Minsham Properties Ltd v Price (Inspector of Taxes) ; Lysville Ltd v Same
| Jurisdiction | England & Wales |
| Judgment Date | 26 October 1990 |
| Date | 26 October 1990 |
| Court | Chancery Division |
Chancery Division.
Vinelott J.
Mr Andrew Park QC and Mr David Unwin (instructed by Brecher & Co) for the taxpayers.
Mr Alan Moses QC (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Cairns v MacDiarmid (HMIT) TAXTAX(1982) 56 TC 556; [1983] BTC 188
Corinthian Securities Ltd v Cato TAX(1969) 46 TC 93
Eyles v Ellis ENR(1827) 4 Bing 112
Garforth (HMIT) v Newsmith Stainless Ltd TAX(1978) 52 TC 522
IR Commrs v Doncaster TAX(1924) 8 TC 623
IR Commrs v Holder TAX(1931) 16 TC 540
IR Commrs v Oswald ELR[1945] AC 360
Paton (as Fenton's Trustee) v IR Commrs TAX(1938) 21 TC 626
Corporation tax - Interest - Interest on informal loan from parent to subsidiary company credited by book entry - Accrued interest added to principal - Whether short interest or yearly interest - Whether interest "paid" - Income and Corporation Taxes Act 1970 section 248 subsec-or-para (1) section 248 subsec-or-para (3)Income and Corporation Taxes Act 1970, sec. 248(1), 3(a) (now Income and Corporation Taxes Act 1988 section 338 subsec-or-para (1) section 338 subsec-or-para (3)Income and Corporation Taxes Act 1988, sec. 338(1), 3(a)).
This was an appeal by two companies ("Minsham" and "Lysville") from the decision of a special commissioner that accrued interest on a loan to Minsham from its parent company was yearly interest within the meaning of the Income and Corporation Taxes Act 1970 section 248 subsec-or-para (3)Income and Corporation Taxes Act 1970, sec. 248(3)(a) but was not deductible from Minsham's total income underIncome and Corporation Taxes Act 1970 section 248 subsec-or-para (1)sec. 248(1) because it was not "paid".
The two taxpayer companies were wholly-owned subsidiaries of SBA. In June 1983 Minsham had a bank overdraft of some £270,000 which was extinguished by the payment of that amount by SBA to Minsham's account. Loan accounts for that amount were then opened in the books of Minsham and SBA with a balance of £270,000. Since there was no written agreement as to the terms on which the loan was made, the loan was repayable on demand.
Interest at 15 per cent accruing during Minsham's accounting periods ending on 30 September 1984, 1985 and 1986 was credited to SBA by book entry and later added to the SBA's loan account, increasing the amount of the loan.
In each of the accounting periods ending on 30 September 1984 and 1985 Minsham made a loss which it surrendered to Lysville.
In appeals relating to 1984 and 1985 Lysville claimed that the interest on the loan from SBA to Minsham was "short interest". It was repayable on demand and equivalent to the overdraft which it replaced. The interest was therefore deductible in ascertaining the amount of the losses surrendered in those years.
Minsham claimed that if the interest on the loan was yearly interest and not short interest, the accrued amount was nevertheless deductible from its total income under the Income and Corporation Taxes Act 1970 section 248 subsec-or-para (1)Income and Corporation Taxes Act 1970, sec. 248(1) for the period ending 30 September 1986 during which the accrued interest had been transferred to SBA's loan account and added to principal. The question was whether the accrued interest was "paid".
The special commissioner concluded that the interest in question was yearly interest not deductible in ascertaining trading profits and that the accrued interest was not "paid".
Lysville and Minsham appealed to the High Court.
Held, dismissing the taxpayers' appeals:
1. The special commissioner was entitled on the facts to infer that the loan was intended as a long-term commitment to refinance Minsham and could not be regarded in the same way as the overdraft which it replaced. The interest on the loan was therefore not short interest but yearly interest. (Corinthian Securities Ltd v Cato TAX(1969) 46 TC 93 and Cairns v MacDiarmid (HMIT) TAX[1983] BTC 188 considered.)
2. While interest might be regarded as paid by book entry, here the accrued interest was not paid but was added to principal with the result that it was compounded and thereafter itself bore interest. (Paton (as Fenton's Trustee) v IR Commrs TAX(1938) 21 TC 626followed.)
1. At a hearing before me sitting as a single commissioner for the special purposes of the Income Tax Acts on 14 and 15 June 1989, Minsham Properties Ltd ("Minsham") appealed against an assessment to corporation tax for its annual accounting period ending on 30 September 1986.
2. On the same occasion I heard appeals by Lysville Ltd ("Lysville") against the refusal of a claim to group relief for losses surrendered by Minsham for its annual accounting periods ending on 30 September 1984 and 30 September 1985.
3. Minsham and Lysville are wholly-owned subsidiary companies of Shulem Berger Association Ltd ("SBA") and the three appeals turn on the same question of principle, viz., whether any form of deduction or other relief for corporation tax is available for interest which accrued upon indebtedness owned by Minsham to SBA in the three said accounting periods. At the conclusion of the hearing I reserved my decision. A single decision in writing was issued on 20 July 1989.
4. The issues shortly stated were:
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(a) whether the interest payable by Minsham on the loan made to it by SBA was interest other than annual interest and if not;
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(b) whether in the events which happened and are found as facts in my decision the interest on the said loan was "paid" by Minsham within the meaning of Income and Corporation Taxes Act 1970 section 248sec. 248 of the Income and Corporation Taxes Act1970.
5. In addition to an agreed statement of facts the documentary evidence proved or admitted is listed in my decision.
6. The facts and contentions of the parties are set out in my decision. It will be seen therefrom that I answered in the negative both issues in para. 4 above. I dismissed Minsham's appeal and confirmed the assessment for its accounting period ending on 30 September 1986.
7. In addition to the cases referred to in my decision there was also cited in argument Scottish North American Trust Ltd v FarmerTAX(1911) 5 TC 693.
8. Immediately after receipt of my decision Minsham declared to me its dissatisfaction therewith as being erroneous in point of law and on 27 July 1989 required me to state a case for the opinion of the High Court pursuant to the Taxes Management Act 1970 section 56Taxes Management Act 1970, sec. 56.
9. The question of law for the opinion of the court is whether the decisions on the issues in para. 4(a) and (b) above were erroneous in point of law.
I have before me the appeals of two companies, namely Minsham Properties Ltd ("Minsham") and Lysville Ltd ("Lysville") both of which are wholly-owned subsidiary companies of Shulem Berger Association Ltd ("SBA") which is a company having exclusively charitable objects.
Lysville appeals against the refusal of a claim to group relief for losses surrendered by Minsham for its annual accounting periods ending on 30 September in 1984 and 1985. Minsham appeals against an assessment to corporation tax for its annual accounting period ending on 30 September 1986. The three appeals hinge on the one question of principle. The issue is whether any form of deduction or other relief for corporation tax is available for interest which has accrued (using a neutral word) upon indebtedness owed by Minsham to SBA in the three accounting periods. In relation to Lysville this question is relevant because it affects the amount of losses capable of being surrendered by Minsham to Lysville which qualify for group relief under Income and Corporation Taxes Act 1970 section 258sec. 258 of theIncome and Corporation Taxes Act 1970 ("the 1970 Act"). Minsham is and has been for a number of years a company dealing in property.
Mr Andrew Park QC appeared on behalf of Minsham and Lysville. Miss Leeder of the Solicitor's Office, Inland Revenue, appeared on behalf of the Crown.
There were put in evidence:
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(2) an agreed statement of facts;
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(3) accounts and corporation tax computations of Minsham for the annual accounting periods ending on 30 September 1984, 1985 and 1986;
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(4) a folder containing computer print-outs and other documents showing relevant accounting records and entries of Minsham and SBA;
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(5) a reconstructed statement of SBA's loan account with Minsham.
Oral evidence was given by Mr Arnold Cohen of Messrs Cohen Arnold & Co, chartered accountants, the auditors and accountants of Minsham, Lysville and SBA and other associated companies. I shall refer to the firm as Cohen Arnold.
Before I record the facts and the submissions of the parties, it will be convenient to depict the fiscal background to these appeals. It is accepted that if the interest payable by Minsham on the loan to it from SBA is not "yearly interest", it is deductible in computing the annual trading profits or losses of Minsham on an accruals basis, that is to say, whether Minsham pays the interest to SBA or not. If it is yearly interest it cannot be so deducted (Income and Corporation Taxes Act 1970 section 251 subsec-or-para (2)sec. 251(2)(b) of the 1970 Act), but it can qualify for relief as a "charge on income" and be allowed as a deduction against the total profits in computing the corporation tax chargeable for any accounting period of the company if it is "paid by the company in the accounting period" (Income and Corporation Taxes Act 1970 section 248 subsec-or-para (1) section 248 subsec-or-para (2) section 248 subsec-or-para (3)sec. 248(1), (2), (3)(a) and, for group relief, Income and Corporation Taxes Act 1970 section 259 subsec-or-para (6)sec. 259(6)). The principal issues are (1) whether the interest is "short" interest or not and if it is "yearly interest", and (2) whether it is "paid" in any accounting...
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