Scorer (Inspector of Taxes) v Olin Energy Systems Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Fraser of Tullybelton,Lord Keith of Kinkel,Lord Bridge of Harwich,Lord Brightman,Lord Templeman |
| Judgment Date | 21 March 1985 |
| Judgment citation (vLex) | [1985] UKHL J0321-1 |
| Docket Number | Parliamentary Archives, HL/PO/JU/18/245 |
| Court | House of Lords |
| Date | 21 March 1985 |
[1985] UKHL J0321-1
HOUSE OF LORDS
Lord Fraser of Tullybelton
Lord Keith of Kinkel
Lord Bridge of Harwich
Lord Brightman
Lord Templeman
Parliamentary Archives, HL/PO/JU/18/245
My Lords,
I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Keith of Kinkel. I agree with it and, for the reasons given by him, I would dismiss the appeal.
My Lords,
The respondents, Olin Energy Systems Ltd., formerly named Olin Mathieson Ltd. ("Olin"), are a wholly owned subsidiary of a United States corporation incorporated in the State of Delaware. In 1956 Olin commenced business in a trade consisting in the supply of specialist equipment to the coal mining industry and in certain other engineering activities. In 1961 Olin started another trade in the shape of the long-term chartering of a ship, the m.v. Morven, to its parent corporation. The ship had been purchased and equipped with the aid of a loan of $8,582,000 from another subsidiary of the parent corporation, carrying interest at the rate of 5 5/8 per cent. per annum and repayable over a period of 20 years. In February 1967 the charter, which had also been for a term of 20 years, was terminated with the payment of compensation to Olin, the ship was sold, and the balance of the loan was repaid. During each of the seven years for which the ship-chartering business was carried on, Olin's accounts showed the profits of that business, described as "Shipping Division," separately from those of its engineering business, described as "Airbreaker Division." In the profit and loss accounts for each of these years various charges regarded as being directly attributable to either of the two divisions were so treated. The interest on the loan of $8,582,000, by contrast, was not attributed to either division, but was dealt with by charging it against the aggregate trading result of the two divisions.
This treatment was accepted by Olin's very reputable auditors, but it was, as is now common ground, incorrect. By virtue of certain double taxation regulations which it is unnecessary to go into, the provisions of the Income Tax Acts relating to relief for losses were available to Olin in respect of the interest payments. Accordingly it was permissible for Olin, under section 345 of the Income Tax Act 1952, to treat the payments of loan interest, having been made wholly and exclusively for the purposes of the Shipping Division trade, as though they were losses incurred in that trade. Such losses were available, under section 342 of the Act of 1952, to be carried forward and set off against the profits of that trade in future years. Similar relief was made available, after the introduction of corporation tax by the Finance Act 1965, under certain provisions of that Act and associated Regulations. Further, under paragraph 21 of Schedule 15 to the Act of 1965 provision was made for the continued carry-forward of losses incurred before the introduction of corporation tax, including interest payments treated as losses under section 345 of the Act of 1952.
These carry-forward provisions were applicable, however, only in relation to the trade in respect of which the deemed losses in the shape of interest payments were incurred. They did not have the effect of making it permissible to carry the losses forward and set them off against the profits of a separate trade carried on by the same taxpayer. But this did not have a material effect upon the taxation position until the m.v. Morven was sold and the trade of the Shipping Division discontinued. As a matter of general principle, where a taxpayer carries on two trades, losses in one of them in a particular year may be set off against profits of the other realised in that year. So as long as both the Shipping Division and the Airbreaker Division were carrying on trade, the losses of the former were capable of being set off against the profits of the latter. In each of the seven accounting periods prior to the discontinuance of the Shipping Division trade the current losses in that trade, including interest payments deemed to be losses, were so great as to swallow up the profits of the Airbreaker Division, leaving Olin with a nil tax liability. Thus the wrong treatment of the Shipping Division losses in the accounts did not have any practical effect on the taxation position.
The picture changed after the discontinuance of the Shipping Division trade in February 1967. The accumulated losses of the division at that time amounted to £465,457. The profits of the Airbreaker Division for the year ended 30 November 1968 were substantial. There now being only one trade, that of the Airbreaker Division, the terminal losses of the defunct Shipping Division were not capable of being carried forward and set against the profits of that one trade, which were thus liable to corporation tax. On 14 November 1969 Olin's accountants sent to the inspector of taxes accounts for the year to 30 November 1968 together with tax computations. The profit and loss account for the Airbeaker Division in that year brought out a profit of £113,654. That for the Shipping Division showed a nil profit, and comparable figures for the preceding year (including a profit of £42,637) were given. The tax computation for the Airbreaker Division showed an adjusted profit of £115,515. The final page of the computations read as follows:
"OLIN MATHIESON LTD.
SECTION 345 INCOME TAX ACT 1952 SECTION 345 INCOME TAX ACT 1952
| Losses brought forward | £465,457 |
| Deduct profits of Airbreaker Division | £115,515 |
| Carried forward | £349,942" |
On 17 November 1969 the inspector issued to Olin a corporation tax assessment for the year ended 30 November 1968 in the sum of £5,000, this being an estimated assessment. The accountants appealed against the assessment by letter dated 19 November 1969. The inspector raised a number of fairly minor queries on the accounts and computations, which the accountants answered to his satisfaction, and on 8 January 1970 he wrote to the accountants as follows:
"I thank you for your letter of 18 December 1969 and can agree your suggestions. Your computations are therefore agreed for the chargeable accounting period ended 30 November 1968 and the appeal is determined in accordance with section 510, Income Tax Act 1952."
On 14 January 1970 the Inspector issued an amendment to the corporation tax assessment showing:
| "Schedule D Cases I and II | £123,403 |
| (Less losses or charges treated as losses) | £123,403 |
| the tax payable being | nil |
Thereafter the inspector dealing with Olin's tax affairs changed. The accountants had correspondence with him about Olin's corporation tax liability for the year ended 30 November 1969, and he raised the point that the losses of the defunct Shipping Division should not have been carried forward and used to offset the profits of the Airbreaker Division. On 17 July 1972 this inspector (who is the appellant in this appeal) issued an additional assessment to corporation tax on Olin for the year ended 30 November 1968. This had the effect of disallowing relief for carried-forward Shipping Division losses, so that tax of £51,019.12 became payable. The issue in the appeal is whether he was entitled to issue this additional assessment under section 5(3) of the Income Tax Management Act 1964, or whether he was precluded from doing so by section 510 of the Act of 1952. The special commissioners answered this question in Olin's favour. On appeal by the Inland Revenue by way of case stated Walton J. reversed that determination and found in their favour. Olin appealed to the Court of Appeal, which by a majority (Lawton and Fox L.JJ., Kerr L.J. dissenting) allowed the appeal and restored the determination of the special commissioners, but granted the revenue leave to appeal to your Lordships' House.
Section 5 of the Act of 1964, which was extended to corporation tax by paragraph 6(1) of Schedule 6 to the Finance Act 1966, provides by subsection (3):
"If an inspector or the Board discover — ( a) that any income which ought to have been assessed to tax at the standard rate or to surtax has not been assessed, or ( b) that an assessment to tax at the standard rate or to surtax is or has become insufficient, or ( c) that any relief which has been given is or has become excessive, the inspector or, as the case may be, the Board may make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged."
Section 12(4) of the Act of 1964 provides:
"Save as otherwise provided in the Income Tax Acts or the enactments relating to the profits tax the determination of the General Commissioners or the Special Commissioners in any proceedings under the Income Tax Acts or the enactments relating to the profits tax shall be final...
To continue reading
Request your trial
-
Commissioners of Customs and Excise v DFS Furniture Company Ltd (No 2)
...interpreted the evidence, viewed objectively, as an acceptance of an offer made by DFS. He cited Scorer v Olin Energy Systems Limited [1985] STC 218 for the proposition that the situation must be viewed objectively, having regard to the surrounding circumstances. The position was that DFS, ......
-
The Commissioners Of Inland Revenue For Judical Review Of A Decision Of The General Commissioners Of Income Tax
...on ordinary notions of what is involved in an agreement, and is also supported by authority. In Scorer v Olin Energy Systems Ltd., [1985] AC 645; [1985] STC 218, Lord Keith of Kinkel, who delivered the principal speech in the House of Lords, stated (at [1985] AC 656F-H and [1985] STC 222f-h......
-
MacNiven v Westmoreland Investments Ltd
... ... Macniven (Her Majesty's Inspector of Taxes) (Appellants) and ... ...
-
Langham v Veltema
...settled by agreement. There were often issues as to the scope of such an agreement, which the House of Lords, in Scorer v. Olin Energy (1985) 58 TC 592, held, in the context of corporation tax, had to be viewed objectively, having regard to the surrounding circumstances, including all the m......
-
Disclosure, Information Notices And Discovery
...case law and practice. Cases of particular relevance were Cenlon Finance Co Ltd v Ellwood (40 TC 176) and Scorer v Olin Energy Systems Ltd (58 TC 592). Statement of Practice 8/91 explained how the provisions were When IT self assessment ("ITSA") was introduced by FA 1994, new S29 TMA 1970 w......
-
Disclosure, Information Notices And Discovery - June 2012
...case law and practice. Cases of particular relevance were Cenlon Finance Co Ltd v Ellwood (40 TC 176) and Scorer v Olin Energy Systems Ltd (58 TC 592). Statement of: Practice 8/91 explained how the provisions were When IT self assessment ("ITSA") was introduced by FA 1994, new S29 TMA 1970 ......