Lloyds Bank Leasing (No 1) Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 August 2015 |
| Neutral Citation | [2015] UKFTT 401 (TC) |
| Date | 14 August 2015 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Colin Bishopp, Judge Rachel Short
Mr Jonathan Peacock QC and Mr Michael Ripley, counsel, instructed by Norton Rose Fulbright, appeared for the appellant
Mr David Ewart QC, Mr Raymond Hill and Ms Stephanie Barrett, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Corporation tax – Writing-down allowances – Ships – Capital Allowances Act 2001 (CAA 2001), s. 123(4) – Whether obtaining of allowance main object, or one of the main objects of the relevant transactions – Yes – Appeal dismissed.
The First-tier Tribunal (FTT) dismissed the taxpayer's appeal regarding capital allowances. The FTT found that writing down allowances were not available on two ships ultimately leased to non-UK resident lessees because the obtaining of the allowances was a main object, or one of the main objects of the transactions which the various parties entered into. This case had been remitted back to the FTT by the Court of Appeal (in R & C Commrs v Lloyds TSB Equipment Leasing (No 1) Ltd TAX[2014] BTC 37), which found that the original FTT had not properly considered the main objects question.
Lloyds TSB Equipment Leasing (No 1) Ltd (LEL) (now Lloyds Bank Leasing (No 1) Ltd) bought two ships designed to transport liquefied natural gas. LEL entered into a 30 year finance lease with separate joint venture companies (Northern LNG I and Northern LNG II) in respect of the ships. The two Northern LNG companies then granted bareboat charters to K-Euro (a UK resident company) and an existing time charter was novated by K-Line (a Japanese company and the holding company of K-Euro) to K-Euro. K-Euro then contracted out the manning and maintenance of the ships to an associated company. LEL claimed 25% writing-down capital allowances on the cost of the ships.
HMRC disallowed the claim for capital allowances on the basis that the ships were not being used for a qualifying purpose and, if they were, the main object, or one of the main objects, of the arrangements was to obtain capital allowances.
In the original FTT decision (Lloyds TSB Equipment Leasing (No 1) Ltd TAX[2012] TC 01745), the FTT looked at four issues, but the only issue of relevance in this case was whether (under Capital Allowances Act 2001 (CAA 2001), s. 123(4)) the main object, or one of the main objects, of any transaction or series of transactions which included the letting of the ships or charter was to obtain the 25% writing down allowance claimed by LEL. The original FTT considered this issue in depth and ruled in favour of LEL, concluding that obtaining capital allowances was not the main object of the transactions.
In the Upper Tribunal (UT) case (R & C Commrs v Lloyds TSB Equipment Leasing (No 1) Ltd TAX[2013] BTC 2,016), the UT Judges were unable to reach agreement on this issue so the decision to dismiss the appeal on this issue was only made by Mr Justice Newey having the casting vote.
The Court of Appeal (in R & C Commrs v Lloyds TSB Equipment Leasing (No 1) Ltd TAX[2014] BTC 37), found that the original FTT had not properly considered the question of whether the main object, or one of the main objects, of the transactions in the case was to obtain a 25% writing-down allowance. Lord Justice Rimer considered that the original FTT had been wrong to consider the main object test in Finance Act 1971, Sch. 8, para. 3(1) as similar to the main object test in CAA 2001, s. 123(4) and was probably wrongly influenced by Barclays Mercantile Industrial Finance Ltd v Melluish (HMIT) TAX[1990] BTC 209 into its understanding that, provided all the transactions were entered into for genuine commercial reasons, the obtaining of the capital allowances was necessarily an immaterial, subservient consideration. In the Court of Appeal's view even if each of the transactions was entered into for a genuine commercial purpose, it may still be the case that a main object of structuring them in the way they were was to obtain the capital allowances. The Court found that the FTT's decision that the main object, or one of the main objects, of the arrangements was not to obtain capital allowances to be virtually unreasoned. The Court of Appeal therefore decided to set aside the decision of the FTT and remit LEL's appeal to be heard again by the FTT to reconsider this issue.
The two original FTT judges had retired and therefore the remitted case was heard by a newly constituted panel. The FTT found that it was required to: identify the correct test, in light of the Court of Appeal's conclusions; extract the evidence and findings of relevance to this issue from the original FTT's decision; and apply the test to the facts.
The FTT found that CAA 2001, s. 123(4) was not only aimed at those who entered into artificial or contrived arrangements, or transactions with no other purpose than the securing of an allowance, but were rather aimed at limiting the availability of allowances to ships purchased outright by an established UK shipping company and leased to an overseas customer, while excluding those who take steps to bring themselves into a position to satisfy the conditions imposed by CAA 2001, s. 123(1), even if they do so for parallel commercial reasons or even a paramount commercial purpose.
The FTT accepted that the original FTT were right to conclude that the paramount objects of the transactions were commercial and they also accepted that K-Line had committed itself, prior to the transactions, to enter into the arrangements whether or not the allowances were available, albeit the financial terms on which it did so would be different. However the FTT found that, without the capital allowances, it was less likely that K-Euro would have participated. Even if the FTT were satisfied that K-Euro would have entered into the bareboat charters and the time charter novation agreements whether or not the allowances were available, the FTT did not find it possible to agree with LEL that the availability of the allowances was no more than a subsidiary consideration and in fact the FTT were persuaded that the original FTT's findings could only lead to the conclusion that the agreements were structured as they were not only for commercial reasons but also in order that the requirements of the tax legislation be met, and that correspondingly the securing of the allowances was a main object of the transactions, or at least some of them. The FTT found that although the transactions would have gone ahead in some form driven by their paramount commercial purpose, regardless of the availability of the allowances, it was unlikely that they would have taken the form they did but for the possibility that allowances would be available. The FTT therefore found that, based on the original FTT's findings of fact and in light of what the Court of Appeal said, the obtaining of capital allowances was a main object, or one of the main objects, of the transactions into which the various parties entered, and particularly of the bareboat charters, and the FTT accordingly dismissed LEL's appeal.
Although this case looks at the main object test in respect of the overseas leasing of ships and aircraft, it is likely to be of interest to other taxpayers where the main object test is an issue. However note should be taken of L J Rimmer's comments in the Court of Appeal decision in which he criticised the original FTT for treating the main object test in one part of the tax legislation as similar to that in another part of the legislation.
[1] The issue in this appeal is whether the appellant, now known as Lloyds Bank Leasing (No 1) Ltd but formerly known as Lloyds TSB Equipment Leasing (No 1) Ltd and to which, like others before us, we shall refer as LEL, is entitled to writing-down capital allowances in respect of the expenditure of £198,226,884 which it incurred in the purchase of two ships, the Arctic Voyager and the Arctic Discoverer, for which it contracted in 2002 and which were delivered in 2006. LEL is a UK-registered company carrying on the business of finance leasing. It paid instalments towards the price of the ships in 2002, 2003, 2004 and 2005, and claimed allowances for the amount paid in its corporation tax returns for the period ending on 30 September in each of those years; the claims were not challenged at the time. It made a further claim in respect of the balance of the price, which was paid in 2006. On this occasion the respondents, HMRC, challenged the claim, and made an amendment to the relevant return which had the effect of denying the claim for 2006 and, by means of a balancing charge, of recovering the allowances which had been claimed in the earlier years.
[2] LEL appealed to this tribunal against that amendment. Its appeal was heard in September 2011 by a panel composed of Judges Sadler and Shipwright (the FTT). There were four issues before the FTT, to the detail of which we shall come. They decided issues 1, 2 and 4 in favour of LEL, and issue 3 in favour of HMRC but, as success on issues 1, 2 and 4 was sufficient, the appeal was determined in LEL's favour: see [2012] TC 01745.
[3] HMRC sought and obtained permission to appeal to the Upper Tribunal, and their appeal came before a panel of Newey J and Judge Nowlan in 2013. They agreed with the FTT on issues 1, 2 and 3, but whereas Newey J also agreed with the FTT on issue 4, Judge Nowlan did not. However, as Newey J had a casting vote, the FTT's decision was upheld: see [2013] BTC 2,016.
[4] The matter then proceeded to the Court of Appeal in June 2014. By this stage, HMRC challenged only the decision on issue 4, while LEL, by respondent's notice, appealed against the decision on issue 3 (which was whether issue 4 arose for consideration at all). Rimer LJ (with whom Patten and Kitchin LJJ agreed) rejected LEL's appeal, but allowed HMRC's appeal in respect of issue 4, by setting aside...
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