Goodbrand (Inspector of Taxes) v Loffland Brothers North Sea Inc.
| Jurisdiction | England & Wales |
| Judgment Date | 20 December 1997 |
| Date | 20 December 1997 |
| Court | Chancery Division |
Chancery Division.
Lloyd J.
Michael Furness (instructed by the Solicitor of Inland Revenue) for the Crown.
Graham Aaronson QC (instructed by Baker & McKenzie) for the taxpayer.
The following cases were referred to in the judgment:
Aberdeen Construction Group Ltd v IR Commrs TAX(1978) 52 TC 281
Bentley v Pike (HMIT) TAX(1981) 53 TC 590
Booth (EV) (Holdings) Ltd v Buckwell TAX(1980) 53 TC 435
Capcount Trading v Evans (HMIT) TAX[1993] BTC 3
Chevron UK Ltd v IR Commrs TAX[1995] BTC 8034
Fielder (HMIT) v Vedlynn Ltd TAX[1992] BTC 347
Marren v Ingles TAX(1980) 54 TC 76
Stanton (HMIT) v Drayton Commercial Investment Co Ltd TAXTAX(1982) 52 TC 281; [1982] BTC 269
Whittles (HMIT) v Uniholdings Ltd (No. 3) TAX[1996] BTC 399
Corporation tax - Chargeable gains - Assets sold for US dollars by instalments payable over nine years - Chargeable gain calculated in sterling at date of agreement - Depreciation of sterling over the nine years caused actual loss - Whether depreciation of sterling resulted in part of consideration becoming "irrecoverable" - Capital Gains Tax Act 1979, s. 40(2) (Taxation of Chargeable Gains Act 1992 section 48Taxation of Chargeable Gains Act 1992, s. 48.
This was an appeal by the Revenue against the decision of the special commissioners that part of the consideration received under a hire purchase contract had become "irrecoverable" within the meaning ofs. 40(2) of the Capital Gains Tax Act 1979 as a result of the depreciation of sterling during the period of the contract.
The taxpayer was a US corporation, not resident in the UK, carrying on a trade of providing drilling services to oil rigs in the North Sea through a UK branch or agency.
In 1985 the taxpayer entered into an agreement with Chevron as the lead member of the Ninian Field consortium. The agreement was a lease-purchase agreement of four rigs for a price expressed in US dollars to be paid over nine years. The contractual sum was $38,610,000. The sterling equivalent of the dollar proceeds as brought into the taxpayer's tax computation for the relevant accounting period was £33,313,201. After subtracting the acquisition costs of the assets a chargeable gain of £6,721,831 resulted.
During the nine years covered by the agreement, the value of sterling fluctuated, showing a depreciation over the whole period, with the result that the amount received by the taxpayer was nearly £10m less than the sterling value brought into the tax computation.
The special commissioners allowed the taxpayer's appeal against an assessment to corporation tax on a chargeable gain of £6,721,831, made on the footing that there was an entire disposal of the assets at the beginning of the nine years pursuant to Taxation of Chargeable Gains Act 1992 section 27s. 24 of the 1979 Act. They held that the taxpayer was entitled to an adjustment under Taxation of Chargeable Gains Act 1992 section 48s.40(2) of the 1979 Act since part of the consideration had become irrecoverable.
The inspector contended that the commissioners had erred in finding that part of the consideration had become "irrecoverable" within the meaning of Taxation of Chargeable Gains Act 1992 section 48s. 40(2). Each of the contractual payments had been received, even though the amount was less than the value in sterling included in the original computation.
The taxpayer contended that it was entitled, on the true construction ofTaxation of Chargeable Gains Act 1992 section 48s. 40(2), to recompute the chargeable gain arising on the disposal of the assets on the basis that part of the consideration brought into account in computing the chargeable gain had become "irrecoverable". Moreover, the Revenue's case resulted in the absurd position in business terms that the taxpayer should pay tax on the basis that it had made a gain of £6.7m when in reality it had suffered a loss of £2.7m. Accordingly, since it was possible to construe the term "irrecoverable" as applying to losses arising as a result of currency fluctuations, that construction should be applied to avoid an anomalous and artificial result.
Held, allowing the Revenue's appeal:
The provisions of Taxation of Chargeable Gains Act 1992 section 48s. 40(2) of the 1979 Act were not directed at changes in exchange rates, or other changes in valuation, after the date at the outset when the consideration had to be valued. The phrase "subsequently shown … to be irrecoverable" covered the risk of default on the part of the debtor and the possibility that the right to receive part of the consideration might be contingent and the contingency might not be satisfied. The taxpayer had anticipated receiving, and had received, the full amount of the consideration, no part of which became irrecoverable.
By originating motion pursuant to the Taxes Management Act 1970 section 56ATaxes Management Act 1970, s. 56A (as substituted by SI 1994/1813SI 1994/1813 with effect from 1 September 1994) the Revenue appealed against a decision of the special commissioners (Mr THK Everett and Mr DA Shirley) sitting in private released under the name Poseidon Inc v Inspector of Taxes (SpC 82) on 2 May 1996.
The taxpayer appeals against the refusal by the inspector of taxes, by a letter dated 26 July 1995, of its claim to relief pursuant toTaxation of Chargeable Gains Act 1992s. 40(2) of theCapital Gains Tax Act 1979 (now Taxation of Chargeable Gains Act 1992 section 48s. 48 of the Taxation of Chargeable Gains Act 1992). All statutory references in this decision are to the Capital Gains Tax Act 1979) unless otherwise indicated.
Prior to the hearing, protracted negotiations took place between the parties over a period of years and it was part of the Revenue's case that this tribunal did not have jurisdiction in an appeal against a refusal of relief pursuant to s. 40(2). Accordingly we held a preliminary hearing on 3 November 1995 and after hearing arguments from both parties we held that we did have jurisdiction to consider the substantive issue in this appeal.
The facts were not in issue in this appeal. An agreed bundle of documents was placed before us which contained an agreed statement of facts. We are asked only for a decision in principle, requiring us to construe s. 40(2), which reads:
In the computation under this Chapter consideration for the disposal shall be brought into account without any discount for postponement of the right to receive any part of it and, in the first instance, without regard to a risk of any part of the consideration being irrecoverable or to the right to receive any part of the consideration being contingent: and if any part of the consideration brought into account is subsequently shown to the satisfaction of the inspector to be irrecoverable, such adjustment, whether by way of discharge or repayment of tax or otherwise, shall be made as is required in consequence.
The relevant facts in this appeal are as follows:
(2) the taxpayer is a corporation formed under the laws of one of the states of the USA. At the time of the disposal of assets in 1985 to which this appeal relates, the taxpayer was not resident for corporation tax purposes in the UK but was carrying on a trade of providing services in the UK through a branch or agency. The assets in question were situated in the UK and were used in or for the purposes of that trade. Accordingly, the disposal by the taxpayer of the assets fell within the scope of corporation tax on chargeable gains.
(3) In its accounting period ending 31 December 1985 the taxpayer sold the assets in question on lease purchase terms. The purchase was expressed in US dollars and was to be paid in instalments over several years. The total contractual sum was $38,610,000.
(4) The sterling equivalent of the contractual dollar proceeds as brought in to the tax computation for the relevant accounting period amounted to £33,313,201. After subtracting the acquisition cost of the assets a chargeable gain of £6,721,831 resulted.
(5) The instalments of the purchase price were received by the taxpayer over a period of nine years between January 1985 and December 1993. During that period the exchange rate between sterling and US dollars fluctuated between a rate of 1.06 and a rate of 1.982. As a result of those fluctuations the aggregate amount actually received by the taxpayer in sterling terms was substantially less than the sterling value brought into the tax computation. Taking the spot sterling/US dollar rate for each instalment as it fell due, the rate for each aggregate actually received by the taxpayer came to £23,853,508 (i.e. £9,459,693 less than the amount brought into the computation).
(6) The taxpayer contends that it is entitled to claim that the computation of chargeable gains arising on the disposal of the assets should be recomputed so as to reflect the actual sterling proceeds received for the disposal. It claims to do so pursuant to s. 40(2), on the basis that part of the consideration brought into account in computing the chargeable gains for the relevant accounting period has not been shown to be irrecoverable. The Revenue denies that any part of the consideration has been shown to be irrecoverable as each of the contractual payments has been received by the taxpayer even though it has not received the value in sterling terms which was included in the original tax computation.
It is common ground in this appeal that the contract in question falls within the provisions of s. 24 of the 1979 Act and that the assets were disposed of at the date of the contract. It is also common ground that "sterling is the only permissible unit of account for capital gains tax purposes": (Capcount Trading v Evans TAX[1993] BTC 3 at p. 7 approving Bentley v Pike (HMIT) (1981) 53 etc 590 at p. 595).
Counsel for the inspector contends that claims pursuant to s. 40(2) can succeed only where some part of the consideration has not and will not...
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Goodbrand (Inspector of Taxes) v Loffland Brothers North Sea Inc.
...Gains Act 1992 section 48Taxation of Chargeable Gains Act 1992, s. 48). This was an appeal by the taxpayer from a judgment of Lloyd J ([1997] BTC 100) that a loss arising as a result of the depreciation of sterling over the nine years during which instalments were received for assets sold f......