Overseas Containers (Finance) Ltd v Stoker
| Jurisdiction | England & Wales |
| Judgment Date | 22 July 1987 |
| Date | 22 July 1987 |
| Court | Chancery Division |
Chancery Division.
Mr. D.C. Potter Q.C. and Mr. James Kessler (instructed by Messrs. Freshfields) for OCFL.
Mr. Peter Goldsmith Q.C. and Mr. Alan Moses (instructed by the Solicitor of Inland Revenue) for the Crown.
Before: Vinelott J.
The following cases were referred to in the judgment:
AVCO Financial Services Ltd. v. Federal Commr. of Taxation UNK82 ATC 4246
Beauchamp (H.M.I.T.) v. F.W. Woolworth plc TAX[1987] BTC 298
Coates (H.M.I.T.) v. Arndale Properties Ltd. [1984] 1 W.L.R. 1328;TAX[1984] BTC 438
Davies (H.M.I.T.) v. Shell Co. of China Ltd. TAX(1951) 32 T.C. 133
European Investment Trust Co. Ltd. v. Jackson (H.M.I.T.) TAX(1932) 18 T.C. 1
Hallstroms Pty. Ltd. v. Federal Commr. of Taxation UNK(1946) 72 C.L.R. 634
I.R. Commrs. v. Saxone, Lilley & Skinner (Holdings) Ltd. [1967] 1 W.L.R. 501; TAX(1967) 44 T.C. 122
Lupton (H.M.I.T.) v. F.A. & A.B. Ltd. [1968] 1 W.L.R. 1401;TAX(1968) 47 T.C. 580
Pattison (H.M.I.T.) v. Marine Midland Ltd. [1982] Ch. 145;TAX(1983) 57 T.C. 219
Reed (H.M.I.T.) v. Nova Securities Ltd. [1985] 1 W.L.R. 193;TAX[1985] BTC 121
Sun Newspapers Ltd. v. Federal Commr. of Taxation UNK(1938) 61 C.L.R. 337
This was an appeal by the taxpayer company against a determination of the Special Commissioners that transactions involving borrowing Deutschmarks and lending an equivalent sum in sterling to its parent company were not trading transactions.
Overseas Containers Ltd. ("OCL") was formed in 1965 by four major shipping companies as the medium through which they could enter the expanding world-wide container market. The taxpayer company ("OCFL") was incorporated in 1969 as a subsidiary of OCL to take over some functions of its finance division. On 16 June 1969, when a sterling devaluation was expected, OCFL assumed liability for existing loans in Deutchmarks which OCL had incurred for the construction of five ships in Germany, repayable over six and a half years. OCFL became indebted to the German lender and OCL became indebted to OCFL for the sterling equivalent of the loans as of that date.
In December 1969 arrangements were made for OCFL to borrow Deutschmarks which it was to lend on to OCL in sterling, for the construction of five more ships. The loans were to be made to coincide with the stage payments to be made during the course of construction and were repayable over eight and a half years from the date of delivery of the ships.
The anticipated devaluation of sterling occurred and as a result overall losses accrued to OCFL of some £141/2m.
OCFL appealed against assessments to corporation tax for its accounting periods ended 30 September 1969-1982 claiming that the losses were trading losses deductible in computing the group's profits.
The Special Commissioners found that the only reason of any consequence for the formation of OCFL at a time when the devaluation of sterling was virtually inevitable was to obtain the best tax treatment for the group by transferring the considerable risk involved in foreign exchange dealings to it, and to claim tax relief for the group, which would be available to a finance company trading in loans but not to a shipping company. They determined that the activities of OCFL did not constitute a trade in any of the relevant accounting periods and that in any event the losses sustained on foreign currency borrowings would have been on capital account.
OCFL appealed contending that the Commissioners had erred in concluding that the loan transactions were not trading activities; they would have been commercial transactions had they been carried out outside the group and did not cease to be commercial transactions merely because they were carried out within the group.
To succeed in its claim OCFL had to establish both that the loan transactions were trading transactions and that the losses incurred in pursuance of the trade were losses on revenue account.
Held, dismissing OCFL's appeal:
The interposition of OCFL between OCL and the German lenders achieved no commercial purpose. The only purpose was to transmute an exchange loss on capital account into a revenue loss. Transactions designed to achieve that purely fiscal purpose were not trading transactions. Loss relief therefore could not be claimed in respect of the foreign exchange losses. It was unnecessary to consider whether the losses would have been on capital or revenue account.
1. At a hearing before the Commissioners for the special purposes of the Income Tax Acts on 24-27 July 1984 and 28-31 January 1985 Overseas Containers (Finance) Ltd. ("OCFL") appealed against the following assessments to corporation tax covering all its accounting periods from 21 March 1969 (the date of its incorporation) to 30 November 1982:
| Chargeable accounting | Amount of assessment |
| period ended | £ |
| 30 September 1969 | 10,000 |
| 30 September 1970 | 10,000 |
| 30 September 1971 | 10,000 |
| 30 September 1972 | 10,000 |
| 30 September 1973 | 10,000 |
| 30 September 1974 | 200,000 |
| 30 November 1975 | 1000 |
| 30 November 1976 | 1100,000 |
| 30 November 1977 | 2700,000 |
| 30 November 1978 | 2000,000 |
| 30 November 1979 | 2000,000 |
| Chargeable accounting | Amount of assessment |
| period ended | £ |
| 30 November 1980 | 1000,000 |
| 30 November 1981 | 1000,000 |
| 30 November 1982 | 10,000 |
2. [Paragraph 2 listed the witnesses who gave evidence before the Commissioners.]
3. [Paragraph 3 listed the documents proved or admitted before the Commissioners.]
4. The questions for determination, the Commissioners' findings of fact which in their opinion were relevant to those questions, the contentions of the parties and their conclusions in principle appear from the decision.
5. On 30 September 1985, figures having been agreed between the parties, the Commissioners adjusted the assessments as follows:
| Chargeable accounting period | £ |
| 30 September 1969 | 240,859 |
| 30 September 1970 | 377,380 |
| 30 September 1971 | 490,279 |
| 30 September 1972 | 855,604 |
| 30 September 1973 | 2789,424 |
| 30 September 1974 | 1489,231 |
| 30 September 1975 | 1609,040 |
| 30 November 1975 | 268,174 |
| 30 November 1976 | Nil |
| 30 November 1977 | Nil |
| 30 November 1978 | Nil |
| 30 November 1979 | Nil |
| 30 November 1980 | Nil |
| 30 November 1981 | Nil |
| 30 November 1982 | Nil |
6. Immediately after the determination of the appeal OCFL declared dissatisfaction therewith as being erroneous in point of law and on 28 October 1985 required the Commissioners 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.
7. Before stating the case a draft thereof was, in accordance with the usual practice, submitted to each of the parties for any comments they might wish to make. The Commissioners were requested by OCFL's solicitors (inter alia) to amplify the facts and to modify their findings of fact in certain respects. Having given careful consideration to such request the Commissioners made the following findings of additional facts to which they appended where appropriate their observations.
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(A) During the Bretton Woods era there was, as Dr. Robinson put it, a period of learning during which some people were taken by surprise by currency movements. In particular, in mid-1969, there was a body of commercial opinion in the UK which appraised the interest savings against the exchange risk and came to the view, having made the appraisal, that the sensible thing to do was to raise a DM loan. Another body of commercial opinion took the opposite view. "The Economist" at that time was advising against the borrowing of DM. As Dr. Robinson said, this demonstrates that there are always two views in every market.
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(B) Following the October 1969 revaluation of the DM the markets generally were content with the DM/sterling parity and borrowing DM in December 1969 is something which a borrower might reasonably have done. However, as we have indicated, it all depended on how far forward that borrower was looking.
The Commissioners did not accede to any of the other requests made on behalf of OCFL.
8. The questions for the opinion of the court were:
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(a) Whether there was evidence before the Commissioners to support their conclusion that "in the case of the first batch of DM loans currency losses were inevitable and in the case of the second batch were highly likely".
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(b) Whether there was evidence before the Commissioners to support their conclusion that "the transactions whereby OCFL 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 OCL group".
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(c) Whether the Commissioners erred in law in identifying as the crucial questions those set out in para. 8.A of the decision, namely:
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(i) For what purpose was OCFL formed; in particular was the sole or paramount purpose a trading one or a fiscal one?
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(ii) If that purpose was a trading purpose, was there sufficient commerciality in what OCFL actually did to justify what it did being called a trading activity?
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(d) Whether the evidence relied on by the Commissioners was sufficient to justify their findings in para. 8.A of their decision that "the only or dominant purpose (of the formation of OCFL) was to protect the OCL group from these losses by causing them to accrue to OCFL 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 the gains for tax purposes…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...
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