Kl”ckner Ina Industrial Plants Ltd v Bryan (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 29 November 1989 |
| Date | 29 November 1989 |
| Court | Chancery Division |
Chancery Division.
Hoffmann J.
Mr Peter Whiteman QC (instructed Herbert Smith & Co) for the taxpayer.
Mr Jonathan Parker QC and Mr Alan Moses (instructed by the Solicitor of Inland Revenue) for the Crown.
The following case was referred to in the judgment:
Duple Motor Bodies Ltd v Ostime (HMIT) TAX(1961) 39 TC 537
Corporation tax - Relief for increase in value of trading stock - Work in progress - Taxpayer company contracted jointly with another company to supply large industrial plant - Taxpayer to provide financial expertise, the other company to provide hardware - Customer to make all payments to taxpayer which were agreed to be held as trustee for hardware supplier - Whether stock relief available on basis that difference between payments made to hardware supplier and payments received on account from customer represented work in progress -Finance Act 1976 schedule 5 subsec-or-para 9 schedule 5 subsec-or-para 29Finance Act 1976, Sch. 5, para. 9(1), 29(4)(repealed by Finance Act 1981 part VII schedule 19Finance Act 1981, Sch. 19, Pt. VII).
This was an appeal by the taxpayer company against the decision of a special commissioner refusing its claim to stock relief under theFinance Act 1976 schedule 5Finance Act 1976, Sch. 5.
The taxpayer carried on the business of supplying industrial plant and technical services. Its particular expertise was the financing of large contracts which it would enter into as principal while sub-contracting the hardware and technical obligations. In the case of a long-term contract still in progress, sums paid to the sub-contractors would be shown as "work in progress" and stage payments received from the buyer as a liability under the heading "advance payments received".
However, for the purpose of a contract to provide two large methanol plants in the Soviet Union, the taxpayer entered into a "co-operation agreement" with a company ("DPG") under which the taxpayer and DPG became joint contractors rather than principal and sub-contractor. Because the buyer preferred to deal solely with the taxpayer the co-operation agreement provided that the buyer was to make all payments to the taxpayer, the sums due to DPG to be held as trustee for DPG.
In the accounting year ended 31 December 1979, the taxpayer received £103,641,740 from the bank financing the buyer. During the same year it paid £107,980,444 to DPG in accordance with the provisions of the co-operation agreement. In its accounts the taxpayer showed the former sum as "advance payments received" and the latter as "work in progress" as it would have done if DPG had been a sub-contractor.
The taxpayer claimed that the difference between the two figures was the value of its trading stock at 31 December 1979 for the purposes ofFinance Act 1976 schedule 5Sch. 5 to the Finance Act 1976. As it had no trading stock at the beginning of the period, it claimed stock relief on that difference.
It was common ground that in the case of a normal sub-contracted long-term contract, the value of the taxpayer's "trading stock" for the purposes of Finance Act 1976 schedule 5Sch. 5 would be "work in progress" (see Finance Act 1976 schedule 5 subsec-or-para 9para. (9) less advance payments received (seeFinance Act 1976 schedule 5 subsec-or-para 29para. 29(4)). If the value at the end of the accounting period exceeded its value at the beginning, the taxpayer would be entitled to stock relief on the difference.
The taxpayer contended that the terms of the co-operation agreement made no difference to the commercial reality of the transactions and stock relief should be allowed.
Held, dismissing the taxpayer's appeal:
The payments made by the buyer to the taxpayer which were to be passed on to DPG were not received by the taxpayer in its own right but held as trustee for DPG. The money had therefore never belonged to the taxpayer. The payments made by the taxpayer to DPG under the co-operation agreement could not be regarded as expenditure by the taxpayer in the performance of the contract with the buyer and there could be no basis for crediting the taxpayer with work in progress or trading stock.
1. From 3 to 11 May 1988 and on 13 June 1988 I, commissioner for the special purposes of the Income Tax Acts heard an appeal by Klöckner Ina Industrial Plants Ltd ("Klöckina") against the refusal by the respondent, HM Inspector of Taxes, of its claim to stock relief underFinance Act 1976 schedule 5Sch. 5 to the Finance Act 1976 for its accounting period of 12 months ended on 31 December 1979 in the sum of £4,338,708.
2. Shortly stated the question for the decision was whether, at 31 December 1979, Klöckina had trading stock (as defined inFinance Act 1976 schedule 5 subsec-or-para 29 schedule 5 subsec-or-para 30para. 29 and 30 of Sch. 5 to the Finance Act 1976) to the value of £4,338,708 which was properly to be brought into account in computing the profits or gains of its trade for the purposes of corporation tax.
3. [Paragraph 3 listed the witnesses who gave evidence.]
4. The documentary evidence comprised two bundles of documents and a copy of a letter dated 30 December 1980 from Peat Marwick Mitchell and Co to the inspector of taxes, Mayfair district.
5. I reserved my decision and gave it in writing on 25 July 1988.
6. Klöckina immediately after the determination of the appeal declared to me its dissatisfaction therewith as being erroneous in point of law and on 16 August 1988 required me to state a case for the opinion of the High Court pursuant to the Taxes Management Act 1970 section 56Taxes Management Act 1970, sec. 56.
7. The question of law for the opinion of the court is whether, on the facts found, the conclusion that Klöckina had no trading stock at 31 December in respect of which relief could be claimed underFinance Act 1976 schedule 5Sch. 5 to the Finance Act 1976 was erroneous in point of law.
The appellant company ("Klöckina") is registered in the UK and conducts its business from an office in London. It is a member of a group of companies centred in West Germany with worldwide business interests. I shall call the West German parent company "Klöckner".
Klöckina appeals against the inspector's refusal of its claim to stock relief under Finance Act 1976 schedule 5Sch. 5 to theFinance Act 1976 for the year to 31 December 1979. Stock relief has been withdrawn in relation to accounting periods ending on or after 14 November 1980, but while it was in force Finance Act 1976 schedule 5 subsec-or-para 9para. 9(1) of Sch. 5 provided that:
Where a company carries on a trade in respect of which it is within the charge to corporation tax under Income and Corporation Taxes Act 1988Case 1 of Schedule D-
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(a) the value of its trading stock at the end of a period of account (the "closing stock value") exceeds
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(b) the value of its trading stock at the beginning of that period (the "opening stock value")
The company shall, subject to the provisions of this Schedule, be entitled to relief under this paragraph by reference to the amount of that excess (the "increase in stock value").
The meaning of "trading stock" in this context was explained inFinance Act 1976 schedule 5 subsec-or-para 29 schedule 5 subsec-or-para 30para. 29 and 30 of the same Schedule.Finance Act 1976 schedule 5 subsec-or-para 29 schedule 5 subsec-or-para 29 schedule 5 subsec-or-para 29Subparagraphs (1), (4) and (5) of para. 29, which are relevant to the issue in this appeal, provided that:
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(1) Subject to the provisions of this paragraph, in this Schedule "trading stock" means property of any description, whether real or personal, being either:
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(a) property such as is sold in the ordinary course of the trade, profession or vocation in question, or would be so sold if it were mature or if its manufacture, preparation or construction were complete; or
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(b) materials such as are used in the manufacture, preparation or construction of any such property as is referred to in Finance Act 1976 schedule 5 subsec-or-para 29paragraph (a) above,
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and includes work in progress.
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(4) For the purposes of this Schedule the value of a person's trading stock at any time shall be reduced to the extent to which payments on account have been made at or before that time in respect of that stock.
(5) References in this Schedule to trading stock are to the trading stock brought into account in computing the profits or gains of a trade, profession or vocation in accordance with Income and Corporation Taxes Act 1988Case I or, as the case may be,Income and Corporation Taxes Act 1988Case II of Schedule D.
Finance Act 1976 schedule 5 subsec-or-para 30Paragraph 30 provided that:
In this Schedule "work in progress" means:
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(a) any services performed in the ordinary course of the trade, profession or vocation, the performance of which was partly completed at the material time and for which it would be reasonable to expect that a charge will subsequently be made; and
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(b) any article produced, and any such material as is used, in the performance of any such services.
Before considering the effect of those provisions I must set the scene by summarising the material facts which I find from the evidence, oral and documentary, adduced at the hearing.
The Klöckner group trades in the export of industrial plant to the developing countries of the world, to Eastern Bloc countries and to China. In some cases Klöckner itself undertakes a contract for the supply of such plant to one of those countries; but if for any reason a more competitive tender can be submitted by one of its subsidiaries from another country Klöckner passes the negotiations to that subsidiary and the subsidiary, if successful, will undertake the contract, with financial support from Klöckner in the form of guarantees.
Klöckina provides the group's presence in the UK and enters into...
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