Scorer v Olin Energy Systems Ltd
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE LAWTON,LORD JUSTICE FOX,LORD JUSTICE KERR |
| Judgment Date | 19 December 1983 |
| Judgment citation (vLex) | [1983] EWCA Civ J1219-2 |
| Docket Number | 83/0521 |
| Court | Court of Appeal (Civil Division) |
| Date | 19 December 1983 |
[1983] EWCA Civ J1219-2
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION (REVENUE PAPER)
(MR. JUSTICE WALTON)
Royal Courts of Justice
Lord Justice Lawton
Lord Justice Fox
Lord Justice Kerr
83/0521
MR. G. R. AARONSON Q.C. (instructed by Messrs. Linklaters & Paines) appeared for the Appellants.
MR. D. C. POTTER Q.C. and MR. R. J. A. CARNWATH (instructed by The Solicitor of Inland Revenue) appeared for the Respondent.
This appeal, which is from a judgment of Walton J., delivered on 30th July 1982, raises two issues: first, whether profits earned by the appellant company for a particular accounting period fell to be reduced by having offset against them losses carried forward from earlier periods; and, secondly, whether a successful appeal by the company against a corporation tax assessment for one accounting period barred the Inland Revenue from issuing a further assessment for that period when it later discovered that the appeal had been allowed in error.
The facts are fully set out in the case stated by the Commissioners for the Special Purposes of the Income Tax Acts. For the purposes of this judgment I shall give a summary of them, omitting much of the accountancy detail. The appellant company was incorporated in England on 12th December 1955 and at all material times has been resident in the United Kingdom for tax purposes. It is a subsidiary of a U.S. corporation. It commenced business in 1956 by supplying specialist equipment used in coal mining. Throughout the relevant period the appellant company continued this activity together with the manufacture or supply of various other items of an industrial or engineering nature. It drew up its accounts on the basis that these activities constituted a composite trade, and it was agreed for the purposes of this appeal that this treatment was correct. The parent corporation carried on, inter alia, a shipping activity both directly and through various of its subsidiaries. In connection with this activity, one of the subsidiaries placed an order in 1957 with an Italian shipyard for the construction of a large dry cargo/oil carrier due for delivery in or about May 1961. It was decided that the appellant company would take delivery of the vessel from the Italian shipyard, would register it in England, and would then charter it out on a 20 year time charter to the parent corporation, under which charter profits of at least £50,000 per annum could be expected to accrue to the appellant company. The appellant company obtained Bank of England permission to enter this arrangement, the purchase price of U.S. $8,582,000 being borrowed from a subsidiary of the parent corporation incorporated in the State of Delaware, U.S.A. This loan was for a period of 20 years commencing on 12th July 1961 and carried interest at the annual rate of 5 5/8%. The entirety of the dollar loan was expended on the purchase and equipping of the vessel (which was known as the M.V. Morven), and the ship chartering activity was commenced by the appellant company during its accounting period ending 30th November 1961. The appellant company continued its ship-chartering activity until February 1967, at which time the long-term charter to the parent corporation was terminated and the vessel was sold.
For the seven accounting periods during which the appellant company carried on its ship-chartering activity, its accounts showed the profits of that activity separately from the profits of the other industrial and engineering activities. In the profit and loss account for each of those accounting periods the trading result of the shipping activities was referred to under the heading "Shipping Division" while the trading results of the other activities were shown under the heading "Airbreaker Division". It has always been accepted by the appellant company and the Inland Revenue that these two divisions constituted separate trades for tax purposes. In the profit and loss accounts for these accounting periods depreciation, expenditure and charges which were regarded by the appellant company as directly referable to one or other of the two divisions were dealt with in arriving at the trading result for each of the two divisions. The interest on the dollar loan, however, was not attributed to either division, but was dealt with by means of charging it against the aggregate trading result of the two divisions. This accounting treatment was accepted by the appellant company's auditors, a well-known firm of accountants.
At all stages of this case the appellant company has contended that, as it treated the interest on the dollar loan as a general finance charge of its business, it was entitled to apportion the interest payments between the separate trading divisions. The statutory provisions relating to treating interest charges as losses sustained in a trade and carrying trading losses forward and setting them off against future profits are complex. I do not find it necessary to examine them in detail because dispute has not been about what the relevant law was but about how it should be applied to the facts of this case. For the purposes of corporation tax the interest charges on the dollar loan were in any accountable period allowable as deductions against profits for that period (section 52 of the Finance Act 1965). Section 58 regulated the carrying forward of losses. They had to be losses "in the trade" carried on by the company. Sub-section (8) provided as follows:
"Where in an accounting period the charges on income paid by a company—(a) exceed the amount of the profits against which they are deductible; and (b) include payments made wholly and exclusively for the purposes of a trade carried on by the company; then, up to the amount of that excess or of those payments, whichever is the less, the charges on income so paid shall in computing a loss for purposes of subsection (1) above be deductible as if they were trading expenses of the trade."
In this case, as was admitted, the appellant company carried on two trades. The question was whether the interest charges had been incurred "wholly and exclusively for the trade carried on by the appellant company" for the accounting period 1967/8. The only trade carried on during that period was that of the Airbreaker Division. The trade of the Shipping Division had ceased before the accounting period 1967/8 began. The Special Commissioners found as a fact that the borrowing was for the shipping venture and not for both trades. There was ample evidence to support this finding. It follows that the appellant company was not entitled in the year under consideration to set off the interest charges against the profits of the Airbreaker Division.
The appellant company's accountants, however, thought they were entitled to do this. On 14th November 1969 they wrote to the Inspector of Taxes enclosing the accounts of the appellant company for the year ended 30th November 1968 together with tax computations. The computations were drawn up on the basis that the appellant company's trading profit for the year was to be reduced to nil by setting off losses brought forward, being the amount still unused of the interest on the dollar loan. On 17th November 1969 the Inspector issued to the appellant company a Notice of Assessment of corporation tax for the year ended 30th November 1968 in the sum of £5,000. This was an estimated assessment made without reference to the relevant accounts and computations and probably crossed in the post with the accountant's letter of 14th November. By letter dated 19th November 1969 the accountants gave notice of appeal on behalf of the appellant company stating as grounds that the assessment had been estimated and was incorrect. The Inspector wrote to the accountants on 20th November 1969 and raised queries about two items on the accounts which had been sent to him but raised no query about the figures in the computation under the heading "Section 345 Income Tax Act 1952" which showed losses brought forward of £465,457 and losses carried forward of £349,942. Further correspondence took place between the accountants and the Inspector about minor matters. On 8th January 1970 the Inspector wrote to the accountants as follows:
"I thank you for your letter of 18th December 1969 and can agree your suggestions. Tour computations are therefore agreed for the Chargeable Accounting period ended 30th November 1968 and the appeal is determined in accordance with section 510 Income Tax Act 1952."
On 14th January 1970 the Inspector issued a statement amending the corporation tax assessment on the appellant company showing:
| "Schedule D Cases I and II | £123,403 |
| Less losses or charges treated as losses | £123,403" |
The tax payable was shown as nil.
On 19th October 1970 the Inspector issued a corporation tax assessment on the appellant company for the accounting period ended 30th November 1969 in the estimated amount of £100. The accountants appealed against this on 26th October 1970 and sent the appellant company's accounts and tax computations to the Inspector on 18th March 1971. There followed correspondence. A new Inspector was of the opinion that the losses carried forward in the year ended 30th November 1968 ought not to have been carried forward. On 17th July 1972 this Inspector issued a further corporation tax assessment on the appellant company for the year ended 30th November 1968 demanding corporation tax of £51,019.12. Unless the appellant company is entitled to the protection of section 510 of the Income Tax Act 1952 it...
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