Revenue and Customs Commissioners v Lloyds TSB Equipment Leasing (No 1) Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 August 2013 |
| Neutral Citation | [2013] UKUT 368 (TCC) |
| Date | 14 August 2013 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2013] UKUT 368 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Mr Justice Newey, Judge Howard M. Nowlan.
David Ewart QC, Raymond Hill and Stephanie Barrett, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Appellants
Jonathan Peacock QC and Michael Ripley, instructed by Norton Rose LLP, appeared for the Respondent
Corporation tax - Claim for capital allowances in respect of ships where the end sub-lease was to a non-UK resident user - Time charter to that end user granted by a UK resident company that claimed that its role (as the disponent owner under the time charter) satisfied the terms of CAA 2001, Capital Allowances Act 2001 section 123s. 123, and therefore constituted a "qualifying user" so preserving the respondent finance leasing company's entitlement to 25 per cent writing-down allowances - Three issues the subject of the appeal by HMRC, and one the subject of a cross-appeal by the respondent.
The Upper Tribunal has upheld a First-tier Tribunal decision on capital allowances in Lloyds TSB Equipment Leasing (No 1) LtdTAX[2012] TC 01745, ruling that capital allowances were available on two ships designed to transport liquefied natural gas where the ships were ultimately leased to non-UK resident lessees.
Lloyds TSB Equipment Leasing (No 1) Ltd (Lloyds Leasing) bought two ships designed to transport liquefied natural gas. Lloyds Leasing entered into a 30-year finance lease with separate joint venture companies (Northern LNG I and Northern LNG II) in respect of the ships. The two Northern LNG companies then granted bareboat charters to K-Euro (a UK resident company) and an existing time charter was novated to K-Euro. K-Euro then contracted out the manning and maintenance of the ships to an associated company. Lloyds Leasing claimed 25 per cent writing-down capital allowances on the cost of the ships.
HMRC disallowed the claim for capital allowances on the basis that the ships were not being used for a qualifying purpose and, if they were, the main object, or one of the main objects, of the arrangements was to obtain capital allowances.
The First-tier Tribunal looked at four issues:
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(2) whether the lessee (K-Euro) was responsible for paying all, or substantially all, expenses in connection with the ships under the time charter throughout the charter period;
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(3) whether the lessee let the ships on charter in the course of a trade which consists of or includes operating ships;
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(4) whether the main object test could apply in this case (a technical point of statutory interpretation of the law); and
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(5) whether the main object, or one of the main objects, of any transaction or series of transactions which includes the letting of the ships or charter was to obtain the 25 per cent writing down allowance claimed by Lloyds Leasing.
The First-tier Tribunal found in favour of Lloyds Leasing in respect of the first and second issues, finding that K-Euro was responsible for paying all, or substantially all, expenses in connection with the ships and that K-Euro let the ships on charter in the course of a trade which consists of or includes operating ships. The Tribunal found in favour of HMRC on the third issue, deciding that the main object test could apply in this case. The fourth issue was considered in depth, with the Tribunal ruling in favour of Lloyds Leasing, concluding that obtaining capital allowances was not the main object of the transactions.
HMRC appealed the decisions reached by the First-tier Tribunal on the first, second and fourth issues, with Lloyds Leasing appealing the decision reached in favour of HMRC on the third issue. The Upper Tribunal dismissed the appeals on all four of the issues. However the Upper Tribunal Judges were unable to reach agreement on the fourth issue so the decision was only made by Mr Justice Newey having the casting vote. Although Mr Justice Newey considered "some of the FTT's observations on the law to be open to criticism" he was not "persuaded that the FTT applied an incorrect legal test", whereas Judge Nowlan considered "that errors of law led the FTT to apply the section 123(4) test in a wrong manner".
Although the leasing rules dealt with in this case have subsequently changed, the case is likely to be good news for taxpayers who have entered into similar transactions and whose capital allowance claims have been challenged by HMRC. The case provides some comfort that taking steps to improve the chances of obtaining capital allowances does not necessarily equate to entering into arrangements with the purpose of obtaining capital allowances, providing there is genuine commercial reasoning behind the transactions. The case is likely to be of interest to other taxpayers where the "main object" test is an issue.
Given that the two judges were unable to reach agreement on the fourth issue it seems inevitable that HMRC will attempt to take the case to the Court of Appeal.
For commentary on the special rules that used to apply to overseas leasing see CCH Tax Reporter at 240-140. For commentary on capital allowances and how they apply to ships see CCH Tax Reporter at 240-500ff.
[1]This is an appeal by HM Revenue and Customs ("HMRC") against the decision of the First-tier Tribunal (Tribunal Judges Edward Sadler and Adrian Shipwright) in favour of the Respondent, Lloyds TSB Equipment Leading (No 1) Ltd ("Lloyds Leasing"), on three of the four points in dispute in this case. Lloyds Leasing also appeals, against the decision of the Tribunal ("the FTT") in favour of HMRC on the fourth disputed point.
[2]The basic issue in this case is whether Lloyds Leasing was entitled to 25% writing-down capital allowances (indeed any capital allowances) in respect of its purchase of two ships designed to transport liquefied natural gas ("LNG"), having regard to the fact that the ships were ultimately leased to non-UK resident lessees. Notwithstanding that HMRC succeeded on one point, the FTT's decision ("the Decision") meant that Lloyds Leasing sustained its full claim for 25% writing-down allowances. The total expenditure incurred on the two ships was £198,226,884. The largest claim for allowances was made for Lloyds Leasing's accounting period ended 30 September 2006, when the two ships were delivered, and this is the period to which the appeal relates. The outcome of the appeal would naturally have a bearing on claims in later periods during which further claims would be made for writing-down allowances as well as affecting the potential recovery of allowances given in earlier years.
[3]All four points in dispute revolved around the interpretation and then the application of the provisions of Capital Allowances Act 2001 section 123section 123 of the Capital Allowances Act 2001 ("the CAA"). In other words, Lloyds Leasing's entitlement to writing-down allowances in this case depends on whether the role undertaken by a company that we will refer to below as "K-Euro" satisfies all the requirements of Capital Allowances Act 2001 section 123section 123, and thus precludes other sections of the CAA, that limit allowances in respect of "overseas leasing", from eliminating the entitlement to allowances because the end-users of the vessels are non-UK resident companies. In view of this, it may be of assistance if we say something at this stage about the purpose of Capital Allowances Act 2001 section 123section 123 and the context in which it appears. Once we have outlined the statutory provisions, and then the facts, we will identify the four matters in contention.
[4]In terms of context, it is first important to remember that, at the time the expenditure in question in this appeal was incurred, capital allowances could generally be claimed by a finance lessor, as the legal owner of plant and machinery, regardless of the fact that the finance lease would usually have passed the equity and residual interest in the plant and machinery to the lessee.
[5]Capital Allowances Act 2001 section 123Section 123 of the CAA is contained in the Chapter of the Act that deals with "overseas leasing". It was common ground between the parties that the overall policy underlying the overseas leasing provisions was to prevent any undue benefit of UK writing-down allowances from flowing to non-UK residents.
[6]The essential benefit of 25% writing-down allowances is that they generally provide tax relief for capital expenditure on a more accelerated, and thus more beneficial, basis than that on which depreciation is usually claimed for accounting purposes. Similarly, where plant and machinery were acquired by finance lessors (and the allowances were still available - as in the present case - to the finance lessors rather than the lessees who had the equity and reversionary interest in the plant and machinery), 25% writing-down allowances were often available in advance of the profile for the recovery of that expenditure by the finance lessors in the form of rentals. Some of the benefit of the tax relief could be passed on to lessees by reducing their rentals below the amounts that finance lessors would have charged had they simply lent the lessees the funds to acquire the plant and machinery themselves and charged interest on the loans.
[7]The overseas leasing provisions sought to limit the extent to which non-resident lessees benefit from UK allowances in two ways. One provision, Capital Allowances Act 2001 section 109section 109 of the CAA, reduced the rate of writing-down allowance from 25% to 10% on the premise that, at this rate, the timing benefit of accelerating the lessor's allowances would be very modest. Where attempts were made to increase that timing benefit by various expedients (for instance, by having a finance lease for more than 13 years, by having "renewal periods"...
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