Taylor Clark International Ltd v Lewis (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 18 November 1998 |
| Date | 18 November 1998 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Simon Brown, Peter Gibson and Schiemann LJJ.
Graham Aaronson QC and Anthony de Garr Robinson (instructed by William Sturges & Co) for the taxpayer.
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 TAX(1978) 52 TC 281
Cleveleys Investment Trust Co v IR Commrs TAX(1971) 47 TC 300
Ramsay (WT) Ltd v IR Commrs WLRELR[1979] 1 WLR 974; [1982] AC 300
Singer v Williams ELR[1921] 1 AC 41
Corporation tax - Allowable loss - Loan in US dollars by UK company to US member of group - Promissory note given as security, secured on real property - Whether a "debt on a security" - Whether currency exchange loss on repayment of loan an allowable loss - Taxation of Chargeable Gains Act 1992 section 132 subsec-or-para (3) section 251 subsec-or-para (1)Capital Gains Tax Act 1979, ss. 82(3)(b), 134(1) (Taxation of Chargeable Gains Act 1992 section 132 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 the taxpayer from a judgment of Robert Walker J ([1997] BTC 200), dismissing an appeal from the determination of the special commissioners, that an exchange loss incurred on the repayment by an overseas subsidiary of a loan made to it by the taxpayer was not a deductible loss for corporation tax purposes.
In 1984 the taxpayer lent over $15m to its US subsidiary ("Holdings"). The loan was for property development in California, but that purpose was not a contractual term. Security was given in the form of a promissory note, secured on the real property, issued by Holdings to the taxpayer. The initial interest was to be adjustable from time to time at the taxpayer's option to one per cent over LIBOR with a minimum of nine per cent. The note stipulated repayment on demand and Holdings could repay the loan at any time without penalty. It was expressly contemplated that the promissory note would be assignable. In the event, the loan was repaid as to $15m in 1986 and as to the remainder in 1992, giving rise to a sterling loss on conversion.
The basis of the Revenue's case was 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). By that section, no chargeable gain accrued on the discharge of a debt by the original creditor except in the case of a debt on a security within Taxation of Chargeable Gains Act 1992 section 132 subsec-or-para (3)s. 82(3)(b) of the 1979 act. The word "security" was defined by Taxation of Chargeable Gains Act 1992 section 132 subsec-or-para (3)s. 82(3)(b) as "including", inter alia, any loan stock or other security. The phrase "debt on a security" as a whole was not defined.
The appeal raised the issue whether the fact that a debt was secured was a sufficient characteristic for the debt to be a "debt on a security" within Taxation of Chargeable Gains Act 1992 section 251 subsec-or-para (1)s. 134(1). The second issue was whether, if it was not, the debt in question was, by reason of its particular characteristics, a "debt on a security".
On the first point the taxpayer contended that the statutory definition of "security" was only inclusive, not exhaustive. The normal meaning of the word "security" denoted any debt that was secured on some fund or property as well as marketable securities such as stocks and shares. On the second point the taxpayer contended that the true commercial context of the loan was the provision of a substantial sum of money by way of mortgage to enable holdings to acquire properties for development and investment. The significant features of the loan in the present case were that it was secured on the promissory note; it yielded a commercial rate of interest; it entitled the holder of the promissory note to sell it at will; and the holder of the note was entitled to an income based on the going commercial rate for dollar borrowings. That was a loan in the nature of an investment, not a mere debt.
Held, dismissing the taxpayer's appeal:
1. Even if Taxation of Chargeable Gains Act 1992 section 132 subsec-or-para (3)s. 82(3)(b) was not exhaustive, it was improbable that Parliament intended that any secured debt would be included in the definition of "security". There appeared to be no unifying characteristic of secured debts and the marketable investments comprehended by the words of inclusion. There could not be two disparate classes of asset, one defined by inclusion and the other unexpressed, both amounting to "securities" for the purpose of the phrase "a debt on a security". A debt on a security was not a synonym for a secured debt. It could not have been intended that the existence of any security, however inadequate, for any debt, however impermanent, should turn the debt into a debt on a security.
2. The loan in the present case was not a marketable security in any realistic sense, the most important features being the absence of any fixed term and the fact that it was repayable on demand. It was not of any great materiality that the taxpayer lent the money for property development. That was not a contractual term and did not detract from the impermanence of a loan which the borrower or the creditor could bring to an end at any time. The loan was not intended to be a marketable loan nor to be dealt in, even though it was assignable. It was a mere interest-bearing loan, with security, from a parent company to its subsidiary.
3. The fact that the loan was in foreign currency, which always gave rise to the possibility of a currency gain or loss when repaid was not significant. The basic rule in Taxation of Chargeable Gains Act 1992 section 251 subsec-or-para (1)s. 134(1) expressly recognised that, whether the debt was in sterling or some other currency, no chargeable gain or allowable loss was to accrue to the original creditor on its disposal.
Peter Gibson LJ: When Parliament in 1962 introduced legislation on capital gains in the form of short term capital gains tax chargeable under Case VII of Sch. D, it used for the first time the term "debt on a security" (para. 15(1) of Sch. 9 to the Finance Act1962). That term was not defined as such, but "security" was defined in a non-exhaustive way (para. 11(3)(b) ibid.). In WT Ramsay Ltd v IR Commrs ELR[1982] AC 300 at p. 333 Lord Fraser said that it was not a term familiar to lawyers or business men and at p. 334 called it a "strange phrase". When capital gains tax was introduced by theFinance Act 1965, debts were treated for the purpose of that tax in much the same way with only minor exceptions. The same undefined term "debt on a security" was used (para. 11(1) of Sch. 7 to theFinance Act 1965) with the same non-exhaustive definition of "security" (para. 5(3)(b) ibid.). Subsequent consolidations of the capital gains tax legislation have made no significant changes to that undefined and that defined term. The meaning of "debt on a security" has been found to be a matter of difficulty even in the House of Lords. One finds descriptions such as "particularly obscure" and "[lacking] a rational explanation" (Aberdeen Construction Group Ltd v IR CommrsTAX(1978) 52 TC 281 at p. 305 per Lord Russell) and "baffling both on the statutory wording and as to the underlying policy" (Ramsayat p. 329 per Lord Wilberforce).
This appeal raises the issue, not the subject of any binding decision of the courts prior to this case, whether the fact that a debt is secured is a sufficient characteristic for the debt to be a "debt on a security". A second issue is whether, if that is not a sufficient characteristic, the debt in question is, by reason of its particular characteristics, a "debt on a security".
It is an appeal by the taxpayer, Taylor Clark International Ltd ("Taylor Clark"), from the order of Robert Walker J on 7 March 1997 ([1997] BTC 200). Taylor Clark had claimed that an exchange loss incurred on the repayment by an overseas subsidiary of a loan made to it by Taylor Clark was a deductible loss for the accounting period ended 31 March 1992. The Revenue disallowed that claim when making an assessment on the profits and chargeable gains of Taylor Clark for that period. Taylor Clark appealed to the special commissioners. Unusually the appeal was heard by three special commissioners (Mr THK Everett, Mr Stephen Oliver QC and Mr MP Cornwell-Kelly). No doubt that indicates the recognition by the special commissioners that the case is a test case of general importance. On 9 September 1996 they gave a decision in principle whereby they dismissed the appeal. Taylor Clark appealed from the decision to the judge who dismissed the appeal.
The report of the judge's judgment also contains the decision of the special commissioners and it is unnecessary to repeat all the facts which have been set out with clarity in the special commissioners' decision and in the judge's meticulous judgment. I will confine myself to recording what to my mind are the salient features of those facts relevant to this appeal.
(1) The loan was arranged in April 1984 by Taylor Clark. It was to lend money to its wholly owned Californian subsidiary, Castlehill Holdings Inc. ("Holdings"), which was formed on 4 April 1984 and which in turn owned another recently formed Californian company, Castlehill Properties Inc ("Properties").
(2) Properties purchased three properties in Sunnyvale City for the purpose of property development and investment, the purchase being completed on 3 May 1984 and financed by equity and loan capital.
(3) Taylor Clark lent $15,193,000 in two tranches in May and June 1984 to Holdings which lent that money on to Properties.
(4) Holdings gave Taylor Clark a promissory note dated 9 April 1984, by which it...
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