Mink and Others v HM Inspector of Taxes
| Jurisdiction | England & Wales |
| Judgment Date | 05 November 1998 |
| Date | 05 November 1998 |
| Court | Special Commissioners (UK) |
special commissioners decision
Mr THK Everett and Mr Theodore Wallace
In form, these appeals are by a large number of companies comprised in the Mink Group, covering appeal periods ended between 31 December 1986 and 31 December 1994 inclusive and include appeals against group relief determinations made by the Inspector and (in a smaller number of cases) appeals against Corporation Tax assessments.
In reality however these appeals are concerned with claims by Gerbil Property and Investment Co Ltd ("GPIC") that it is entitled to treat interest accruing from the debts owed by it to Hamster Bank Ltd ("HB") as a charge on income within section 338 Income and Corporation Taxes Act 1988. HB claims not to be required to take that interest into account in computing its profits, save as appears below. We are asked for a Decision in principle only at this stage, the Crown having abandoned its reliance on section 774 Income and Corporation Taxes Act 1988 prior to the hearing.
All of the debts in respect of which interest was charged arose out of property transactions by various banks. HB bought from those other banks the debts owing to them by GPIC (which was then insolvent) at a fraction of the face value of the debts, and continued to charge interest, making provision for the interest considered not to be immediately recoverable.
All references in this Decision are to the Income and Corporation Taxes Act 1988 unless otherwise stated. Section 338 thereof provides as follows, where relevant:
-
338.-(1) …In computing the corporation tax chargeable for any accounting period of a company any charges on income paid by the company in the accounting period, so far as paid out of the company's profits brought into charge to corporation tax, shall be allowed as deductions against the total profits for the period as reduced by any other relief from tax, other than group relief.
-
(2) …"charges on income" means for the purposes of corporation tax-
-
(a) payments of any description mentioned in subsection (3) below, not being dividends or other distributions of the company and
-
(b) -
-
but no payment which is deductible in computing profits or any description of profits for purposes of corporation tax shall be treated as a charge on income.
(3) …the payments referred to in subsection (2)(a) above are -
-
(a) any yearly interest (whether charged to revenue or capital)…
-
(b) any other interest (whether charged to revenue or capital) payable in the United Kingdom on an advance from a bank carrying on a bona fide banking business in the United Kingdom,…
and for the purposes of this section any interest payable by a company as mentioned in paragraph (b) above shall be treated as paid on its being debited to the company's account in the books of the person to whom it is payable.
These appeals raise the following issues on the legislation:
1. Was the interest payable by GPIC to HB a "charge on income" as defined in section 338(2) by virtue of being "payable on an advance from a bank carrying on a bona fide banking business in the United Kingdom" as mentioned in section 338(3)(b)? If the answer to this issue is "yes", GPIC is entitled to a deduction from its profits in respect of interest accruing in favour of HB, regardless of whether or not it was actually paid.
2. If the answer to the question in paragraph 1 above is "no", is GPIC entitled (pursuant to section 338(3)(a)) to a deduction from its profits in respect of interest accruing in favour of HB as and when the interest was actually paid? The answer to this question depends upon whether the interest actually paid by GPIC was "yearly interest".
We received no oral evidence. The evidence before us consisted of a statement of agreed facts and issues (as revised on 19 October 1998) and four bundles in very large lever arch files, very few of the contents of which were opened to us.
From the evidence before us we find the following relevant facts:
1. Throughout the relevant period HB was a bank carrying on a bona fide banking business in the United Kingdom.
2. Throughout the relevant period GPIC owed money to HB.
3. The debt owed by GPIC arose many years ago consequential upon certain transactions which had been entered into three years earlier, relating primarily to the development of certain foreign property ("The Foreign Development"), of which the most important are described below. Brief descriptions of the nature of the instruments are as follows:
-
(a) A Joint Venture Agreement between GPIC, a syndicate of UK banks ("The UK Syndicate") and certain other parties governing the incorporation of a foreign incorporated company involved in the Foreign Development ("Foreign") and the undertaking of certain further transactions, in particular those set out below.
-
(b) A Loan Agreement between a syndicate of non-UK banks ("The Foreign Syndicate") and Foreign.
-
(c) A Guarantee of the Foreign borrowings under the loan agreement given by GPIC and by the UK Syndicate.
-
(d) A Facility Letter under which Foreign agreed to indemnify the UK Syndicate against their liabilities under the guarantee.
-
(e) An Agreement under which GPIC covenanted to indemnify the UK Syndicate in respect of their prospective liabilities under the guarantee and guaranteed Foreign's performance of its obligations under the Facility Letter.
-
(f) A letter by which Foreign agreed to indemnify GPIC in respect of its prospective obligations under its agreement.
4. The members of the UK Syndicate were:
Five well Known UK banks
At all material times the relevant UK banks were banks carrying on bona fide banking businesses in the United Kingdom.
5. Foreign defaulted on its loan repayments under the Loan Agreement and the Foreign Syndicate was entitled to call on the parties to the guarantee to fulfil their obligations under that instrument. In consequence of this the above arrangements were renegotiated and the following further instruments were executed:
(a) A Master Deed between the parties to the Joint Venture Agreement under which the Joint Venture Agreement was cancelled in consideration of the execution and performance of two further agreements, referred to as "the Supplemental Indemnity" and "the New Agreement".
The recitals to the Master Deed included the following:
-
(C) The [foreign] banks represented by [New] have indicated to [GPIC] and the Syndicate Companies that in view of the alleged default … under the [New] Loan the [foreign] Banks will call upon [GPIC] and the Syndicate Companies to meet their entire obligations pursuant to the Guarantee but that if [GPIC, GPIC BV] and the Syndicate Companies enter into the [New] Agreements the [foreign] Banks will inter alia release [GPIC] from its Guarantee obligations and [GPIC BV] from its shareholder obligations to the [foreign] Banks and will extend and increase the loan facilities of the [foreign] Banks.
-
(D) It is part of and contemplated by the [New] Agreement that [one of the UK banks] on behalf of the Syndicate Companies shall make a payment of [the equivalent of £8,510,701 in foreign currency to the foreign] Banks under the Guarantee and in certain events should waive against the SCI or assign for a nominal sum to the [foreign] Banks the indebtedness of the SCI to [one of the UK banks] as a result of such guarantee payment.
-
(E) [GPIC] has guaranteed, undertaken and warranted generally in all respects to indemnify the Syndicate Companies in respect of all obligations undertaken by them in the Guarantee and on, inter alia, [one of the UK banks] making the said payment under the Guarantee [GPIC] will be liable as principal debtor to make certain payments to the Syndicate Companies.
(b) The [New] Agreements under which (inter alia) the UK Syndicate paid [above] the sum of Ffr. 62,896.607.97 to the [foreign] Syndicate.
(c) A Supplemental Deed of Indemnity (being the instrument referred to in the Master Deed as "the Supplemental Indemnity") between GPIC and the UK Syndicate.
This Deed included the following provisions:
-
1. Save only as set out in Clause 7 hereof [GPIC] affirmed and acknowledged to the Syndicate Companies their continuing obligations to the Syndicate Companies under the L&O Indemnity as more particularly described and set out therein and in the recitals to this Deed.
-
2. Whilst so affirming and acknowledging as set out in Clause 1 above and in consideration of the Syndicate Companies giving the time and indulgence referred to in Clause 3 below and agreeing pursuant to the Master Deed to arrange to make the Syndicate Guarantee Payment under and entailing the [New] Agreements and of the other matters agreed to by the Syndicate Companies pursuant to the Master Deed and hereunder and always without prejudice to [GPIC's] obligations as so affirmed and acknowledged the Syndicate...
To continue reading
Request your trial