Van-Arkadie v Sterling Coated Materials Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 03 December 1982 |
| Date | 03 December 1982 |
| Court | Chancery Division |
Chancery Division.
Mr. R. Carnwath (instructed by the Solicitor of Inland Revenue) for the Crown.
Mr. D.C. Potter Q.C. and Mr. A.G. Wilson (instructed by Messrs. Clifford-Turner) for the taxpayer company.
Before: Vinelott J.
Capital allowances - First-year allowance - Purchase of machinery for Swiss francs - Contract providing for payment by instalments - Variation in payment provisions requested by vendor - Liability for instalment payments altered by entry into credit contract between purchaser and Swiss bank - Whether sterling cost of meeting instalments deductible in years paid - Extra sterling required to meet instalments as result of deterioration of sterling against Swiss franc - When was expenditure incurred - Whether first-year allowance available in respect of extra sterling amount - Finance Act 1972 section 41 subsec-or-para (1)Finance Act 1971. sec. 41(1): Finance Act 1972 section 50 subsec-or-para (4)50(4).
This was an appeal by the Crown from a decision of the Special Commissioners that the taxpayer company (SCM) was entitled to first-year allowances in respect of its total payments made to a Swiss bank as consideration for the purchase of equipment from a Swiss manufacturing company.
The initial contract between SCM and the manufacturer provided that 70 per cent of the contract price was payable over a five year period by 10 half-yearly instalments, with interest. The currency of payment and the rate of interest were not clearly set out in that contract. The instalments were to commence after the machinery was satisfactorily installed in SCM's factory.
The manufacturer was unable to finance the construction of the plant from its own resources and could not afford to wait for the instalments. It therefore needed to arrange a facility through which it could receive cash in return for the right to receive the instalments. This facility was arranged through a Swiss bank and SCM agreed that its liability for the instalments should be transferred to that bank. A loan agreement was entered into by SCM and the bank.
SCM paid the bank five instalments of 300,000 Swiss francs at six monthly intervals from 1 April 1974 to 1 April 1976. The balance was paid by two larger instalments, with interest, on 1 October and 1 December 1976. During the payment period the value of the £ sterling dropped against the Swiss franc. The additional cost of sterling in meeting those instalments was the amount in issue in this appeal. It was common ground that, had the loan agreement not been entered into and had the instalments been paid as provided under the original contract, the instalments would have been deductible in the years that they were paid.
The Commissioners found that, if SCM had entered into the loan contract to enable it to enter into the contract to purchase the equipment, the additional sums required to purchase the Swiss francs with which to repay the loan would have been sums expended on the provision of finance and would not have qualified for relief under Finance Act 1971 section 41 subsec-or-para (1)sec. 41(1) of the Finance Act 1971. However, the Commissioners concluded that the loan arrangement had been entered into with the object of putting the manufacturer in funds and substituting, in effect, the bank for the manufacturer as the company entitled to the instalment payments under the contract. In their view the additional sums in issue were directly connected with and were part of the expenditure incurred on the purchase.
The Crown contended that the Commissioners had erred in law by explicitly substituting the commercial effect of the transactions for their true legal effect, which was that SCM had borrowed from the Swiss bank, had paid those sums to the manufacturing company in satisfaction of the outstanding liabilities under the original contract and repaid the borrowing from the bank by instalments.
Held, appeal dismissed.
1. It may be that the transaction between the bank and SCM was a loan. However, it does not follow that the capital expenditure by SCM must be treated as having been incurred when the sums were debited to SCM's account.
2. Both parties relied on the House of Lords' decision inBen-Odeco Ltd. v. Powlson (H.M.I.T.) TAX52 T.C. 459. However, in that case the question was whether the expenditure was incurred on the provision of plant, while in this case, the question is when did the Swiss francs become payable by SCM.
3. It was a condition of the original contract that 70 per cent of the purchase price of the plant would be payable by instalments over five years. SCM agreed to the alteration of the arrangements only on the basis that 70 per cent of the purchase price (or the 3000,000 Swiss francs substituted for it) continued to be payable by instalments over that five year period. SCM did not become liable to pay the 3000,000 Swiss francs otherwise than by instalments over the five year period. Accordingly, it cannot be said that the whole of the 3000,000 francs became payable by SCM at the time the loan agreement was entered into.
4. SCM are entitled to first-year allowances under Finance Act 1971 section 41 subsec-or-para (1)sec. 41(1) of the Finance Act 1971 in respect of the additional cost of meeting the instalments.
Vinelott J.: This is an appeal from a decision of the Special Commissioners who held in favour of the taxpayer, Sterling Coated Materials Ltd. (which I shall abbreviate to "SCM"), that in calculating its profits for the accounting periods 1 January 1975, to 31 December 1975, and 1 January 1976, to 31 December 1976, it was entitled to first year allowances in respect of certain payments made in those years to a Swiss bank, the Union Bank of Switzerland (which I shall abbreviate to "UBS").
The facts which give rise to this dispute are complex and unusual, and I shall have to set them out more fully than is ordinarily the case. Under a written contract between SCM and a Swiss manufacturing company, Bachofen & Meier (which I shall abbreviate to "B & M"), (which is undated but which the Commissioners found was entered into on 21 March 1973) B & M agreed to supply SCM with specified plant at the price of 4.4 million Swiss francs. It was provided that delivery should be considered complete only when the plant had been delivered, erected, commissioned and handed over in a state which would enable SCM to commence production. The contract contained provisions for the payment of liquidated damages for delay and for breach of a performance guarantee.
A specification and quotation dated 28 February 1973, which formed part of the contract provided that the price was to be payable "net in Swiss francs, US dollars, Dutch florins or Deutschmarks" as to 20 per cent on the date of the contract, as to 10 per cent at a date midway between the date of the contract and the date fixed for dispatch...
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