Finance Ltd v HM Inspector of Taxes, SPC 00370
| Jurisdiction | UK Non-devolved |
| Judge | Dr A Nuala BRICE |
| Judgment Date | 30 June 2003 |
| Respondent | HM Inspector of Taxes |
| Appellant | Finance Ltd |
| Reference | SPC 00370 |
| Court | First-tier Tribunal (Tax Chamber) |
CORPORATION TAX - exchange gains and losses - transitional provisions - delayed application of 1993 legislation to certain fluctuating debts - agreed that in this appeal the amounts of the debts were fixed - whether the terms of the debts were fixed - yes - whether it was provided that any part of the principal once repaid could not be withdrawn - yes - appeal dismissed - FA 1993 Ss 165(4); Exchange Gains and Losses (Transitional Provisions) Regulations 1994 SI 1994 No. 3226 Reg 3(1)(d) and 3(6)(b)(ii)
FINANCE LIMITED
Appellant
- and -
(HM INSPECTOR OF TAXES)
Respondent
SPECIAL COMMISSIONERS : DR A N BRICE (Chairman)
DR D W WILLIAMS
Jonathan Peacock QC, instructed by Messrs Ernst & Young Chartered Accountants, for the Appellant
Philip Jones of Counsel, instructed by the Solicitor of Inland Revenue, for the Respondent
© CROWN COPYRIGHT 2003
ANONYMISED DECISION
The appeal
1. Finance Limited (the Appellant) appeals against an assessment to corporation tax dated 14 January 2000 in respect of the accounting period ending on 31 December 1996. We were asked to give a written decision in principle on one issue in the appeal, namely whether eight loans entered into by the Appellant were fixed debts for the purposes of the transitional provisions relating to the taxation of exchange gains and losses. If the loans were fixed debts then we were informed that exchange gains in the region of £29M would be included in the Appellant's taxable profits for its accounting period ending on 31 December 1996.
The legislation
2. Part II (sections 51 to 184) of the Finance Act 1993 (the 1993 Act) introduced amendments to the legislation relating to income tax, corporation tax and capital gains tax. Chapter II of Part II (sections 125 to 170) contained provisions about exchange gains and losses. Section 165 contained the commencement and transitional provisions the effect of which was that each company had its own commencement day which was the first day of its first accounting period to begin after 23 March 1995. Section 165(1) and (2) provided:
"(1) This Chapter applies where-
(a) a qualifying asset is one to which the company becomes entitled on or after the company's commencement day;
(b) a qualifying liability is one to which the company becomes subject on or after that day;
(c) the rights and duties under a currency contract are ones to which the company becomes entitled and subject on or after that day.
(2) Where a qualifying asset or liability is held or owed by a qualifying company both immediately before and at the beginning of its commencement day, for the purposes of this Chapter the company shall be treated as becoming entitled or subject to the asset or liability at the beginning of its commencement day. … "
3. Thus the effect of section 165(2) was to apply the new provisions in Chapter II to loans in existence on the company's commencement day. However, section 165(4) provided that in certain circumstances the application of Chapter II could be delayed. Section 165(4) read:
"(4) Regulations may provide that where-
(a) a qualifying asset or liability is held or owed by a qualifying company both immediately before and at the beginning of its commencement day, and
(b) the asset or liability is of a prescribed description
subsection (2) above shall not apply and for the purposes of this Chapter the company shall be treated as becoming entitled or subject to the asset or liability at such time (falling after its commencement day) as is found in accordance with the prescribed rules."
4. The Regulations referred to in section 165(4) were the Exchange Gains and Losses (Transitional Provisions) Regulations 1994 SI 1994 No. 3226 (the 1994 Regulations). Regulation 3 contained provisions about the delayed application of Chapter II in relation to certain fluctuating debts and the relevant parts of Regulation 3 provided:
"3(1) Subject to paragraph (5) below, paragraph (2) below applies in relation to an asset or liability which is held or owed by a company and falls within section 165(4)(a) where- …
(c) the asset or liability is the right to settlement of a debt or the duty to settle a debt, and
(d) the amount of the debt or the term of the debt (or both) are not fixed."
5. Paragraph 3(2) provided for the delayed application of Chapter II until the amount of the debt was increased or until the sixth anniversary of the company's commencement day. Paragraph 3(5) provided that paragraph 3(2) did not apply if a company elected that section 165(2) should apply. The relevant part of paragraph 3(6) provided:
"(6) For the purposes of this regulation the term of a debt is fixed if (and only if) -
(a) … or
(b) it is provided that-
(ii ) any part of the principal once repaid cannot be withdrawn; and … "
6. Thus the scheme of the legislation was to delay the application of Chapter II in respect of certain fluctuating debts, that is debts where the amount or the term (or both) were not fixed. It was agreed that in this appeal the amounts of the debts were fixed. Regulation 3(6)(b) provided that the term of a debt was fixed only if "it is provided that any part of the principal once repaid cannot be withdrawn".
The issue
7. It was agreed that, if the loans were fixed loans, then tax was due on the exchange gains in 1996 but that, if the loans were not fixed loans, then tax was delayed under the 1994 Regulations. It was also agreed that there was no express term in the loans at issue in the appeal that any part of the principal once repaid could not be withdrawn.
8. The Appellant argued that the delayed application of Chapter II applied to the loans at issue in the appeal which were fluctuating debts because the loan agreements did not specifically provide that any part of the principal once repaid could not be withdrawn. The Inland Revenue argued that the delayed application of Chapter II did not apply because the loans were fixed debts and that a provision that any part of the principal once repaid could not be withdrawn could be implied because the loan agreements had originally provided that any part of the principal once repaid could be withdrawn and had been specifically amended to remove that provision.
9. Thus the issue for determination in the appeal was whether the application of Chapter II to the loans at issue in the appeal was delayed. Specifically, the question arising out of that issue was whether the loans were fixed debts and, in particular, whether it was provided that any part of the principal once repaid could not be withdrawn within the meaning of Regulation 3(6)(b)(ii) of the 1994 Regulations.
The evidence
10 The parties produced a statement of agreed facts and an agreed bundle of documents.
The facts
The Appellant and its borrowings
11 The Appellant is a wholly owned subsidiary of Group Plc. The Appellant provides finance and treasury service to members of the group and, in particular, makes loans to, and borrows from, other group companies.
The eight loans
12. Between 30 July 1991 and 18 February 1994 the Appellant entered into eight loans to borrow money from other companies in the group. One loan was of Swiss francs, one was of Belgian francs and six were of Dutch guilders. Originally, each loan provided for a facility to be available to the Appellant that could be drawn down, repaid and drawn down again as required.
13. We saw all eight loan agreements but describe only the first in detail. It was dated 30 July 1991 and was made between a Swiss company in the Appellant's group as lender and the Appellant as borrower. The relevant parts of Articles 1 and 4 provided:
"Article 1 -...
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