MacNiven v Westmoreland Investments Ltd

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
Judgment Date23 October 1998
Date23 October 1998

Court of Appeal (Civil Division).

Peter Gibson, Pill and Mummery LJJ.

MacNiven (HM Inspector of Taxes)
and
Westmoreland Investments Ltd

David Milne QC and Adrian Shipwright (instructed by Ashurst Morris & Crisp) for the taxpayer.

Christopher McCall QC and Michael Furness (instructed by the Solicitor of Inland Revenue) for the Crown.

The following cases were referred to in the judgment:

C & E Commrs v Faith Construction Ltd TAX[1989] BTC 5121

C & E Commrs v West Yorkshire Independent Hospital (Contract Services) Ltd TAXTAX[1988] BTC 5095 (QBD); [1989] BTC 5121 (CA)

Cairns v MacDiarmid (HMIT) TAXTAX[1982] BTC 74; (1982) 56 TC 556

Ensign Tankers (Leasing) Ltd v Stokes (HMIT) TAXTAXWLRELR[1989] BTC 410 (Ch D); [1992] BTC 110 (HL); [1989] 1 WLR 1222 (Ch D); [1992] 1 AC 655 (HL)

Furniss (HMIT) v Dawson TAXELR[1984] BTC 71; [1984] AC 474

Hyett (HMIT) v Lennard ELR[1940] 2 KB 180

IR Commrs v Burmah Oil Co Ltd TAXTAX[1982] BTC 56; (1981) 54 TC 200

IR Commrs v Duke of Westminster ELR[1936] AC 1

IR Commrs v Fitzwilliam TAXWLR[1993] BTC 8003; [1993] 1 WLR 1189

IR Commrs v McGuckian TAXWLR[1997] BTC 346; [1997] 1 WLR 991

IR Commrs v Willoughby TAXWLR[1997] BTC 393; [1997] 1 WLR 1071

Ramsay (WT) Ltd v IR Commrs ELR[1982] AC 300

Corporation tax - Loss relief - Investment company - Management expenses - Charges on income - By a circular series of transactions taxpayer borrowed from a pension scheme which held its shares to pay accrued interest on loans from the scheme - Whether interest was "paid" - Whether Ramsay principle applied - Income and Corporation Taxes Act 1988 section 75 subsec-or-para (3) section 338 subsec-or-para (5) section 787 subsec-or-para (1)Income and Corporation Taxes Act 1988, ss. 75(3), 338(5)(a), 787(1).

This was an appeal by the taxpayer against a decision of Carnwath J ([1997] BTC 424) allowing an appeal by the Revenue from a decision of the special commissioners who held that a circular payment of interest on a loan made to it by its shareholder with funds provided by a the shareholder was not an avoidance scheme within the principle inWT Ramsay Ltd v IR Commrs ELR[1982] AC 300.

The taxpayer was a property investment company which had suffered in the property depression in the 1970s. It was ultimately owned by a tax exempt approved pension scheme ("the scheme").

The taxpayer had to borrow heavily from the scheme and by 1987 it owed the scheme over £73m including £42m interest, increasing by 1990 to £106m. In 1988, the last of the taxpayer's properties was sold but it invested in a small amount of gilts to protect its status as an investment company.

In 1988 the scheme decided to sell the failing company. It would not be saleable unless it could be sold as an investment company with tax deductible management expenses crystallised as a charge on income to be carried forward, capable for tax purposes of being set against future profits. The unpaid interest rolled up over the years would not be tax deductible unless it was paid. Therefore the trustees of the scheme provided the funds and made arrangements, involving the circulation of loans through another member of the Westmoreland group, to enable the interest to be paid. In effect, the taxpayer borrowed the funds, interest free, from the scheme in order to pay the interest due to the scheme.

The taxpayer contended that the obligations to pay interest were real obligations incurred in consequence of real loans, but a tax loss had not crystalised and would not do so without payment of the interest. The refinancing of the debt might have been achieved by other means such as by varying the terms of the loans without payments being made, but it was open to a taxpayer to choose the payment route as being more advantageous. That, it was submitted, was not tax avoidance but, if anything, tax mitigation, unaffected by the Ramsay principle.

The Revenue contended that Ramsay principle applied; that, applying that principle, the interest was not "paid" within the meaning of theIncome and Corporation Taxes Act 1988 section 338Income and Corporation Taxes Act 1988, s. 338; that if the interest was paid, the payment was not "ultimately borne" by the taxpayer withinIncome and Corporation Taxes Act 1988 section 338 subsec-or-para (5)s. 338(5) but by the scheme; that the payment was not made wholly and exclusively for the purposes of the taxpayer's business within Income and Corporation Taxes Act 1988 section 75 subsec-or-para (3)s. 75(3) of the Act; and that the payment fell within the restriction of relief for payment of interest inIncome and Corporation Taxes Act 1988 section 787 subsec-or-para (1)s. 787(1).

It was accepted before the Court of Appeal that the taxpayer was at the material time an "investment company" within Income and Corporation Taxes Act 1988 section 130s. 130 of the 1988 Act.

Held, allowing the taxpayer's appeal:

1. The method adopted of paying the interest amounted to tax mitigation, not tax avoidance. The taxpayer had a genuine accrued interest liability under genuine loans, and it was in its commercial interest to refinance its indebtedness. The obligation to pay interest being a real one, must be treated as a "payment" within the meaning of Income and Corporation Taxes Act 1988 section 338s. 338. It was not therefore open to the Revenue, as a matter of statutory construction, to deny the consequences of the exercise of rights under Income and Corporation Taxes Act 1988 section 75 section 388ss. 75 and 388 of the 1988 Act, even if a tax purpose influenced the choice. The fact that the original creditor provided the funding to discharge the accrued interest liability to it did not make the payment of the interest not a reality:Ensign Tankers (Leasing) Ltd v Stokes (HMIT) TAX[1989] BTC 410 at p. 477, per Millett J applied; IR Commrs v Burmah Oil Co Ltd TAX[1982] BTC 56 and WT Ramsay v IR CommrsELR[1982] AC 300 distinguished.

2. The payments of interest were "ultimately borne" by the taxpayer. The statutory reference in Income and Corporation Taxes Act 1988 section 338 subsec-or-para (5)s. 338(5) to the payment not being ultimately borne by the payer referred to situations where a third party made a contribution to the payer, such as where there was a joint and several liability with another from whom a contribution was obtainable.

3. The payment of interest was wholly and exclusively made for the purposes of the taxpayer's business within Income and Corporation Taxes Act 1988 section 75 subsec-or-para (3)s. 75(3), although the scheme had the incidental purpose of enhancing the taxpayer's saleability.

4. The payment of interest did not fall within the restriction of relief for payment of interest in Income and Corporation Taxes Act 1988 section 787 subsec-or-para (1)s. 787(1) which applied where the sole or main benefit that might be expected to the payer was the obtaining of a reduction in tax liability.

JUDGMENT

Peter Gibson LJ: It is now more than 17 years since the House of Lords in WT Ramsay Ltd v IR Commrs ELR[1982] AC 300 ("Ramsay") made what Lord Diplock in IR Commrs v Burmah Oil Co Ltd TAXTAX[1982] BTC 56 at p. 58; 54 TC 200 at p. 214 ("Burmah") was to describe as-

a significant change in the approach adopted by this House in its judicial role to a pre-ordained series of transactions (whether or not they include the achievement of a legitimate commercial end) into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence of those particular steps would have been payable.

The scope of the applicability of the new approach is still being explored in the courts. The primary issue in this appeal is whether theRamsay principle has application to the circumstances of the present case.

It is an appeal by the taxpayer, Westmoreland Investments Ltd ("WIL"), from the order of Carnwath J on 24 July 1997 ([1997] BTC 424). The judge allowed an appeal by the Revenue from the decision dated 11 December 1996 of the special commissioners (Mr DA Shirley and Mr THK Everett). They had allowed an appeal by WIL against the refusal by the Revenue of WIL's claim to treat as charges on income (and therefore to deduct against the total profits for the periods under appeal) payments of accrued interest made by WIL in 1988, 1989 and 1990. The judge's judgment is now reported, together with the decision of the special commissioners ([1997] BTC 424), and it is unnecessary to rehearse the facts in full.

WIL was incorporated in 1968. Prior to 24 May 1983 it became wholly owned by the Electricity Supply Pension Scheme ("the scheme"), an exempt approved scheme not liable to tax on interest paid to it. On that date WIL became a subsidiary of another company wholly owned by the scheme. Its principal activity over the years has been as a holding company for a group of companies with investments and developments in commercial property in the UK and elsewhere. But it did not prosper, suffering from the property slump in the 1970s. It had to borrow heavily from the scheme but was unable to pay the accruing interest in full. By 31 March 1987 it owed the scheme over £73m including more than £42m accrued interest. In the year to March 1988 the last of its properties was sold, but it had invested in a small amount of gilts to protect its status as an investment company for tax purposes. Its balance sheet showed an excess of liabilities over assets of some £74m in 1987, £85m in 1988, £97m in 1989 and £106m in 1990. All those liabilities were owed to the scheme.

Consideration was given by the scheme and its advisers to what should be done with WIL. It had a huge accrued interest liability, but this was of no benefit to WIL (or the scheme as the ultimate owner of WIL) unless it actually paid that interest. If it did so, the interest could be set off against profits or if there were no profits, it could be carried forward as excess management expenses to be...

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