Vodafone Cellular Ltd and Others v Shaw (Inspector of Taxes)

JurisdictionEngland & Wales
Judgment Date03 February 1995
Date03 February 1995
CourtChancery Division

Chancery Division.

Jacob J.

Vodafone Cellular Ltd & Ors
and
Shaw (HM Inspector of Taxes)

Michael Flesh QC and Felicity Cullen (instructed by Touche Ross and Vodafone Cellular Ltd Legal Department for Vodafone; Legal Department, Racal Electronics plc Group for the Racal companies and Stephenson Harwood for Racal Redac (UK) Ltd (now Zuken-Redac UK Ltd)) for the taxpayers.

Launcelot Henderson (instructed by the Solicitor of Inland Revenue) for the Crown.

The following cases were referred to in the judgment:

Anglo-Persian Oil Co Ltd v Dale (HMIT) TAX(1931) 16 TC 253

Barr, Crombie & Co Ltd v IR Commrs TAX(1945) 26 TC 406

Beauchamp (HMIT) v FW Woolworth plc ELRTAX[1990] 1 AC 478; [1989] BTC 233

Bentleys, Stokes & Lowless v Beeson (HMIT) TAX(1952) 33 TC 491

British Insulated and Helsby Cables Ltd v Atherton ELR[1926] AC 205

Edwards (HMIT) v Bairstow & Anor ELR[1956] AC 14

Fleming (HMIT) v Bellow Machine Co Ltd TAX(1965) 42 TC 308

Lawson (HMIT) v Johnson Matthey plc TAX[1992] BTC 324

MacKinlay (HMIT) v Arthur Young McClelland Moores & CoTAXTAXTAX(1989) 62 TC 704; [1986] BTC 398 (ChD), [1989] BTC 587 (CA)

Mallalieu v Drummond (HMIT) ELRTAX[1983] 2 AC 861; [1983] BTC 380

S Ltd v O'Sullivan [1972] Irish Tax Cases No. 108

Strick (HMIT) v Regent Oil Co Ltd ELR[1966] AC 295

Sun Newspapers Ltd v Federal Commr of Taxation UNK(1938) 61 CLR 37

Tucker (HMIT) v Granada Motorway Services Ltd TAX(1979) 53 TC 92

Van den Berghs Ltd v Clark (HMIT) TAX(1935) 19 TC 390

This was an appeal by Vodafone Cellular Ltd ("the taxpayer") and four other members of the Racal group of companies against the decision of a special commissioner.

The question was whether a payment for the cancellation of an agreement to pay ten per cent of the taxpayer's pre-tax profits to another company was a capital or revenue payment, and whether it was paid wholly and exclusively for the purposes of the taxpayer's trade.

In 1982, the taxpayer, which was a member of the Racal Electronics group, entered into an agreement with a US based company, Millicom. The purpose of the agreement was to obtain a telecommunications operating licence and Millicom had expertise in mobile cellular radio telephones in the US.

The terms of the agreement were settled on 30 June 1983. They were contained in two agreements, the "share agreement" and the "fee agreement". Under the share agreement Millicom was entitled to a 15 per cent shareholding in the taxpayer and agreed to supply know-how and technical support. Under the fee agreement Millicom was entitled to ten per cent of the taxpayer's pre-tax profits for 15 years.

In due course the Vodafone network was set up. It turned out that the Millicom technology was not as important as anticipated. Alternative technology was obtained and the fee agreement became a millstone. An opportunity arose for Racal to buy Millicom out. This was done on 29 December 1986 by two agreements. The 15 per cent Millicom interest in the taxpayer and the fee agreement were brought to a end. The fee agreement was cancelled for consideration of US$30m. That payment was the subject of a claim for tax relief.

The taxpayer appealed against the refusal of the inspector to allow as a deduction for corporation tax purposes the sterling equivalent of US$30m and a consequent refusal to give full effect to claims for group relief made by four companies (the Racal Group) under the provisions ofIncome and Corporation Taxes Act 1970 section 258s. 258 of the Income and Corporation Taxes Act 1970 in respect of the taxpayer's losses. The Revenue took the view that the cancellation payment was of a capital nature but even if it was not it would not be deductible because it was not expended wholly and exclusively for the purposes of the taxpayer's trade.

The special commissioner held that the obligation to pay fees and royalties under the fee agreement was of a revenue nature, so its commutation was a revenue item. The commissioners considered that the fee agreement did not relate to the whole structure of the taxpayer's trade. However, the commissioners disallowed the claim on the ground that the payment was made for the benefit of the trade of all four companies, and was not therefore made "wholly and exclusively" for the benefit of the taxpayer's trade.

The Revenue contended in relation to the capital question that the commissioners had applied the wrong test. Rather than the "whole structure" test, the right test would have been to ask whether the agreement was an asset or advantage brought into existence for the "enduring" benefit of the trade, and that test was not satisfied. The payment was made for shares which represented capital, giving the agreement a "flavour" of capital.

The taxpayer contended that the payment was made by the taxpayer exclusively to get rid of its own legal obligation under the agreement. The taxpayer had its own trade. The payment was for the benefit of that.

Held, dismissing the taxpayer's appeal:

1. It did not follow that anything acquired in exchange for shares had to be capital, and, in any event, it was the fee agreement which had to be considered. The fee agreement at the time it was entered into was essentially a revenue item and it followed that a payment for its cancellation was a revenue payment: British Insulated and Helsby Cables Ltd v Atherton ELR[1926] AC 205 at p. 274, per Viscount Cave applied.

2. As a question of fact, the deductibility of payments was to be judged by reference to the purpose of those making the payment, and not by the effect which resulted from the payment. However, the purpose of the person making the payment was not inevitably limited to that person's conscious motive when the expenditure was made if it was "inescapable" that one object of the taxpayer was another purpose. Realistically the burden of the Millicom agreement was not only a legal liability of the taxpayer but a burden on the group's collective trade. Benefit to the collective trade of the group was a self-evident purpose behind the payment. Once one regarded the trade as collective, then the benefit obtained by removal of the burden on that trade was the inescapable purpose of such removal.

CASE STATED

1. At a hearing before two of the special commissioners (Dr A N Brice and His Honour Judge Stephen Oliver QC) on 10, 11, 14, 15, 16 and 17 June 1993 Vodafone Cellular Ltd (the taxpayer company) appealed against the refusal of the inspector of taxes to allow a deduction for the purposes of corporation tax of the payment of a sum of £20,286,366.00 which was paid by the taxpayer company as consideration for the release by another company of its rights to receive a fee amounting to ten per cent of the consolidated pre-tax profits of the taxpayer company for a period of 15 years. In respect of that payment the taxpayer company made claims for loss relief totalling £14,590,374 under the provisions of Income and Corporation Taxes Act 1970 section 177 subsec-or-para (2)s. 177(2) of the Income and Corporation Taxes Act 1970 for the two years ending on 31 March 1986 and 31 March 1987 respectively; £1,877,354 in respect of the year ending on 31 March 1986 and £12,713,020 in respect of the year ending on 31 March 1987.

2. Because of the refusal to allow the deduction referred to in para. 1 above, the inspector of taxes also refused to give full effect to claims for group relief made by four companies under the provisions ofIncome and Corporation Taxes Act 1970 section 258s. 258 of the Income and Corporation Taxes Act 1970 in respect of the losses in the taxpayer company's accounts for the period ending on 31 March 1987. The four companies, and the amounts disallowed, are:

  1. (2) Racal Defence Radar & Displays Ltd: £7,805,387

  2. (3) Racal Defence Electronics (Radar) Ltd: £6,997,856

  3. (4) Racal Redac (UK) Ltd: £1,938,083

  4. (5) Racal Finance Ltd: £33,490.

3. The principal questions for determination were:

  1. (2) whether the cancellation payment was of a capital or revenue nature; and, if it was of a revenue nature,

  2. (3) whether it was paid wholly and exclusively for the purposes of the trade of the taxpayer company.

4. Mr Michael Flesch QC and Mrs Felicity Cullen appeared on behalf of the taxpayers. Mr G Shaw, district inspector, and Ms M R Bashford appeared on behalf on the Revenue.

5. Oral evidence was given on behalf of the taxpayers by:

  1. (2) Sir Ernest Harrison, chairman of Racal Electronics plc and also chairman of Vodafone Group plc.

  2. (3) Mr Gerald Arthur Whent, the chief executive of the Vodafone Group plc who was, at all relevant times, the chairman and chief executive of the taxpayer company. He was also a director of Racal Electronics plc and chairman and managing director of Racal-Vodafone Ltd and Racal-Vodac Ltd from the dates they were formed until 1 January 1985 after which date he remained chairman but not managing director.

  3. (4) Mr Edward John Peett CBE, an executive director of the Vodafone Group plc, who in 1982 was a director of Racal-Tacticom Ltd and from 7 March 1983 a director of the taxpayer company.

6. The documentary evidence was contained in an agreed bundle of documents which included a document entitled "Background Information and Statement of Agreed Facts". Transcripts of the proceedings were taken throughout the hearing. None of the documentary evidence is attached hereto but copies of all or any of it, and the transcripts, are available for inspection by the court if desired.

7. At the conclusion of the hearing we reserved our decision which we gave in writing on 15 September 1993. A copy of that decision, amended to correct typographical errors, is annexed hereto and forms part of this case.

8. The facts and contentions of the parties are set out fully in our decision. It will be seen that we decided that the cancellation payment was of a revenue, and not a capital, nature but that it was not paid wholly and exclusively for the purposes of the trade of the taxpayer company.

9. Immediately after the determination of...

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8 cases
  • Vodafone Cellular Ltd and Others v Shaw (Inspector of Taxes)
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    • Court of Appeal (Civil Division)
    • March 20, 1997
    ...Corporation Taxes Act 1988, s. 74(1)(a)). This was an appeal by members of the Racal group of companies against a judgment of Jacob J ([1995] BTC 206) holding that a payment of $30m by a member of the group ("Vodafone") for the cancellation of an agreement was not made wholly and exclusivel......
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