Hoechst Finance Ltd v Gumbrell
| Jurisdiction | England & Wales |
| Judgment Date | 20 January 1983 |
| Date | 20 January 1983 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal.
Mr. J. E. Holroyd Pearce Q.C. and Mr. A. G. Wilson (instructed by Messrs. Slaughter & May) for the taxpayer company.
Mr. R. J. Carnwath (instructed by the Solicitor of Inland Revenue) for the Crown.
Before: Lawton, May and Dillon L.JJ.
Corporation tax - Expenses of management of investment company - Annual commission payable to parent company as consideration for guarantee for repayment of loan - Money raised to invest by way of advances in group companies in UK - Whether an expense of management - Income and Corporation Taxes Act 1970 section 304 subsec-or-para (1)Income and Corporation Taxes Act 1970, sec. 304(1).
This was an appeal by the Crown from a finding of Nourse J. that commissions paid by the taxpayer company were deductible underIncome and Corporation Taxes Act 1970 section 304 subsec-or-para (1)sec. 304(1) of the Income and Corporation Taxes Act 1970 as "expenses of management (including commissions)".
The taxpayer company, an investment company within the meaning ofIncome and Corporation Taxes Act 1970 section 304sec. 304, is a wholly-owned subsidiary of a German company. Its function is to raise money and invest it by way of loans to English operating subsidiaries in the group, thereby receiving interest. The assessments in issue arose out of one particular fund-raising operation, the moneys from which were invested by way of advances to the UK operating subsidiaries. The taxpayer company secured an issue of loan stock secured by a guarantee given by its parent company. German law required that such guarantees should be given on commercial terms. Accordingly, the taxpayer company agreed to pay its parent company a commission of1/4 per cent per annum of the amount of the loan stock outstanding. That commission was payable half-yearly in arrears.
The Special Commissioners found that the commission payments were not part of the cost of managing the company's business year by year but were essentially part of the cost of raising the initial finance. Nourse J., however, considered the payments were "expenses of management" within the meaning of Income and Corporation Taxes Act 1970 section 304 subsec-or-para (1)sec. 304(1), as that phrase included expenses to which the company was put "in conducting its business" of maintaining financial assistance to UK companies in the group. In reaching that conclusion, his Honour considered that each half-yearly commission payment should be regarded as a payment for the guarantee during the previous six months.
Held, appeal allowed.
1. Nourse J. erred in his attempted re-definition of the phrase "expenses of management" and construed it more widely than did the House of Lords in the Sun Life Assurance Society case, TAX37 T.C. 330. Additionally, Nourse J. laid too great an emphasis on the instalment nature of the commissions.
2. The continuing commission was agreed to, with the intention of enabling the taxpayer company to obtain the parent company's guarantee and, as a consequence, the loan itself. The commission cannot be severed from the cost of the loan stock. The annual payments all relate back to the giving of the guarantee and cannot be seen as payments which are merely part of the continuing management of the company.
Dillon L.J.: This is an appeal by the Crown against a decision of Nourse J. given on 19 November 1980. Nourse J. allowed an appeal by the taxpayer, Hoechst Finance Limited (which I will call "the company") from a decision of the Special Commissioners, who had upheld certain assessments on the company. The question arises underIncome and Corporation Taxes Act 1970 section 304sec. 304 of the Income and Corporation Taxes Act 1970. It is a short question, whether certain commission paid by the company, in circumstances which I shall have to set out, ranks as "expenses of management (including commissions)" within the meaning ofIncome and Corporation Taxes Act 1970 section 304sec. 304.
Income and Corporation Taxes Act 1970 section 304 subsec-or-para (1)Section 304(1) reads as follows:
In computing for the purposes of corporation tax the total profits for any accounting period of an investment company resident in the United Kingdom there shall be deducted any sums disbursed as expenses of management (including commissions) for that period…
There is then an exception which does not matter and a proviso which also does not matter. Income and Corporation Taxes Act 1970 section 304Section 304 has been qualified by Finance Act 1980 section 38 subsec-or-para (1)sec. 38(1) of theFinance Act 1980, but that qualifying section was not in force in the years of assessment with which this appeal is concerned.
Income and Corporation Taxes Act 1970 section 304Section 304 applies only to investment companies. It replaces provisions to the same effect in an earlier Act which related to insurance companies as well as investment companies. Insurance companies' expenses of management are dealt with by Income and Corporation Taxes Act 1970 section 305sec. 305 of the 1970 Act. The relevance of the position of insurance companies is that the leading case on what is nowIncome and Corporation Taxes Act 1970 section 304sec. 304 - Sun Life Assurance Society v. Davidson TAX(1957) 37 T.C. 330 - was in fact concerned with an insurance company.
It is common ground that the company in the present case is an investment company within the meaning of Income and Corporation Taxes Act 1970 section 304sec. 304. It is a wholly-owned subsidiary of a German company called Hoechst A.G. of Frankfurt. Its function...
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