Pattison v Marine Midland Ltd
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE DILLON,LORD JUSTICE GRIFFITHS,THE MASTER OF THE ROLLS |
| Judgment Date | 04 March 1983 |
| Judgment citation (vLex) | [1983] EWCA Civ J0304-5 |
| Docket Number | 83/0106 |
| Court | Court of Appeal (Civil Division) |
| Date | 04 March 1983 |
[1983] EWCA Civ J0304-5
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION (REVENUE PAPER)
(MR. JUSTICE VINELOTT)
Royal Courts of Justice.
The Master of the Rolls
(Sir John Donaldson)
Lord Justice Griffiths (not Present)
and
Lord Justice Dillon
83/0106
1980 NO. 83
MR. D.C. POTTER, Q.C. and MR. P. GOLDSMITH (instructed by the Solicitor of Inland Revenue) appeared on behalf of the (Appellant) Respondent in the Court of Appeal.
MR. F. HEYWORTH-TALBOT, Q.C., MR. J.R. GARDINER, Q.C. and MR. R. THOMAS (instructed by Messrs. Freshfields) appeared on behalf of the (Respondent) Appellant in the Court of Appeal.
This is an appeal by the taxpayer, Marine Midland Ltd., which I shall call "the company", against a decision of Mr. Justice Vinelott given on the 7th May, 1981, whereby Mr. Justice Vinelott allowed an appeal by the Crown from a decision, in favour of the company, of the General Commissioners for the City of London.
The appeal is concerned with the liability of the company to corporation tax for its accounting periods down to the 15th December, 1976, but, before I endeavour to explain the point at issue, it is convenient to summarise the salient facts as found by the Commissioners.
The company was incorporated in England on the 8th October, 1971. It is a wholly owned subsidiary of an American bank holding company. During the material periods, the company carried on the business of international commercial banking. The bulk of this business consisted of the provision of short and medium term finance, mainly in dollars (i.e. U.S. dollars) in the international banking market. The main part of its trading income consisted of the excess of the interest receivable on loans and deposits made by the company over the interest payable on the loans and deposits which it received for the purpose of financing those loans and deposits.
The company had an issued share capital, designated in sterling, of £5,084,483. This was mainly invested in long term gilt-edged securities and sterling certificates of deposit.
On, or immediately before, the 12th October, 1971 the company issued $15m subordinated unsecured loan stock to two United States resident subsidiaries of the company's American parent. The subordinated loan stock was issued with the intention that the whole of the proceeds, viz. $15m, should be employed in the making of dollar loans and deposits at interest, and the proceeds of the issue were used in the making of dollar loans and deposits in the ordinary course of the banking business of the company.
The whole of the subordinated loan stock was purchased by the company and cancelled on the 15th June, 1976, the company repaying the $15m out of its existing dollar funds. At no time had any part of the $15m been converted into sterling.
The company was not in business to speculate in foreign exchange transactions. It looked for its profits by way of the interest differentials between amounts lent and amounts received on deposit. The general aim of the company in its transactions was to maintain a matched book in each foreign currency, or in other words to ensure that at any particular time the total of its monetary assets (principally loans and deposits made by it) denominated in any particular foreign currency was equal to the total of its monetary liabilities (principally borrowings and deposits received) denominated in that same foreign currency. In practice the company achieved at least 95 per cent matching in any particular foreign currency 90 per cent of the time.
The company had an occasional open position in a foreign currency. If the foreign currency in question appreciated (or depreciated) against sterling during the period while this unmatched foreign currency asset was held, its value in terms of sterling would increase (or decrease) during that period. The amount of this increase (or decrease) would be treated as an exchange profit (or loss) falling to be brought into the company's profit and loss account (which was expressed in sterling).
Where the borrowing and lending transactions, whether involving dollars or another currency, were entirely matched, there was no commercial profit other than the interest differential. Where a "hedge swap" transaction was entered into, again there was no commercial profit or loss on the principal sums borrowed or lent but the interest differential could be augmented or diminished by a premium or discount on a contemporaneous forward exchange contract. The interest differential and premium or discount represented the only commercial profit, and this was so regardless of any fluctuations in exchange rates between the currency or currencies concerned and sterling.
The company maintained what is called a "multi-currency" system of accounting. All transactions denominated in foreign currency were recorded only in that currency and this was achieved by the use of separate ledgers and a full set of books for each currency. Hence all U.S. dollar transactions were recorded in the company's books in terms of dollars.
The company was incorporated and resident in the United Kingdom and its accounts for each accounting period were expressed in sterling. Any foreign currency items of income or expenses included in the trading accounts were translated into sterling by reference to the spot rate of exchange at the end of each month in which they arose.
For balance sheet purposes—my underlining—assets and liabilities denominated in a foreign currency (including the subordinated loan stock) were translated into sterling at the spot rate of exchange at the balance sheet date. Any differences arising from these translations were credited or debited to the profit and loss account as profits or losses on exchange as appropriate. Where, however, loans and deposits made by the company were matched by borrowings so that any exchange loss or profit on the assets would be balanced by the exchange profit or loss on the corresponding liabilities, nothing was brought into the profit and loss account for changes in their sterling values. The only amount credited or debited in addition to the interest differential for a matched loan transaction was the premium or discount on a hedge transaction in the futures or forward exchange market, if there was such a hedge swap.
At no time were the proceeds of the subordinated loan stock invested in sterling nor was it repaid out of sterling. It was a dollar loan, the proceeds being retained in dollar assets while it was in existence and being finally repaid in dollars at termination. Hence the company's accounts showed no exchange loss or profit on the loan or its matching assets either during the periods in which they were maintained at the various balance sheet dates or in the period in which the matching assets were realised and the loan was repaid.
The General Commissioners record and accept the evidence of Mr. McLeish. The principal function of the bank, i.e. the company, was to lend money to earn interest and stability lay in fully matching advances with deposits in the same currency. When obligations and assets in a currency were fully matched with no disparity to be affected by the course of the exchange, the main profit to the company arose from the margin between the interest rates, modified by any premium or discount arising on a forward exchange contract, and the movement of sterling became irrelevant. The subordinated loan stock which on the formation of the company had been subscribed in dollars by group companies demonstrated a dollar base of $15m which were used as if they were dollar deposits in the day-to-day market activity of matching dollar advances.
The General Commissioners also record and apparently accept the evidence of Mr. Crowther, a partner in Price Waterhouse & Co., who was the company's auditor. He stated that the company's practice of matching obligations and assets in their separate currencies is mirrored in its book-keeping, the transactions in a currency being kept separately in a set of books for that currency. Interest and other profit or loss during a month—and I interject that I understand this to mean actual, and not merely notional, interest and other profit or loss—is ascertained in currency which is translated into sterling at the rate of exchange current at the end of the month. The annual accounts of the company are presented in sterling, profit and loss being primarily derived from the monthly profit or loss translated into sterling, while all assets and liabilities in foreign currencies are translated into sterling at the exchange rates current at the close of the accounting year with an immaterial exception. The difference between the translation of profit and loss and the translation of assets and liabilities at balance sheet dates is carried, with any foreign exchange conversion differences, to a foreign exchange account which is treated as part of the profit or loss for the year. On unmatched transactions, profit or loss would arise on conversion or translation into sterling but, in so far as financial transactions in a particular currency are fully matched, no profit or loss could arise through variations in the rate of exchange.
The issue between the parties arises from the contention of the Crown that as the company is an English company it is constrained to translate all its transactions in foreign currencies, including those that are fully matched and...
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