.

14 July. MILLETT J. read...

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