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

JurisdictionEngland & Wales
Judgment Date20 March 1997
Date20 March 1997
CourtCourt of Appeal (Civil Division)
Vodafone Cellular Ltd & Ors
and
Shaw (HM Inspector of Taxes)

Hirst and Millett L JJ and Sir John Balcombe,

Court of Appeal (Civil Division).

Corporation tax - Losses - Payment for release of obligation - Agreement to pay ten per cent of pre-tax profits for 15 years to US corporation in return for technical know-how - Sum paid for release - Whether capital or revenue payment - Whether payment wholly and exclusively for the purposes of the company's trade - Income and Corporation Taxes Act 1970, s. 130(a) (Income and Corporation Taxes Act 1988 section 74 subsec-or-para (1)Income and 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 exclusively for the benefit of Vodafone's trade. The Revenue cross-appealed against the judge's decision that the payment was a revenue payment.

In 1982 Vodafone entered into an agreement with a US based company, Millicom, to provide technical assistance in setting up a mobile telephone network in the UK. In order to obtain the necessary manufacturing licences and technology Vodafone was formed, Racal holding 80 per cent of the shares, Millicom holding 15 per cent and a financial institution holding five per cent.

To comply with Department of Trade requirements, Vodafone formed two subsidiaries, one to operate the network and one to sell apparatus and service. There were no formal contractual arrangements providing for payment by the subsidiaries to Vodafone for any Millicom technology made available to them, but it was contemplated that the subsidiaries would be charged with the fees paid to Millicom in the same way that they were charged for management and other services supplied to them by Vodafone.

On 29 June 1983 Vodafone entered into two agreements with Millicom. By a share agreement Millicom was granted its shareholding in Vodafone and agreed to supply the initial know-how and technical support for a sum of £2m. By the other agreement (the fee agreement) Millicom agreed to supply Vodafone with future know-how in return for an annual fee equal to ten per cent of its pre-tax profits for 15 years.

After the network was established it transpired that Millicom's technology was not needed. Alternative technology was obtainable more cheaply elsewhere. The two agreements were brought to an end by two further agreements on 29 December 1986.

By one agreement Vodafone's parent company acquired Millicom's shares. By the other agreement (the fee cancellation agreement) Vodafone agreed to pay Millicom $30m for extinguishing its liability under the fee agreement and Vodafone released Millicom from its obligation to supply future know-how.

Vodafone and its two subsidiaries had not earned any profits by the time of the fee cancellation agreement so that no payments under it had become due.

Vodafone appealed against the inspector's refusal to allow deduction of the $30m as a revenue payment and the consequent refusal to give effect to claims for group relief made by the Racal companies in respect of Vodafone's losses.

The High Court upheld the special commissioners' decision that the $30m payment was a revenue payment made for cancellation of revenue obligations under the fee agreement, but that it was not made wholly and exclusively for the purposes of Vodafone's trade within theIncome and Corporation Taxes Act 1988 section 74 subsec-or-para (1)Income and Corporation Taxes Act 1970, s. 130(a). It was held that the relationship with Millicom was a burden on the collective trade of the group so that its removal could not be regarded as exclusively for the benefit of Vodafone's trade.

Held, allowing Vodafone's appeal and dismissing the Revenue's cross-appeal:

1. In 1986, when the payment was made, the fee agreement was a contract for future services to be paid for out of income which turned out to be a liability. Since, generally, a payment to acquire an asset or to get rid of a liability had the same character as the asset or liability concerned, the payment to cancel the fee agreement was a revenue payment.

2. A benefit to one company in a group would also be advantageous for the group as a whole, but a distinction was to be made between a benefit to the members of the group and the benefit to their different trades. Since there were no contractual arrangements between Vodafone and the subsidiaries as to payment for the Millicom technology, Vodafone could charge the subsidiaries for its use, but could not demand payment for services which they did not use. In that event payments to Millicom under the fee agreement would be irrecoverable. It followed that the sum paid for cancellation of the agreement made no difference to the subsidiaries and was wholly and exclusively made for the benefit of Vodafone's trade.

3. The "wholly and exclusively" question was one of inference from the primary facts and the true and only reasonable conclusion on the facts found by the commissioners contradicted their determination.

The following cases were referred to in the judgments:

Anglo-Persian Oil Co Ltd v Dale (HMIT) ELR[1932] 1 KB 124

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

Commissioner of Taxes v Nchanga Consolidated Copper Mines LtdELR[1964] AC 948

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

Hancock (HMIT)v General Reversionary & Investment Company LtdELR[1919] 1 KB 25

IR Commrs v Carron Co TAX(1968) 45 TC 18

MacKinlay (HMIT) v Arthur Young McClelland Moores & CoELRTAX[1990] 2 AC 239; [1989] BTC 587

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

Mallett (HMIT)v Staveley Coal and Iron Co Ltd ELR[1928] 2 KB 405

Odhams Press Ltd v Cook (HMIT) TAX(1938) 23 TC 233

S Ltd v O'Sullivan UNK[1972] 2 ITR 602

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

Tucker (HMIT) v Granada Motorway Services Ltd WLR[1979] 1 WLR 683

Van den Berghs Ltd v Clark (HMIT) ELR[1935] AC 431

Roger Henderson QC, Michael Flesch QC and Felicity Cullen (instructed by Racal Group Services, Vodafone Group Services and Stephenson Harwood) for the taxpayers.

Launcelot Henderson QC and Christopher Tidmarsh (instructed by the Solicitor of Inland Revenue) for the Crown.

JUDGMENT

Millett LJ: The question in this appeal is whether the taxpayer can deduct the sterling equivalent of $30m in the calculation of its profits for the purpose of corporation tax. It can do so only if the payment giving rise to the claim for deduction satisfies two requirements. It must be (i) a revenue and not a capital payment and (ii) a payment made wholly and exclusively for the purposes of the taxpayer's trade.

The special commissioners held (in favour of the taxpayer) that the payment was of a revenue nature but (in favour of the Crown) that it was not made wholly and exclusively for the purposes of the taxpayer's trade. Accordingly they disallowed the deduction. Their decision was affirmed by Jacob J on both points. The taxpayer now appeals to this court against the ruling that the payment was not made wholly and exclusively for the purposes of its trade, and the Crown cross-appeals against the ruling that the payment was of a revenue nature.

The facts

In 1982 the Racal Electronics Group ("Racal") was intent on establishing a cellular mobile telephone network in the UK. In order to obtain the necessary manufacturing licences and technology it decided to enter into a joint venture with an American company Millicom Inc ("Millicom"). The taxpayer was formed as a joint venture company for this purpose, Racal holding 80 per cent of the shares and Millicom 15 per cent. The remaining five per cent were held by a financial institution. These shareholdings did not reflect the parties' original intentions, but nothing turns on this. In due course Millicom granted five royalty-free licences to the taxpayer to manufacture its products and incorporate them into equipment for use in the UK. The licences were conditional on the taxpayer obtaining an operating licence for the system from the Department of Trade and Industry.

In the event the Department of Trade and Industry insisted that the operation of the network and the sale of apparatus and service to subscribers must be undertaken by different companies. Accordingly the taxpayer formed two wholly-owned subsidiaries, one to operate the network and one to sell the apparatus and service; and the operating licence was granted to the company which was to be responsible for operating the network.

On 29 June 1983 the taxpayer entered into two agreements with Millicom. By one ("the share agreement") Millicom was granted its shareholding in the taxpayer and agreed to supply the initial know-how and technical support for a sum of £2m. By the other ("the fee agreement") Millicom confirmed the grant of the manufacturing licences to the taxpayer. This was necessary because the operating...

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