Euroceanica (UK) Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 26 April 2013 |
| Neutral Citation | [2013] UKFTT 313 (TC) |
| Date | 26 April 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 313 (TC)
Judge Rachel Short, Richard Thomas.
Giles Goodfellow QC and Ms Zizhen Yang, instructed by Mazars LLP, appeared for the Appellant
David Yates, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Tonnage tax - credits arising from cash collateral - relevant shipping profits - loan relationship credits - whether received in the course of activities forming an integral part of shipping activities - yes - bareboat charter - over-capacity - meaning.
The First-tier Tribunal decided that interest income arising from cash collateral, which a taxpayer company deposited with two banks as part of its loan arrangements with those banks for the financing of its shipping fleet, constituted relevant shipping income under Finance Act 2000 ("FA 2000"), Finance Act 2000 part VI schedule 22Sch. 22, Pt. VI. Thus, they fell to be taxed under the tonnage tax regime and excluded from the general corporation tax on profits. However, the "over-capacity" envisaged by FA 2000, Finance Act 2000 schedule 22 subsec-or-para 18Sch. 22, para. 18 was not apt to cover the taxpayer's position in respect of one of the loans. Thus, the interest receipts relating to that loan should be excluded from the tonnage tax regime.
The taxpayer was a tonnage tax company in a tonnage tax group. Between May 2005 and December 2006, it entered into a number of loans with two Italian banks ("Sanpaolo" and "Unicredit"). The Sanpaolo loans were used to finance the purchase of seven "Euro" vessels, which were operated by the taxpayer as part of its tonnage tax business. There was an initial short-term facility for the purchase of three vessels, followed by long-term loans replacing that facility, and 12-year loans for the four other vessels. The Unicredit loan was a short-term loan used to finance indirectly the purchase of five "Crystal" vessels, which were owned and operated by a 100 per cent subsidiary of the taxpayer, as part of its own tonnage tax business.
In November 2011, HMRC issued a closure notice concerning the tax treatment of interest income arising to the taxpayer for the accounting periods 2006, 2007, 2008 and 2009. The interest in question arose from cash collateral, which the taxpayer deposited with Sanpaolo and Unicredit as part of its loan arrangements with those banks for the financing of its shipping fleet.
The taxpayer contended that the income arising from the cash collateral deposited with the banks fell within FA 2000, Finance Act 2000 schedule 22 subsec-or-para 46 schedule 22 subsec-or-para 50Sch. 22, para. 46 and 50. The purchase of all the vessels, which were financed by the loans, was part of the taxpayer's tonnage tax activities. The concept of "operating ships" was defined by FA 2000, Finance Act 2000 schedule 22 subsec-or-para 18Sch. 22, para. 18 as including owning ships, as well as chartering them in. The taxpayer accepted that bareboat chartering otherwise took shipping activities outside the scope of the tonnage tax regime. However, the reason for the bareboat charter in that instance was "over-capacity" in that the taxpayer had more vessels than it could manage from December 2006 until March 2007. Thus, the exception in FA 2000, Finance Act 2000 schedule 22 subsec-or-para 18Sch. 22, para. 18(5) applied.
HMRC contended that the overall structure of the tonnage tax regime showed that tonnage tax activities comprised types of receipts, which would be treated as trading income under general income tax principles. The sale and purchase of vessels could not give rise to such receipts, being a capital matter. The references in FA 2000, Finance Act 2000 part VI schedule 22Sch. 22, Pt. VI to income from types of activity which qualified as "secondary activities" and the reference in Finance Act 2000 schedule 22 subsec-or-para 48Sch. 22, para. 48 to "turnover" concluded that those paragraphs were looking at trading income only. Relying on Nuclear Electric plc v Bradley (HMIT)TAX[1995] BTC 445 (Nuclear Electric), HMRC viewed that the taxpayer was a ship operating company and the placing of deposits at interest could not be treated as an integral part of its tonnage tax trade. Furthermore, for the period from December 2006 until the Crystal Fleet was fully operated under time charter by the taxpayer, credits in respect of the Unicredit loan were outside the scope of tonnage tax because of the restrictions in FA 2000, Finance Act 2000 schedule 22 subsec-or-para 18Sch. 22, para. 18 relating to bareboat chartering.
The Tribunal held that on the basis of the reasoning in Bank Line Ltd v IR CommrsTAX(1974) 49 TC 307, which was carried in Nuclear Electric, whatever the nature of the taxpayer's trade, a fund and its related income could be treated as part of a taxpayer's trading activities to the extent that it was currently actively supporting that trade. On that premise, it would be perfectly possible for the interest from a fund to be treated as trading income for one period and investment income for the next, depending on whether the trader was accessing the funds for current trading purposes.
Unlike in Nuclear Electric, the interest in this case arose from funds which were being used for current purposes, namely, to collateralise the financing of ships which were being used for the trade. The cash deposits and related loans were of a relatively short-term nature and were in some instances used to fund current liabilities, including, in some instances, the interest due on the loans themselves. In the taxpayer's position, the capital in question was being actively employed in the trade in question during the relevant accounting periods and that the relevant interest income should be treated as trading income. Therefore, the interest income arising should be treated as "arising in the course of activities which [were] an integral part of the taxpayer's trade" for the purpose of FA 1996, Finance Act 1996 section 103 subsec-or-para 2s. 103(2) and, therefore, of FA 2000, Finance Act 2000 schedule 22 subsec-or-para 50Sch. 22, para. 50. The interest credits in respect of the collateral held under both the Sanpaolo and Unicredit loan financing constituted relevant shipping income under FA 2000, Finance Act 2000 part VI schedule 22Sch. 22, Pt. VI and fell to be taxed under the tonnage tax regime and excluded from the general corporation tax on profits.
However, the Tribunal held that the "over-capacity" envisaged by FA 2000, Finance Act 2000 schedule 22 subsec-or-para 18Sch. 22, para. 18 was not apt to cover the taxpayer's position, which was more an under-capacity of management ability than an over-capacity of ships. FA 2000, Finance Act 2000 schedule 22 subsec-or-para 18Sch. 22, para. 18 was premised on a relevant shipping activity having commenced in relation to a particular ship before the bareboat charter was entered into. That was not the case here, save for the scintilla of time between the signing of the agreement for the acquisition of the Crystal fleet and the entering into the bareboat charter, which all occurred on the same day. Thus, the interest receipts for that period relating to the Unicredit loan should be excluded from the tonnage tax regime and any relevant apportionment under FA 2000, Finance Act 2000 schedule 22 subsec-or-para 61Sch. 22, para. 61 and any other adjustments required should be made and agreed between the parties.
This decision discusses whether the interest income arising from cash collateral constituted relevant shipping income for the purposes of the tonnage tax regime under FA 2000, Finance Act 2000 schedule 22Sch. 22. In order for the interest income to be treated under such regime, the taxpayers must show that the income arose from activities integral to their trade. For commentary on interest treated as relevant shipping profits, see CCH British Tax Reporter at 791-800.
[1]This case is an appeal against a closure notice issued on 13 November 2011 and concerns the tax treatment of interest income arising to the Appellant ("Euroceanica") for the accounting periods comprising the calendar years 2006, 2007, 2008 and 2009 amounting to $4,094,648. The interest in question arose from cash collateral deposited by Euroceanica with two Italian banks as part of its loan arrangements with those banks for the financing of its shipping fleet. The question for the Tribunal is whether that interest fell for UK tax purposes to be treated as within the favourable tonnage tax regime, or within the normal, and less favourable, corporation tax regime in the UK.
[2]Euroceanica was a tonnage tax company in a tonnage tax group (both terms as defined by Finance Act 2000 schedule 22 subsec-or-para 2paragraph 2(1) Schedule 22 Finance Act 2000. ("Schedule 22")). Between May 2005 and December 2006 it entered into a number of loans with two Italian banks - Sanpaolo IMI SpA ("Sanpaolo") and Unicredit Banca d'Impresa ("Unicredit"). All of the relevant loans have now been repaid or refinanced.
[3]The loans from Sanpaolo were used to finance the purchase of seven "Euro" vessels which were operated by Euroceanica as part of its tonnage tax business (the "Euro Fleet"). There was an initial short term facility for the purchase of three vessels, followed by long term (12 year) loans replacing that facility, and 12 year loans for the four other vessels. The Unicredit loan was a short term loan (12 months) used to finance indirectly the purchase of five "Crystal" vessels which were owned and operated by a 100% subsidiary of Euroceanica, Crystal Pool (UK) Limited ("Crystal"), as part of its own tonnage tax business. The Unicredit loan was on lent interest free by Euroceanica to Crystal and used by that company to finance the purchase of the Crystal vessels. (the "Crystal Fleet").
[4]We were given illustrative details of the terms of the Sanpaolo loans (both the short term facility and the...
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