Overseas Containers (Finance) Ltd v Stoker
| Jurisdiction | England & Wales |
| Judge | THE VICE-CHANCELLOR,LORD JUSTICE PARKER,LORD JUSTICE RUSSELL |
| Judgment Date | 16 March 1989 |
| Judgment citation (vLex) | [1989] EWCA Civ J0316-4 |
| Docket Number | 89/0290 |
| Court | Court of Appeal (Civil Division) |
| Date | 16 March 1989 |
[1989] EWCA Civ J0316-4
The Vice-Chancellor
(Sir Nicolas Browne-Wilkinson)
Lord Justice Parker
Lord Justice Russell
89/0290
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL. CIVIL DIVISION
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(REVENUE LIST)
MR JUSTICE VINELOTT
Royal Courts of Justice
MR A. THORNHILL Q.C. and MR J. WOOLF (instructed by Messrs Freshfields) appeared on behalf of the appellant (plaintiff).
MR P. GOLDSMITH Q.C. and MR A. MOSES (instructed by The Inland Revenue Solicitor) appeared on behalf of the respondents.
This is an appeal from a decision of Vinelott J. who upheld the decision of the Special Commissioners confirming assessments made by the Revenue against Overseas Containers (Finance) Limited ("O.C.F.L."). The decision of the Special Commissioners and the judgment of Vinelott J. are both fully set out in the report of the case at 1987 Simons Tax Cases 547. References to page numbers in this judgment are references to that report. In the circumstances, I will not restate the facts fully in this judgment.
Overseas Containers Limited ("O.C.L.") at all material times carried on a successful and profitable trade as an owner and operator of container ships. Some of the vessels were owned by O.C.L. itself: others were chartered by O.C.L. from four independent shipping companies who between them owned the share capital of O.C.L. In 1967 O.C.L's four shareholders each contracted to purchase vessels to be constructed by a German shipyard and to be operated by O.C.L. The shipyard made loans in Deutschmarks to O.C.L. to finance the construction costs. The Revenue accept that O.C.L's decision to borrow in DM was a purely commercial decision. The interest rates on the loans made by the shipyards were subsidised. Moreover the market rate of interest payable on DM loans was in any event lower than rates for sterling loans, such differential reflecting the relative strengths of the two currencies.
O.C.F.L was formed in March 1969. Its objects were to provide short and medium term finance and to carry out foreign currency transactions and the investment of surplus funds for O.C.L. and its associated companies, i.e. the shareholders, subsidiaries and related companies of O.C.L. ("the O.C.L. Group"). Although several reasons were put forward before the Special Commissioners for the formation of O.C.F.L., the Special Commissioners found that the sole or dominant reason was O.C.L's wish to get the best tax treatment for the financial transactions that O.C.F.L. was formed to carry out, in particular in relation to currency losses on the DM loans.
The tax advantage sought to be obtained was as follows. Loans to O.C.L. in DM carried a risk that sterling would be devalued as against the DM, thereby giving rise to a currency loss on the repayment of the loans. Such currency losses, being capital losses, would not be allowable in computing the tax liability of O.C.L. However, if such losses were to be incurred by a finance company, such as O.C.F.L., in the course of conducting its trade, such losses would be deductible in computing the tax liability of O.C.F.L. If O.C.F.L., after deducting such currency losses, was left with a net loss on its "trading", such loss would, by reason of group relief, be available to be set against the other income of the companies in the O.C.L. Group. By this means currency losses could be taken into account in computing the tax liability of the O.C.L. Group as a whole. This was the tax advantage which it was sought to achieve by interposing O.C.F.L. between O.C.L. and those to whom O.C.L. owed debts expressed in a foreign currency.
It should be noted that the tax advantage would only be obtained if such currency losses were deductible in computing O.C.F.L's profits for tax purposes. In order to be deductible it had to be shown that:
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1. transactions in relation to which O.C.F.L. suffered the currency losses were properly to be regarded as trading transactions of O.C.F.L; and
2. such currency losses were properly to be treated as revenue (as opposed to capital) losses.
Those were the two questions which fell to be determined by the Special Commissioners.
The transactions entered into by O.C.F.L. fell into three categories: first, medium and short term loans required by the O.C.L. Group for financing its capital expenditure; second, handling the monies of O.C.L. Group on the money market; third, dealings in foreign exchange. The medium and short term loan transactions are those which are central to this case. They can be classified as follows:
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(a) The first batch of DM loans: in June 1969 and 1967 loans to O.C.L. were novated so as to substitute O.C.F.L. as the DM debtor to the German shipyards. O.C.F.L. then advanced the sterling equivalent of the loans to O.C.L. These loans totalled DM 218.4m.
(b) The second batch of DM loans: in December 1969 O.C.L. entered into contracts with German shipyards for the construction of five further ships. Under the contract the German shipyards offered financing facilities in the form of medium term loans totalling DM 413.5m. These DM loans were made to O.C.F.L. who again lent the sterling equivalent to O.C.L.
(c) Other loans: there were a substantial number of other medium and short term loans for the purposes of financing the business of O.C.L. which were taken via O.C.F.L. Some were in sterling but most were in foreign currencies.
In the case of all the DM loans at least, payment was guaranteed to the foreign lender by O.C.L. or by a company in the O.C.L. Group. In addition the debts owed to the foreign lender were charged on the ships being purchased by O.C.L. or the O.C.L. Group. Under the arrangements, O.C.F.L. obtained the advantage of the low rate of interest payable on each of the DM loans. On the corresponding sterling loan by O.C.F.L. to O.C.L. a higher rate of interest was payable, such interest being calculated to be the market rate for sterling loans subject to certain adjustments. Therefore, under each of these arrangements O.C.F.L. assumed the whole exchange risk but received a higher rate of interest on the sterling loans to O.C.L. than it had to pay on the DM loans to the German lender ("the interest differential").
The exchange losses incurred by O.C.F.L. from all transactions totalled £41.3m of which over £39m is attributable to the first and second batches of DM loans. As against this, the total of interest received by O.C.F.L. from O.C.L. on the sterling loans exceeded the total interest paid by O.C.F.L. to the foreign lenders by £27.8m. In broad terms, the loss accruing to O.C.F.L. from these transactions was £14.4m after charging certain fees.
The Special Commissioners first dealt with the question whether the short and medium term loans were trading transactions of O.C.F.L. They found (at p.575b) that O.C.F.L. was a mere conduit pipe inserted between O.C.L. and the sources which satisfied O.C.F.L's financial requirements. The offices and staff of O.C.F.L. were effectively those of O.C.L. The only extra burden on such staff was the keeping of separate books of account and the need to determine the market rate of interest payable on the sterling loans by O.C.F.L. to O.C.L. They found that commercially the O.C.L. Group as a whole continued to operate as before and to produce the same trading results as before. The payment of interest by O.C.L. to O.C.F.L. merely transferred income from one company in the group to another company in the same group producing no alteration in the taxable profit of the group as a whole apart from the deductibility of the exchange losses. O.C.F.L. did no business with anyone outside the Group: it did not have the appearance one would expect of a finance company nor did it run the risks one normally associates with a finance company. They said (p.575e) "all in all it strikes us as a very peculiar sort of concern"·
However, they rightly felt bound to treat O.C.F.L. as a separate legal entity. They said (at p. 576d) that the crucial question "is whether O.C.F.L's transactions were of a truly commercial character". They then posed themselves two further "crucial questions" (at p.576h), viz.
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(a) For what purpose was O.C.F.L. formed; in particular was the sole or paramount purpose a trading one or a fiscal one?
(b) If that purpose was a trading purpose, was there sufficient commerciality in what the taxpayer company actually did to justify what it did being called a trading activity?
They then made the following finding of fact (at p.577f—g):
"We find that the only or dominant purpose was to protect the O.C.L. Group from these losses by causing them to accrue to the taxpayer company where, it was hoped, they would qualify as trading losses available to members of the group by way of group relief in the computation of their gains for tax purposes. In other words the sole or dominant purpose was to obtain a fiscal benefit. If, by chance, a profit should ensue which attracted tax that tax was, in effect, the price the group was prepared to pay to secure the allowance for the losses. It follows, and we so hold, the transactions whereby the taxpayer company assumed liability for the two large batches of DM loans in 1969 were entered into with a view to establishing loss claims against the Revenue which would not have been available had they accrued, as they otherwise would have done, in the ordinary course of business to the O.C.L. Group. Such transactions are not in law trading transactions and we so hold".
In the light of this finding and the further finding that the fiscal purpose of O.C.F.L....
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