Sun Chemical Ltd v Smith
| Jurisdiction | England & Wales |
| Judgment Date | 05 November 2002 |
| Date | 05 November 2002 |
| Court | Special Commissioners (UK) |
special commissioners decision
Dr John F Avery Jones.
Malcolm Gammie QC (instructed by Simmons & Simmons) for the appellant.
Brian Jolly, Appeals Unit Scotland, for the Crown.
1. This is an appeal by Sun Chemical Ltd against a further corporation tax assessment made on 9 December 1998 for its 1992 accounting period. The appellant was represented by Mr Malcolm Gammie QC, and the respondent by Mr Brian Jolly.
2. The issue in brief is whether the inspector can disallow certain charges on income. The appellant raises a procedural objection and a legal one. The circumstances are that Sun Chemical Inks Ltd ("the predecessor company"), whose business was acquired by the appellant from the close of business on 31 December 1991 claimed relief for interest paid to UK banks or UK branches of non-resident banks (which I shall call UK bank interest, since no distinction arises between the two) as a charge on income. The appellant continued to do so after acquiring the predecessor company's business and in its 1992 accounting period claimed relief as a charge on income for interest accrued to the predecessor company but paid by the appellant in the 1992 period. An appeal against the assessment for the 1992 accounting period was settled by an agreement under Taxes Management Act 1970 section 54s. 54 of the Taxes Management Act 1970 in 1994. In 1998, just before the time limit for assessing the 1992 period expired, the inspector raised a further assessment for reasons unconnected with charges on income. That assessment was appealed and the appeal has not been settled. New accountants had alerted the inspector in 1997 that interest relief for UK bank interest for earlier years should have been claimed as a Case I expense. A breakdown of the interest which was affected was not provided until 1999. The inspector seeks to disallow the UK bank interest accrued by the predecessor company and paid by the appellant in the 1992 period by adjusting the 1998 further assessment. The procedural point is whether the 1998 assessment made for a different purpose can be adjusted for this purpose, and whether the point was settled by the agreement made in 1994 determining the original assessment. The legal point is whether the interest is a charge on income.
3. Income and Corporation Taxes Act 1988 section 338Section 338 of the Income and Corporation Taxes Act1988 dealing with charges on income provides:
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(1) … in computing the corporation tax chargeable for any accounting period of a company any charges on income paid by the company in the accounting period, so far as paid out of the company's profits brought into charge to corporation tax, shall be allowed as deductions against the total profits for the period as reduced by any other relief from tax, other than group relief.
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(2) Subject to the following subsections, to section 339 and to any other express exceptions, "charges on income" means for the purposes of corporation tax-
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(a) payments of any description mentioned in subsections (3) below, not being dividends or other distributions of the company; and
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(b) payments which are qualifying donations (within the meaning of section 339);
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but no payment which is deductible in computing profits or any description of profits for purposes of corporation tax shall be treated as a charge on income.
(3) Subject to subsections (4) to (6) below, the payments referred to in subsection (2)(a) above are-
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(a) any yearly interest (whether charged to revenue or capital), annuity or other annual payment and any such other payments as are mentioned in section 348(2)) but not including sums which are or, but for any exception would be, chargeable under Schedule A; and
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(b) any other interest (whether charged to revenue or capital) payable in the United Kingdom on an advance from a bank carrying on a bona fide banking business in the United Kingdom, or from a person who in the opinion of the Board is bona fide carrying on business as a member of the Stock Exchange or bona fide carrying on the business of a discount house in the United Kingdom …
4. Having set out an outline of the dispute I set out the facts, which are not in dispute, in more detail.
(1) The predecessor company which had been incorporated in 1931 had at least since its 1989 accounting period claimed relief for interest as a charge on income. In the 1991 period it claimed relief for charges on income of £4,788,735 and carried forward £1,091,343 accrued but unpaid interest with which this appeal is concerned. An appeal against an assessment for that year was settled by agreement under Taxes Management Act 1970 section 54s. 54 of the Taxes Management Act 1970 on 21 September 1993. In the correspondence leading up to the agreement a letter from the accountants referred to deduction of tax at the basic rate from interest of £796,000 paid to the New York branch of Mitsubishi Bank. The inspector then raised a query asking why tax had in fact been deducted at ten per cent only and not at the basic rate. The reply enclosed some documents which I did not see but which I presume showed that this was the treaty rate that the Revenue had agreed should be deducted. The tax computation shows annual interest paid of £2,811,575 and accrued of £2,856,778 in the year. The predecessor company sold its business and assets subject to liabilities to the appellant from the close of business on 31 December 1991 and thereupon ceased to trade and was dissolved on 11 February 1997.
(2) The appellant which had been incorporated on 19 September 1991 claimed relief in its 1992 period as a charge on income for interest of a total of £3,825,000 paid to banks listed as LTCB Japan (three separate loans), Mitsubishi Bank, Fuji Bank, NatWest, and Hartmann, some of which may have been paid to UK branches of non-resident banks. I presume that the interest paid to Mitsubishi Bank was paid to a non-UK branch of a non-UK bank as it was in the case of the predecessor company. The appellant showed in the tax computation the annual interest of the £1,091,343 which had accrued to the predecessor company the liability for which had been taken over by the appellant, £3,087,134 as paid in the period, £2,895,344 as accrued in the period, and £899,553 as carried forward, and claimed the amount paid as a charge on income. The inspector asked for an analysis of the amount paid on each loan, the rate of interest, and whether tax had been deducted. The reply gave the accrued amount of £3,633,000 and the amount paid of £3,633,000 for the Sun Chemical Inks division (which I assume is the business taken over from the predecessor company) broken down among the seven loans, showing the rate of interest charged on each of them (presumably the difference between these figures for total interest and the figures for annual interest claimed as charges is that the company also paid short interest). It also stated that all interest was treated as annual interest except for overdraft interest (to NatWest) and one month rolling interest to LTCBJ Japan. The appellant did not answer the question about the deduction of tax. This was not followed up by the inspector. The assessment was amended on 9 November 1994 by an amended assessment stating that the appeal was determined under s. 54 of theTaxes Management Act 1970 ("the 1994 agreement").
(3) On 7 July 1997 different accountants wrote to the inspector saying that in the course of their review they had discovered that UK bank interest should have been claimed as a Case I expense and that they were collating the information for previous (but unstated) periods. The letter was headed with the appellant's name and there is a reference to "the company" in the relevant paragraph. No mention was made of the predecessor company. The new accountants asked for the inspector's agreement in principle to this treatment. The revised claims giving the figures for each year were not made until 29 March 1999. The claims went back to the 1991 period, the figures for which presumably relate to the predecessor company, although this was not stated. The inspector replied on 9 April 1999 saying that he agreed the change to the treatment of the UK bank interest in principle but, since the 1991 period for the predecessor company was settled on 21 September 1993, that period could not be reopened. The accountants replied on 19 November 1999 saying that they would accept that the predecessor company's 1991 period could not be reopened if the inspector agreed that the brought forward figure of £1,091,343 was a charge on income in the appellant's 1992 period. This was refused by the inspector on the ground that the UK bank interest was "deductible in computing profits" (s. 338(2) of ICTA 1988) by the predecessor company and it could not therefore be a charge for the appellant, thus giving rise to the dispute in this case.
(4) A transfer pricing enquiry took place around this time and the inspector wrote saying that he would be raising a further assessment for 1992 to keep the time limits open in relation to transfer pricing, and four other matters on which adjustments had been agreed. The further assessment was made on 9 December 1998 ("the 1998 assessment") and shows the additional items in a separate column with no change to the charges which accordingly remained the same as before in the total column. The transfer pricing adjustments were agreed on 21 December 1999 with an additional profit for 1992 of £677,000 but the appeal was not determined as there were other matters outstanding.
(5) The inspector seeks to amend the 1998 assessment (which it is common ground was issued for the different purpose of giving effect to the transfer pricing adjustments and the four other agreed items) to disallow the £1,091,343 UK bank interest (the UK bank interest) as a charge for the 1992 period....
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