R.T.Z. Oil and Gas Ltd v Elliss
| Jurisdiction | England & Wales |
| Judgment Date | 12 December 1986 |
| Date | 12 December 1986 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Mr. D.C. Potter Q.C. and Mr. A.G. Moses (instructed by the Solicitor of Inland Revenue) for the Crown.
Mr. G.R. Aaronson Q.C. and Mr. T.R. Mowschenson (instructed by Messrs. Linklaters & Paines) for the companies.
Before: Sir Nicolas Browne-Wilkinson V. C., Balcombe and Bingham L.JJ.
The following cases were referred to in the judgment of Balcombe L.J.:
I.R. Commrs. v. Joiner WLR[1975] 1 W.L.R. 1701
Morgan (H.M.I.T.) v. Tate & Lyle Ltd. ELRELR[1953] Ch. 601 (C.A.); [1955] A.C. 21(H.L.)
Usher's Wiltshire Brewery Ltd. v. Bruce ELR[1915] A.C. 433
Wilcock (H.M.I.T.) v. Frigate Investments Ltd. TAX(1981) 55 T.C. 530
Corporation tax - Capital allowances - Capital expenditure on provision of plant and machinery - Claim - Whether full capital allowances given automatically irrespective of company's wishes - Whether only allowances specifically claimed by company to be taken into account -Finance Act 1965 section 56Finance Act 1965, sec. 56(now Capital Allowances Act 1968, Finance Act 1965 section 73sec. 73).
These were appeals by the Crown against a decision of Walton J. ([1985] BTC 555) that, for corporation tax purposes, capital allowances to which a company was entitled did not fall to be credited to the company automatically; only so much of the allowances as the company chose to claim would be taken into account.
The first named company was entitled to capital allowances and industrial buildings allowances for 1967-1976. The second company was entitled to capital allowances for 1970-1976. Both companies chose not to claim allowances up to 1972; by not claiming them in those years the companies could claim annual allowances in later years based on higher written-down values of the machinery, plant or buildings in question. Both companies were assessed, for the accounting periods ending 31 December 1967 to 31 December 1976, on the basis that the full amount of capital allowances to which they were entitled for each accounting period had to be credited to them. The companies appealed, and the determination of a Special Commissioner allowing their appeals was upheld by Walton J. on the Crown's appeal to the High Court.
The Crown appealed from that decision to the Court of Appeal, contending that, on the introduction of corporation tax by the Finance Act 1965, the right of a company to choose whether to claim capital allowances was withdrawn. That was the mandatory effect of the word "shall" inFinance Act 1965 section 56 subsec-or-para (2)sec. 56(2). That section made a capital allowance a trading expense, which obviated the need for a claim to be made for it; the deduction would be made automatically, i.e. compulsorily.
Held, dismissing the Crown's appeals:
1. It would be surprising if a fundamental change making a capital allowance compulsorily deductible for corporation tax purposes, and thus introducing a distinction between the treatment of companies and individuals, were to be effected by provisions which appeared to be only procedural or technical. In the absence of any clearly demonstrated legislative intention to the contrary, the changes effected by the Finance Act 1965 were made on the basis that they were technical in nature, and did not involve a major change of principle.
2. Neither Finance Act 1965 section 56sec. 56 of the 1965 Act, nor later consolidating provisions, said that capital allowances should be deducted as trading expenses. The mandatory effect of Finance Act 1965 section 56 subsec-or-para (2)sec. 56(2) was that allowances, when validly claimed, had to be given in a particular manner, i.e. by treating them as trading expenses.
Balcombe L.J.: B.P. Oil Northern Ireland Refinery Ltd. ("BPNI") were assessed to corporation tax for ten consecutive accounting periods, ending 31 December 1967 to 31 December 1976 inclusive, all in nil amounts. B.P. Tyne Tanker Co. Ltd. ("BPTT") were assessed to corporation tax for seven consecutive accounting periods, ending 31 December 1970 to 31 December 1976 inclusive, all in nil amounts. BPNI and BPTT ("the taxpayers") appealed to the Special Commissioner, who allowed the appeals. The inspector of taxes requested a case stated, the Special Commissioner duly stated such a case in both appeals, and the appeals by way of case stated came before Walton J. On 25 July 1985 he dismissed both appeals: his judgment is reported at [1985] BTC 555; [1985] STC 722. The inspector has appealed to this court.
The appeals raise an unusual point of statutory construction: whether for the purposes of corporation tax the capital allowances to which a company is entitled fall to be credited to the company automatically, whether it wants them or not, or whether only those allowances which have been specifically claimed by the company fall to be taken into account. As the judge said in his judgment, the paradox of this case is that the inspector is arguing for the former result and the taxpayers for the latter, with the deliberate intent of claiming less than the full amounts to which, by statute, they are entitled for the years in question. The reasons which motivated the taxpayers to take this course were that they calculated that, by not claiming capital allowances in less profitable years, they could claim annual allowances in later, more profitable years based upon higher figures of the written down values of the machinery, plant or buildings in question. We were told that tax in the sum of £60m depends on the result of this case.
The modern system of capital allowances was introduced by the Income Tax Act 1945 as a relief from income tax. The right to the relief was given to taxpayers who incurred capital expenditure on industrial buildings or plant where they were used in the taxpayer's trade or were leased out by the taxpayer. By availing himself of the relief the taxpayer could reduce his tax charge for the year in which he acquired the asset (by means of an "initial allowance") and for that and subsequent years (by means of an "annual allowance") for so long as the asset remained in use for the trade or remained on lease. In the case of assets used in the trade, the relief took effect by reducing the charge on trading income. In the case of assets which were leased, the relief took effect by reducing the charge on rental income, which might involve a repayment of tax already deducted at source from the rental. A taxpayer who availed himself of the relief would potentially face an additional tax charge (a "balancing charge") when the assets ceased to be used for the purposes of the trade or ceased to be let.
There was thus introduced an exception to the general rule that capital expenditure was not deductible in calculating the profits or gains brought into charge to income tax. The evident intention was to encourage industrial...
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