Taylor Clark International Ltd v Lewis (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 07 March 1997 |
| Date | 07 March 1997 |
| Court | Chancery Division |
Chancery Division.
Robert Walker J.
Graham Aaronson QC and Anthony de Garr Robinson (instructed by William Sturges & Co) for TCI.
Launcelot Henderson QC (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Aberdeen Construction Group Ltd v IR Commrs ELRTAX[1978] AC 885 (HL); (1978) 52 TC 281
Capcount Trading v Evans (HMIT) TAX[1993] BTC 3
Cleveleys Investment Trust Co v IR Commrs TAX(1971) 47 TC 300
Ramsay Ltd (WT) v IR Commrs; Eilbeck (HMIT) v Rawling ELRWLRTAX[1982] AC 300 (HL); [1979] 1 WLR 974; (1981) 54 TC 101
Singer v Williams ELR[1921] 1 AC 41
Corporation tax - Allowable loss - Loan in US dollars by UK company to US member of group secured on real property - Promissory note given as security - Currency conversion loss - Whether loss in respect of a debt on a security - Whether allowable loss - Capital Gains Tax Act 1979, ss. 82(3)(b), 134(1) (Taxation of Chargeable Gains Act 1992 section 123 subsec-or-para (3) section 251 subsec-or-para (1)Taxation of Chargeable Gains Act 1992, ss. 132(3)(b), 251(1).
This was an appeal by a UK company ("TCI") against the decision of the special commissioners that a loss on the repayment of a US dollar loan by the company to its US subsidiary was not an allowable loss for corporation tax purposes. The loan was not a "debt on a security" within the terms of the Taxation of Chargeable Gains Act 1992 section 132 subsec-or-para (3)Capital Gains Tax Act 1979, s. 82(3)(b).
In 1984 TCI lent over $15m to its US subsidiary ("Holdings") for property development in California. A promissory note, secured on the real property, was issued by the US company to TCI. The initial interest payable was to be adjustable from time to time (at TCI's option) to one per cent over LIBOR with a minimum of nine per cent. The note stipulated repayment on demand and the US company could repay the loan at any time without penalty. In the event the loan was repaid as to $15m in 1986 and the remainder in 1992 giving rise to a sterling loss on conversion.
The Revenue claimed that the exchange loss was precluded from being treated as an allowable loss by the Taxation of Chargeable Gains Act 1992 section 251 subsec-or-para (1)Capital Gains Tax Act 1979, s. 134(1) because it was not in respect of a "debt on a security" within Taxation of Chargeable Gains Act 1992 section 132 subsec-or-para (3)s. 82(3)(b).
The first issue was whether the existence of a security conferring a proprietary interest in any property on the creditor ("a proprietary security") by itself constituted a "debt on a security" withinTaxation of Chargeable Gains Act 1992 section 132 subsec-or-para (3)s. 82(3)(b). The second issue was, if it did not, whether the debt due from Holdings to TCI, in all the circumstances, was it a debt on a security.
On the first issue TCI contended that where there was a proprietary security, the meaning of a debt on a security was satisfied. In this case, although there was no evidence as to Californian law, the promissory note was evidence of a mortgage which amounted to a proprietary security satisfying the definition of a "security" inTaxation of Chargeable Gains Act 1992 section 132 subsec-or-para (3)s. 82(3)(b).
On the second issue, TCI contended that, if it was not enough that there was a proprietary security, the promissory note fulfilled the requirement that there should be a marketable security. The policy of the legislation was that only debts which were capable of securing a gain for the creditor were within the capital gains tax. Debts which could never exceed their original value and could only be disposed of at a loss were excluded. There might not be a ready market for the promissory note, but it was nevertheless capable of being sold.
The Revenue contended that if Parliament had intended every debt backed by some proprietary security to fall within Taxation of Chargeable Gains Act 1992 section 251 subsec-or-para (1)s. 134(1) of the 1979 Act, it would not have done so by borrowing the definition of "security" from Taxation of Chargeable Gains Act 1992 section 132 subsec-or-para (3)s. 82(3)(b). That definition was by its terms limited to such readily marketable debts as loan stock issued by a government or financial institution.
Held, dismissing TCI's appeal:
1. The context of the term "security" in Taxation of Chargeable Gains Act 1992 section 132 subsec-or-para (3)s. 82(3)(b) of the 1979 Act was the conversion of securities held, in the typical case, as an investment, although that might not by itself be a reliable guide. Although mortgage debts were regarded as investments in the past, there were difficulties in accepting them as a marketable investments capable of producing a profit, simply because they were well secured, especially if the rate of interest was variable and if the debt was liable to be called in or paid off at any time. It was not therefore conclusive that the existence a proprietary security brought a debt within the terms ofTaxation of Chargeable Gains Act 1992 section 132 subsec-or-para (3)s. 82(3)(b).
2. A marketable investment had to have the following characteristics: issue of loan stock by an institution with a view to it being dealt in on a stock exchange or some other established market; to be capable of realising a gain for the original creditor; the loan to carry interest (or to provide premium on repayment broadly equivalent to interest), probably for a fixed term at a fixed rate of interest; and the loan had to have "a structure of permanence". In addition, the existence of a proprietary security, while not necessary to give a debt the quality of being a debt on a security, nevertheless its presence in the form of a fixed or floating charge would make the security more readily acceptable to the market.
3. In this case, although there was a proprietary security evidenced by the promissory note which was assignable and was interest-bearing, it was unlikely if not totally impossible, that the promissory note would be of any interest to an outside investor. The crucial feature was that it lacked a "structure of permanence". It had no fixed term: repayment could have been demanded by the creditor, or made without penalty by the debtor, at any time. Although the fact that a debt might be repayable on demand, or liable to be repaid at any time, was not absolutely decisive, the bare contractual terms had to be looked at in their commercial context. In the context of this case, the provision of finance to a wholly-owned subsidiary for a particular project would be unlikely to be marketable.
By originating motion pursuant to the Taxes Management Act 1970 section 56Taxes Management Act 1970, s. 56 (as substituted by SI 1994/1813SI 1994/1813 with effect from 1 September 1994), the taxpayer, Taylor Clark International Ltd, appealed to the High Court against the following decision of the special commissioners (Mr Stephen Oliver QC and Mr M Cornwell-Kelly) released on 9 September 1996.
This appeal raises the question whether a loss sustained by the lender on an intra-group loan evidenced by a promissory note given by the borrower, and secured on real property, is allowable as a capital loss, the loan being claimed as a "debt on the security" within the meaning ofTaxation of Chargeable Gains Act 1992 section 251 subsec-or-para (1)s. 134(1) of the Capital Gains Tax Act 1979. In formal terms, it is an appeal against an assessment upon the taxpayer to tax of £247,500 on profits of £750,000 from income and chargeable gains for the period ended 31 March 1992. We are asked for a determination of the issue in principle only. No oral evidence was called by either party and the documentation put before us by the taxpayer was not contested, though there was in advance of the hearing no formally agreed statement of facts. The facts we find are as follows.
Castlehill Holdings Inc ("Holdings") was incorporated as a wholly-owned subsidiary of the taxpayer on 4 April 1984 under the laws of the state of California. It was established to carry out property development and investment in the US. On the day it was incorporated, the minutes of a board meeting of the taxpayer company recorded that an offer had been submitted to purchase three properties in Sunnyvale City, California, and that if the offer was accepted the purchase would be carried out through Castlehill Properties Inc ("Properties"), which would be a wholly-owned subsidiary of Holdings. A total borrowing of $20,343,000 to serve as the initial capital of Holdings was authorised.
On 9 April 1984, a promissory note for $15,193,000 was given by Holdings to the taxpayer under the hand of Holdings' president, Ralph C Wintrode, "for value received": we accept that the value received was a loan of that amount from the taxpayer to Holdings. Clause 1 of the note required repayment of the loan on demand; it was in fact repaid as to $10,108,000 on 15 January 1986, and as to the remainder of $5,085,000 on 10 January 1992. It is the exchange losses in converting US dollars to sterling upon the repayments which are the immediate occasion of the loss on the loan, for which the taxpayer now seeks relief. Under cl. 3, Holdings could "prepay" (which we understand to mean "repay") the loan at any time without penalty. Under cl. 4, any default in payment of either principal or interest made the whole of both due immediately; in so far as the principal is concerned, this provision evidently repeats cl. 1.
According to cl. 2 of the note, the loan carried initial yearly interest at 12.3125 per cent until 8 October 1984, but this specific interest rate was varied to 13.3125 per cent on 27 June 1984 as to $429,000 (that final amount having been drawn down on 27 June, the balance having been advanced earlier on 2 May). After 8 October 1984, interest was payable at one per cent above the LIBOR rate...
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