McNiven (Inspector of Taxes) v Westmoreland Investments Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 24 July 1997 |
| Date | 24 July 1997 |
| Court | Chancery Division |
Chancery Division.
Carnwath J.
Christopher McCall QC (instructed by the Solicitor of Inland Revenue) for the Crown.
David Milne QC and Adrian Shipwright (instructed by Ashurst Morris & Crisp) for the taxapyer.
The following cases were referred to in the judgment:
Barnett v Brabyn (HMIT) TAX[1996] BTC 345
C & E Commrs v Faith Construction Ltd TAXTAX[1987] BTC 5111; [1989] BTC 5121 (CA)
Cairns v MacDiarmid (HMIT) TAXTAXTAX(1982) 56 TC 556; [1982] BTC 74; [1983] BTC 188 (CA)
Edwards (HMIT) v Bairstow ELR[1956] AC 14
Ensign Tankers (Leasing)Ltd v Stokes (HMIT) TAXTAXTAX(1992) 64 TC 617; [1989] BTC 410; [1992] BTC 110 (HL)
EYL Trading Co Ltd v IR Commrs TAX(1962) 40 TC 386
FPH Finance Trust Ltd v IR Commrs TAX(1944) 26 TC 131
Furniss (HMIT) v Dawson ELRTAX[1984] AC 474 ; [1984] BTC 71
Henry Briggs, Son & Co Ltd (in liquidation) v IR CommrsTAX(1960) 39 TC 410
IR Commrs v Burmah Oil Co Ltd TAXTAX(1982) 54 TC 200; [1982] BTC 56
IR Commrs v McGuckian TAX[1997] BTC 346
Pigott (HMIT) v Staines Investments Ltd TAX[1995] BTC 90
Tod (HMIT) v South Essex Motors (Basildon) Ltd TAXTAX(1987) 60 TC 598; [1988] BTC 78
WT Ramsay Ltd v IR Commrs ELR[1982] AC 300
Corporation tax - Loss relief - Failing property company ran down investments keeping a minimum to retain status as investment company - By a circular series of transactions taxpayer borrowed from its shareholder to pay interest accrued on loans from the shareholder - Whether taxpayer remained an "investment company" - Whether interest was "paid" - Income and Corporation Taxes Act 1988 section 75 section 130 section 338 subsec-or-para (3)Income and Corporation Taxes Act 1988, ss. 75, 130, 338(3)(a).Assessments agreed with inspector - Whether determination by agreement limited to the year in question or whether agreement covered future years - Taxes Management Act 1970 section 54 subsec-or-para (1)Taxes Management Act 1970, s. 54(1).
This was an appeal by the Revenue against a decision of the special commissioners (Sp C 109) that the taxpayer was an investment company within the Income and Corporation Taxes Act 1988 section 130Income and Corporation Taxes Act 1988, s. 130 at the relevant time and, notwithstanding that interest was paid as a result of a tax avoidance scheme, the interest was deductible underIncome and Corporation Taxes Act 1988 section 338s. 338 of the Act.
The taxpayer ("WIL") was a property investment company in a group which had suffered in the property depression in the 1970's. It was ultimately owned by a tax exempt approved scheme ("the scheme").
It was decided to wind down the group and, as part of that process, nil interest loan stock issued at a premium in 1980 was redeemed and new interest-bearing stock was arranged. The main purpose of that was to provide an interest charge, which would be available to set against income and profits on the sale of properties over the next two to three years.
In the event there were not sufficient profits and WIL was unable to meet the interest payments. By 1987 WIL owed the scheme some £42m accrued interest.
All the properties had been sold by March 1985 except one which was sold in 1988 leaving WIL with assets of small amounts of gilt-edged stock and some bank deposits.
In 1988 it was decided to sell WIL, but it would not be saleable unless it could be sold as an investment company with tax deductible management expenses and interest, but the unpaid interest rolled up over the years was not 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 WIL to pay the interest.
Also, to maintain its status as an investment company, an income-producing property was acquired in 1989.
In December 1990 the scheme trustees sold WIL with outstanding liabilities for a nominal sum, all interest having been paid up to date.
WIL appealed to the special commissioners against assessments to corporation tax for six periods between 1987 and 1992 made on the basis that the payments of interest made by WIL in 1988 to 1990 were not available for set-off and disallowing excess management expenses in 1988-90 on the ground that WIL was not an investment company during the relevant period.
The special commissioners found that WIL never fell out of the definition of an investment company in Income and Corporation Taxes Act 1988 section 130s. 130 of the 1988 Act. It was run down, but it did not cease to hold investments. They also found that the loans made to WIL by the scheme were real loans and WIL used them for real purposes, i.e. the discharge of earlier outstanding loans and the payment of real accrued interest.
The Revenue did not dispute that WIL was an investment company both before 1988 and after 1990, but they contended that in the intervening years it had disposed of its property investments. A company which had effectively closed down its operations was not an investment company. The same was true of a company which had not completely closed down its investment operations but maintained them to a limited extent, calculated to produce the appearance of an investment company.
In relation to payment of accrued interest, the Revenue contended that what were asserted to be payments of interest by WIL, were not "payments" within the meaning of Income and Corporation Taxes Act 1988 section 338s. 338 of the 1988 Act. The purported payments were effected by an artificial circulation of money designed purely for the purpose of a tax advantage. The sole or main benefit expected as a result of the arrangements was the obtaining of reduction in tax. Consequently, the transactions enabling the interest to be paid were to be ignored.
An agreement under the Taxes Management Act 1970 section 54Taxes Management Act 1970, s. 54 had been reached as to "excess management expenses" in the year to 1988 in relation to management expenses. WIL contended that the inspector had agreed not only the computations as they affected that year, but also the amount of excess management expenses which could be carried forward.
Held, allowing the Revenue's appeal in part:
1. Whether WIL was an investment company after the sale of the one remaining property in 1988 was a question of fact for the commissioners who were entitled to look at the activities of WIL over a longer period than the years under review, and to conclude that there had been no definite change in the type of business. Accordingly, it was accepted that WIL was and remained an investment company as defined byIncome and Corporation Taxes Act 1988 section 130s. 130 of the 1988 Act in the relevant period.
2. The arrangements, whereby funds were provided to pay the accrued interest, were a pre-ordained series of transactions. Although they had real business consequences, but whether that was a legitimate commercial end was beside the point. What mattered was that the arrangements for transfer of funds enabling WIL to pay the accrued interest were steps inserted for no commercial purpose apart from the avoidance of liability to tax, that is the conversion of a notional interest obligation, which had no tax significance, into one which could be used to reduce future tax liabilities. The result of that process was that the payments were treated for tax purposes as never having happened. The interest payments were not "payments" within Income and Corporation Taxes Act 1988 section 338 subsec-or-para (3)s. 338(3)(a) of the 1988 Act.: WT Ramsay Ltd v IR Commrs [1982] AC 300 followed.
3. The statutory machinery for a particular year was limited to determining the amount of tax for that year. There was no jurisdiction to determine the amounts due in future years Tod (HMIT) v South Essex Motors (Basildon) LtdTAX [1988] BTC 78 andBarnett v Brabyn (HMIT)TAX [1996] BTC 345 followed.
By originating motion pursuant to the Taxes Management Act 1970 section 56ATaxes Management Act 1970, s. 56A (as substituted by SI 1994/1813SI 1994/1813 with effect from 1 September 1994), the Revenue appealed to the High Court against the following decision of the special commissioners (Mr DA Shirley and Mr THK Everett) released on 11 December 1996.
1. Westmoreland Investments Ltd ("WIL") appeals against assessments to corporation tax for the following six periods:
1 April 1987-31 March 1988
1 April 1988-31 March 1989
1 April 1989-31 March 1990
1 April 1990-30 November 1990 (following a change in its accounting date)
1 December 1990-90 November 1991
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 Income and Corporation Taxes Act 1988 part XIV chapter 1Ch. 1 of Pt. XIVIncome 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...
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