MacNiven v Westmoreland Investments Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 01 January 1996 |
| Date | 01 January 1996 |
| Court | Special Commissioners (UK) |
special commissioners decision
1. Westmoreland Investments Ltd ("WIL") appeals against assessments to corporation tax for the following six periods:
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1 April 1987-31 March 1988
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1 April 1988-31 March 1989
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1 April 1989-31 March 1990
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1 April 1990-30 November 1990
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(following a change in its accounting date)
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1 December 1990-30 November 1991
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1 December 1991-30 November 1992
2. WIL was incorporated in 1968 as a property holding company. Its major shareholders were the trustees of the Electricity Supply Industry's two Superannuation Schemes which became merged into one Scheme, the Electricity Supply Pension Scheme, on 1 April 1983. Prior thereto, by the end of 1978, the Schemes had bought out all the other shareholders. On 24 May 1983 WIL became a subsidiary of Millbank Securities Ltd ("MSL") which was wholly owned by the Electricity Supply Pension Scheme. We shall refer to the Superannuation Schemes and the Pension Scheme as "the Scheme". At all material times the Scheme was an exempt approved scheme for the purposes of Chapter 1 of Part XIV Income and Corporation Taxes Act 1988 and predecessor enactments.
3. In general terms, the issue is whether payments of accrued interest made by WIL in 1988, 1989 and 1990 on loans made to WIL by the Scheme in 1980 and in subsequent years are available for set off against WIL's profits for the accounting periods under appeal. Very briefly, it is the Crown's contention there was neither a payment nor a payment of interest, but if there were a payment of interest it accepts that the interest was "annual" or "yearly" interest. We give our decision in principle only.
4. The statutory context in which the issue arises is section 75 of the Income and Corporation Taxes Act 1988, which provides so far as material -
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(1) In computing for the purposes of corporation tax the total profits for any accounting period of an investment company resident in the United Kingdom there shall be deducted any sums disbursed as expenses of management (including commissions) for that period, except any such expenses as are deductible in computing profits apart from this section.
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…
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(3) Where in any accounting period of an investment company the expenses of management deductible under subsection (1) above, together with any charges on income paid in the accounting period wholly and exclusively for purposes of the company's business, exceed the amount of the profits from which they are deductible -
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(a) the excess shall be carried forward to the succeeding accounting period; and
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(b) the amount so carried forward to the succeeding accounting period shall be treated for the purposes of this section, including any further application of this subsection, as if it had been disbursed as expenses of management for that accounting period…
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5. The Crown accepts that WIL was an "investment company" as defined in section 130 of the Act from 1968 to 1988 (31 March) and from 1990 onwards. It does not admit that WIL was such a company in the years 1988/89 and 1989/90.
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(2) There is in evidence a statement of facts not disputed by the Crown.
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(3) There are three volumes of documentary evidence.
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(4) Two witness statements were put in on behalf of WIL upon which the witnesses were cross-examined by Mr Christopher McCall QC who appeared on behalf of the Crown.
The witnesses were -
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(a) William Brian Matthews FCA who was appointed by the Electricity Council in 1981 as Controller - Finance and Administration in its Superannuation Department. He remained in the post until 1996 by which time he had also become finance director of ESN Pension Management Group Ltd and of the Scheme.
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(b) Jack Allan Ferguson who until his retirement in 1996 was an Insolvency Administrator with Coopers and Lybrand. In 1976 he was an insolvency administrator with W H Cork Gully & Co whose business merged in 1980 with the insolvency practice of Coopers & Lybrand. He was appointed a director of WIL on 22 February 1980. We accept the evidence of both witnesses who were commended to us (by the Crown) as "transparently honest".
7. The Facts
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(2) In essence the principal activity of WIL over the years has been as the holding company for Westmoreland Properties Limited Group of Companies which had investments and developments in commercial properties in the United Kingdom and other parts of the world. The number of companies in the Group has fluctuated. In 1980 there were about 100 subsidiary companies, many "single unit property companies" (Ferguson para 13). There were at that time 17 "principal subsidiaries". In 1989 there were 5 such companies.
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(3) WIL and the Group suffered in the property depressions of the 1970s. In 1974 a reduction of £18,163,938 in capital reserve was made in WIL's accounts. In 1975 there was a £9.1m shortfall on realisation of properties and a further shortfall on realisations in 1976 amounting to £6.5m.
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(4) On 23 August 1976 WIL issued £16.5m nominal value Convertible Unsecured Nil Interest Loan Stock at an issue price of £9.5m. This was redeemable in 1982 at its face value, i.e. at a redemption premium of £7m. The loan stock was constituted by a trust deed.
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(5) In late 1970s WIL's position caused concern. On 18 July 1979 the directors of WIL considered a memorandum from the Secretary proposing that the £16.5m Loan Stock 1982 be redeemed and be replaced by a new stock of £9.5m at a market rate of interest. This followed a recommendation by Peat, Marwick, Mitchell & Co and it would have a resultant benefit in the balance sheet of the Group equating with the amount already provided from reserves for amortisation purposes. The directors considered the proposal further on 19 September 1979.
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(6) W H Cork Gully & Co ("Cork Gully") were asked to advise the Scheme Trustees later in 1979. The deputy chairman of the Electricity Council, Mr A W Bunch, was authorised to work with Sir Kenneth Cork to obtain the best possible results for the Scheme from the unquoted investment portfolio which included WIL.
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(7) Cork Gully published their Report on 21 February 1980. it was written "by businessmen for businessmen". The investigation provided no evidence of misappropriation or misapplication of funds. There appeared to have been some incompetence and some optimistic valuations. The report was discussed. It was decided that an orderly wind-down of the business would produce the best result as long as the continued support of the Scheme was available. The trustees took the view that an institution of their standing had no real alternative but to support their companies. This strategy of continuing the business as a going concern avoided the dangers of forced sale realisations by third party appointed receivers (Mr Ferguson's evidence and Mr Matthew's to that effect, para 11).
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(8) In a chapter XII headed "Exceptional Matters" the Report refers in subheading (v) to "Treatment of Nil Interest Bearing Loan Stock" (paragraph 71 of the Report). It reads as follows:
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71. If as anticipated that there will be income and Profits on sale of Properties in the ensuing 2/3 years, it will be of considerable benefit from the taxation point of view to have charges available to offset such profits. Accordingly therefore, we would recommend that the above Stock should be redeemed and a new Interest Bearing Stock carrying a coupon of 15-17% should be arranged. This will provide an Interest charge of approximately £1.5 million per annum and will thus avoid the payment of a considerable amount of Tax.
(9) On 31 March 1980 WIL entered into two loan agreements (there being then two Schemes). One was for £2,612,500 and the other for £6,887,500, giving a total of £9.5m. The rate of interest was 17% which in Cazenove's opinion (A 112) was a fair rate on 28 March 1980 in current conditions. The loans were to be repaid on 31 March 1982. Repayment of the Convertible Unsecured Loan Stock 1982 took place on the same day, 31 March 1980, thereby saving payment of a premium of £7m in 1982.
(10) The Scheme made other loans to WIL in the first three months of 1980 (A 114). The total amount loaned to WIL as at 31 December 1980 was £1,907,400 and there was accrued unpaid interest of over £2m (A 125A [T/P1]. The Scheme made further loans. Some interest was paid usually but not always with the help of another loan. By 31 March 1987 WIL owed the Scheme £73,747,758. This included £42,206,307 interest accrued but unpaid and advances of £31,541,451. Interest of £50,000 was paid in that year (agreed facts, para 11). Looking at a spread sheet (IRI) summarising WIL's balance sheets, "Due to shareholders" progresses from £18,409,911 (31 December 1979) to £106,050,681 (31 March 1990). There is a corresponding progression in the Group's net liabilities (-£19,219,945 to -£101,887,949) (IR3). That is the general outline.
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(i) By 31 March 1985 all the properties had been sold except one, Albert Embankment, which stood at a value of £825,000. In 1979 the value of properties had been £40,231,725.
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(ii) On 28 February 1985 WIL sold Westmoreland Properties Ltd. It acquired listed investments at a cost of £9,935.
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(iii) In the year to 31 March 1986 the Directors reported that WIL continued to hold investments which comprise government security stock and property. Bank interest receivable amounted to £41,451 (Group £56,664). Gross rental income was £3,677 but outgoings amounted to £6,676. WIL's bank balance was £258,684 (Group £259,882). Listed investments increased to £115,879 (cost) and income received under deduction of tax was £1,215.
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(iv) In the year to 31 March 1987 property remains at £825,000. Net rental income is £12,527 (Group). Interest receivable is £41,451 (Group £45,316). Listed investments remain the same, but income received under deduction of tax is increased to £13,715 (and substantially...
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