Lawson v Johnson Matthey Plc
| Jurisdiction | UK Non-devolved |
| Judge | Lord Keith of Kinkel,Lord Emslie,Lord Templeman,Lord Goff of Chieveley,Lord Jauncey of Tullichettle |
| Judgment Date | 14 May 1992 |
| Judgment citation (vLex) | [1992] UKHL J0514-1 |
| Court | House of Lords |
| Date | 14 May 1992 |
[1992] UKHL J0514-1
House of Lords
Lord Keith of Kinkel
Lord Emslie
Lord Templeman
Lord Goff of Chieveley
Lord Jauncey of Tullichettle
My Lords,
When at the end of September 1984 Johnson Matthey Bankers Ltd. ("J.M.B.") was found to be in deep financial waters it was apparent to the directors of its parent company Johnson Matthey plc ("J.M. plc") that if J.M.B. collapsed its collapse would involve the destruction of the business of J.M. plc. So they set about finding ways and means of averting the collapse of J.M.B. and the agreement with the Bank of England was the result.
The agreement with the Bank of England did not include any contractually binding undertaking by the latter that it would stand by J.M.B., but there was certainly a clear understanding between it and J.M. plc that that was what would happen.
The reason why the Bank of England was prepared to rescue J.M.B. was not, of course, because the Bank had any particular regard for J.M. plc's position, but because it considered that the collapse of J.M.B. would have extremely serious repercussions for the banking world and would therefore be contrary to the public interest. The conditions upon which the Bank of England was willing to rescue J.M.B. were first, that the whole share capital of J.M.B. should be transferred to it for a nominal consideration, and second, that J.M. plc would inject ?50m. into J.M.B. J.M. plc satisfied these conditions and so brought it about that the Bank of England rescued J.M.B. and thus saved J.M. plc's own business. The transfer to the Bank of England of the share capital of J.M.B. was not an end and purpose in itself, but was merely incidental to the purpose of achieving the rescue operation which was in fact achieved. The injection of ?50m. into J.M.B. was on a proper analysis not the payment of the price for getting rid of a burdensome asset, but a contribution required by the Bank of England towards its planned rescue operation, the rest of the funds needed for it being supplied by the Bank of England.
A number of decided cases make it clear that a payment made to get rid of an obstacle to successful trading is a revenue and not a capital payment. I refer in particular to Mitchell v. B.W. Noble Ltd. [1927] 1 K.B. 719; Anglo-Persian Oil Co. Ltd. v. Dale [1932] 1 K.B. 124; and Commissioners of Inland Revenue v. Carron Co. (1968) 45 T.C. 18. This must be no less true of a payment made to save the whole of an existing business from collapse. I am accordingly of the opinion that the decision of the General Commissioners in the present case was correct, and those of Vinelott J. and the Court of Appeal were wrong.
My Lords, for these reasons, and those more fully set out in the speeches of my noble and learned friends Lord Templeman and Lord Goff of Chieveley, I would allow this appeal.
My Lords,
I have had the advantage of reading in draft the speech of my noble and learned friend Lord Keith of Kinkel and the speeches to be delivered by my noble and learned friends Lords Templeman and Goff of Chieveley.
These speeches have persuaded me, on reflection, that the analysis by and the conclusions of Vinelott J. and of the Court of Appeal which, initially, I found attractive, are too narrowly based. For the reasons given by my noble and learned friends I would allow this appeal.
My Lords,
The taxpayer, Johnson Matthey PLC, trades in platinum. In 1984 the taxpayer owned all the shares in Johnson Matthey Bankers Ltd. ("J.M.B."), a company which carried on a banking business and thereby assisted the financing of the taxpayer's platinum trade. On Sunday 30 September 1984 J.M.B. and the taxpayer realised that J.M.B. was unable to pay its debts in full as they fell due and that unless further capital was forthcoming J.M.B. could not open for business the following day. The taxpayer also realised that if J.M.B. ceased business as a result of being unable to meet its debts as they fell due, then the creditors of the taxpayer and in particular the creditors of the taxpayer who were also creditors of J.M.B. would demand immediate repayment of the monies owed to them by the taxpayer and would withdraw the credit facilities which enabled the taxpayer to finance its activities. If J.M.B. could not open for business the following day then the taxpayer could not continue to trade. In these circumstances the taxpayer agreed to sell the shares in J.M.B. to the Bank of England for ?1 and to contribute the sum of ?50 million to the resources of J.M.B. The Bank of England agreed to buy the shares of J.M.B. on those terms. The Bank of England intended and the taxpayer expected that the Bank of England would procure the sums in excess of ?50m. required to satisfy J.M.B.'s creditors. The payment of ?50m. by the taxpayer was necessary and was made to enable the taxpayer to continue to trade in platinum or at all. The objects of the taxpayer were achieved and the taxpayer continued to trade.
Section 74 of the Income and Corporation Taxes Act 1988 , repeating earlier legislation in force in 1984, provides that in computing the amount of the profits of a trade for the purposes of income tax and corporation tax "no sum shall be deducted in respect of — (a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade …". The General Commissioners found and it is not now disputed that the taxpayer's disbursement of ?50m. to J.M.B. was wholly and exclusively laid out for the purposes of the taxpayer's platinum trade; the disbursement was made for the purpose of preserving that trade and for no other purpose. But this finding does not automatically enable the taxpayer to deduct ?50m. in the computation of its profits; the deduction can only be made if the ?50m. was a revenue expenditure and not a capital expenditure. Profits are confined to receipts of an income nature: per Atkin L.J. in Cooper v. Stubbs [1925] 2 K.B. 753 at 775. Conversely, expenses deductible in the computation of profits must be expenditure of a revenue nature: per Viscount Cave L.C. in British Insulated and Helsby Cables Ltd. v. Atherton [1926] A.C. 205 at p. 212 et seq. "the problem of discriminating between … an income disbursement and a capital disbursement … where the item lies on the borderline and the task of assigning it to income or to capital becomes one of much refinement … While each case is found to turn upon its own facts, and no infallible criterion emerges, nevertheless the decisions are useful as illustrations and as affording indications of the kind of considerations which may relevantly be borne in mind in approaching the problem:" per Lord Macmillan in Van den Berghs Ltd. v. Clark [1935] A.C 431 at 438.
In the present case the General Commissioners held:
"that the ?50m. payment was made to preserve the trade of [the taxpayer] from collapse … and, as a payment to preserve an existing business, it was of a revenue nature. We further find that the payment was not converted into a payment of a capital nature by the circumstance that it was associated with the disposal of the J.M.B. shares."
Vinelott J. and the Court of Appeal (Fox, McCowan and Beldam L.JJ.) on the other hand concluded that the ?50m. were paid to get rid of the shares. Vinelott J. [1990] S.T.C. 149 at p. 160 said:
"The purpose of the board of the taxpayer company in agreeing to make that payment was no doubt to preserve the taxpayer company's business. But the means by which that purpose was achieved and indeed … the only means by which it could be achieved was to transfer the shares of J.M.B. to the Bank and part of a single transaction or arrangement to pay ?50m. to J.M.B. and to release J.M.B. from any obligation to repay it. These two elements cannot be severed, the one being treated as the disposal for a nominal consideration of a worthless but not an onerous asset and the other as a payment made to preserve the business of the taxpayer company."
In the Court of Appeal Fox L.J. delivering the leading judgment said at [1991] S.T.C. 259 at p. 265:
"J.M.B. was a capital asset of the taxpayer company … the payment seems to me to be a payment by the taxpayer company to enable it to get rid of a capital asset. That asset was not onerous … but its continued retention was harmful to the taxpayer company. In my view the common sense of the matter is that the ?50m. was capital expenditure."
The facts in the present case are unprecedented but the authorities which speak of the relationship between a payment and a capital asset must be considered.
In British Insulated and Helsby Cables Ltd. v. Atherton [1926] A.C. 205 the taxpayer paid a lump sum as the nucleus of a pension fund for its staff. By a majority the House held that the payment was an expenditure of capital. Viscount Cave said at p. 213 that a "once and for all" payment could be chargeable against profits and instanced a payment made to an employee on retirement and then he continued:
"when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital…. The object and effect of the payment of this large sum was to enable the company to establish the pension fund and to offer to all its existing and future employees a sure provision for their old age, and so to obtain for the company the substantial and lasting advantage of being in a position throughout its business life to secure and retain the services of a contented and efficient...
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