Lloyds TSB Equipment Leasing (No 1) Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 12 January 2012 |
| Neutral Citation | [2012] UKFTT 47 (TC) |
| Date | 12 January 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2012] UKFTT 47 (TC)
Edward Sadler (Chairman), Adrian Shipwright (Tribunal Judges)
Jonathan Peacock QC and Michael Ripley, counsel, instructed by Norton Rose, for the Appellant
David Ewart QC, Nigel Cooper QC, Raymond Hill, counsel and Stephanie Barrett, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
Corporation tax - capital allowances - finance lease of ship by Appellant - whether ship used for a qualifying purpose within terms of Capital Allowances Act 2001 section 123 subsec-or-para 1section 123(1) Capital Allowances Act 2001 - UK company taking bareboat charter of ship and hiring ship on time charter terms - whether ship let on charter in course of trade including operating ships - yes - whether responsible for navigating and managing the ship and for defraying substantially all operating expenses of ship - yes - whether Capital Allowances Act 2001 section 123 subsec-or-para 4section 123(4) Capital Allowances Act 2001 can apply where Capital Allowances Act 2001 section 110section 110 (rather than Capital Allowances Act 2001 section 109section 109) Capital Allowances Act 2001 is in point - yes - whether on facts one of main objects of the letting of the ship on charter or of any related transaction was to obtain capital allowances: Capital Allowances Act 2001 section 123 subsec-or-para 4section 123(4) Capital Allowances Act 2001 - no - appeal allowed
1.This is an appeal by the company Lloyds TSB Equipment Leasing (No 1) Ltd ("the Appellant") against an amendment made on 24 April 2009 by The Commissioners for Her Majesty's Revenue and Customs ("the Commissioners") to the Appellant's corporation tax self-assessment return for the year ended 30 September 2006.
2.The subject of that amendment, and of this appeal, is a claim made by the Appellant for writing-down capital allowances at the rate of 25 per cent in respect of expenditure incurred by the Appellant on the provision of two vessels designed and built to ship liquefied natural gas ("LNG") from northern Norway to Spain and the United States of America as part of a project for the exploitation of natural gas fields under the Barents Sea by a consortium of energy companies. The Appellant is UK tax resident and carries on a trade of finance leasing: it claims such allowances in the computation, for tax purposes, of the profits of that trade.
3.The total expenditure incurred by the Appellant on the two vessels was £198,226,884. The Appellant contracted to purchase the vessels in September 2002 and the vessels were delivered in the Appellant's accounting period ended 30 September 2006, when the greater part of the expenditure on the provision of the vessels was incurred. Instalment payments were made in earlier periods, and capital allowances were accordingly claimed in those earlier periods for such payments. In total, writing-down allowances of the amounts set out as follows were claimed by the Appellant in the respective years specified:
Year ended 30 September 2002 |
£3,882 |
Year ended 30 September 2003 |
£2,393,318 |
Year ended 30 September 2004 |
£3,964,216 |
Year ended 30 September 2005 |
£17,221,144 |
Year ended 30 September 2006 |
£33,351,994 |
4.The effect of the amendment made by the Commissioners to the Appellant's corporation tax return for the year ended 30 September 2006 is to deny the Appellant's claim to any capital allowances for its expenditure on the vessels and, by way of a balancing charge, to recover in full the allowances claimed and allowed in the earlier periods. The amendment results in an additional amount of corporation tax payable by the Appellant for the year ended 30 September 2006 in the sum of £6,278,877, and to certain penalties payable by the Appellant. The Commissioners' decision to deny the Appellant's claim to capital allowances for its expenditure on the vessels has significance beyond the amendment to its tax return for the year ended 30 September 2006, since, if upheld, that decision precludes the Appellant from claiming writing-down allowances for the balance of its expenditure on the vessels over subsequent accounting periods.
5.The factual background to the dispute between the parties in this case as to the entitlement of the Appellant to claim capital allowances for its expenditure on the provision of the vessels can be summarised as follows:
(2) The natural gas fields under the Norwegian sector of the Barents Sea are being exploited by a consortium of energy companies ("the Snøhvit Sellers") who require a fleet of dedicated and purpose-built vessels to ship the natural gas, in a liquefied state, to its long-term customers. The two vessels acquired by the Appellant ("the Vessels") form part of that fleet;
(3) The Snøhvit Sellers, acting through the lead consortium member, the Norwegian energy company, Statoil ASA ("Statoil") sought an owner and operator of the Vessels who would hire the Vessels to the Snøhvit Sellers on a long-term time charter on commercial terms specified by the Snøhvit Sellers whereby the hire would reflect, over the time charter period, a return of the capital cost of the Vessels and a finance charge on such cost, and also the expenses (or an estimate of the expenses) of operating the Vessels. It was a requirement of the Snøhvit Sellers that, since the Vessels would operate only within the Atlantic Basin, the commercial and technical management of the Vessels in the course of their operation should be located in the European time zone;
(4) After a tender process the mandate to own and operate the Vessels was awarded to one of Japan's largest and oldest shipping companies, Kawaski Kisen Kaisha Limited ("K-Line"). K-Line had a strategic business plan to expand into the LNG carrier business and also to expand its business in Europe and the Atlantic Basin and to manage that business regionally. In December 2001 K-Line entered into the contracts with shipbuilders to purchase the Vessels (the Snøhvit Sellers having, in effect, negotiated the technical and commercial terms of the shipbuilding contracts to ensure that the Vessels met their stringent specifications and requirements) and also entered into the time charter. K-Line reserved the right to introduce other parties to co-own the Vessels, and also the right to re-structure ownership rights and arrangements to accommodate the financing of the Vessels (at the time it entered into the purchase contracts and the time charters, K-Line was actively exploring a number of financing options, including UK finance leases);
(5) At this time K-Line had a UK incorporated and resident subsidiary company, K-Line (Europe) Limited ("K-Euro") which had an established shipping trade comprising the operation of coastal container ships in European waters and a general agency for K-Line's container and car carrier business in Europe. K-Line intended that, howsoever the Vessels might be financed, K-Euro should be the company by which it met the requirements of the Snøhvit Sellers for the commercial and technical management of the Vessels in the course of their operation to be located in Europe;
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(6) In September 2002 K-Line had agreed financing for the Vessels on UK finance lease terms with the Appellant, and to effect such financing the following principal transactions took place at that time:
(a) The shipbuilding contracts for the Vessels were novated so that the Appellant contracted to purchase the Vessels;
(b) In the case of each Vessel respectively the Appellant granted a finance lease of the Vessel to a joint venture company ("Northern LNG"), the shareholders of which included K-Line and Statoil, on terms whereby the equity reversionary value in the Vessel resided in Northern LNG. The primary lease period of the finance lease was thirty years from delivery of the Vessel, with provision for renewable secondary lease periods of one year;
(c) Northern LNG entered into a bareboat charter of each Vessel with K-Euro for a twenty year period (with provision for extension for up to a further ten years) under which K-Euro was entitled to possession and use of the Vessel. The hire payable by K-Euro under the bareboat charter was fixed for the first twelve years and was expressed to be a fair commercial rate;
(d) The time charter for each Vessel between K-Line and the Snøhvit Sellers was novated so as to substitute K-Euro for K-Line as disponent owner;
(e) Detailed and complex security arrangements were put in place to safeguard the interests of the different parties and the flow of payments pursuant to the lease and ancillary arrangements.
(7) The business of K-Euro was expanded from 2002 onwards, in particular by the establishment of a bulk and gas carrier division. For the purposes of that business K-Euro took on time charter, or undertook the management of, a number of LNG and bulk carriers;
(8) With effect from 1 January 2006 the business of K-Euro was reorganised with the result that K-Euro retained its interest in the Vessels by reason of the bareboat and time charters described above, but it contracted out the management of the Vessels to a fellow subsidiary in the K-Line group ("K-LNG"), and also transferred to other fellow subsidiaries all other parts of its business. In addition, the hire payable by K-Euro under the bareboat charters was, for a specified period, reduced. Further (as part of this reorganisation, but not effected until October 2006), the share capital of K-Euro was reorganised so that its shareholders (and their respective shareholding interests) corresponded with those of Northern LNG and its shareholders contributed further share capital. This reorganisation was effected because it was anticipated that, contrary to original expectations, K-Euro would make a substantial loss in operating the Vessels and because certain of the security arrangements with respect to...
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