Vodafone Cellular Ltd v G. Shaw (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE MILLETT,SIR JOHN BALCOMBE,LORD JUSTICE HIRST |
| Judgment Date | 20 March 1997 |
| Judgment citation (vLex) | [1997] EWCA Civ J0320-7 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | CHRVF 95/0393/B |
| Date | 20 March 1997 |
[1997] EWCA Civ J0320-7
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Lord Justice Hirst
Lord Justice Millett
Sir John Balcombe
CHRVF 95/0393/B
MR. R. HENDERSON Q.C., MR. M. FLESCH Q.C. and MRS F. CULLEN (instructed by Mr. B.G.C. Cowper, Racal Cellular, Group Legal Department, Fleet, Hampshire) appeared on behalf of the Appellants.
MR. L. HENDERSON Q.C. and MR. C. TIDMARSH (instructed by the Solicitor of the Inland Revenue) appeared on behalf of the Respondent.
The question in this appeal is whether the taxpayer can deduct the sterling equivalent of $30 million 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 United Kingdom. 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% of the shares and Millicom 15%. The remaining 5% 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 United Kingdom. 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 29th. 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 £2 million. By the other ("the fee agreement") Millicom confirmed the grant of the manufacturing licences to the taxpayer. This was necessary because the operating licence had been granted to a subsidiary and not to the taxpayer itself. In addition Millicom agreed to supply the taxpayer from time to time at its request with future know-how. In return the taxpayer agreed to pay an annual fee equal to 10% of its consolidated pre-tax profits for 15 years with provision for losses to be carried forward.
The network was duly established. Afterwards it transpired that Millicom's know-how was not needed. Alternative technology was obtainable more cheaply elsewhere. The fee agreement became a liability. The taxpayer approached Millicom and asked it to agree to bring the arrangements to an end. This was effected on 29th. December 1986 by two further agreements. By one the taxpayer's ultimate parent company acquired Millicom's shares in the taxpayer in exchange for an issue of new shares in itself. By the other, called "the fee cancellation agreement", the taxpayer agreed to pay Millicom $30 million for the extinguishment of its liability under the fee agreement. In addition the taxpayer released Millicom from its liability under the fee agreement to supply future know-how, but not from its liability under the five licences, three of which continued in being.
The taxpayer and its subsidiaries had not earned any profits by the time of the fee cancellation agreement, and accordingly the annual payments provided for by the fee agreement had not yet become payable. It was always intended that the benefit of the fee agreement would be made available to the subsidiaries, and the Special Commissioners found that it was in fact made available to them as there was no other way (at least at first) in which the subsidiaries could operate; moreover, this was the only way in which the benefit of Millicom's expertise could be put to use. They found that there was no formal agreement between the taxpayer and its subsidiaries for the taxpayer to be reimbursed for the benefit of the fee agreement; but that when the arrangements were entered into in 1983 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 the taxpayer.
The Special Commissioners found:
(1) that the payment made to cancel the fee agreement was not made to rid the taxpayer of an onerous capital asset because although the fee agreement was onerous it was not a capital asset;
(2) that the fee cancellation agreement was a separate transaction from the purchase of the shares in the taxpayer held by Millicom (the two agreements were of course between different parties);
(3) that the payment of $30 million was made for the purposes of the trade carried on by the taxpayer (which the Special Commissioners found included promoting the trade of the subsidiaries); but
(4) that the payment was not made wholly and exclusively for the purposes of that trade.
The taxpayer company appeals from (4) and the Crown cross-appeals from (1). There is no cross-appeal from ( 2) or (3). Although the subject of the cross-appeal, the question whether the payment of $30 million was a capital or a revenue payment logically comes first.
Was the payment a capital or revenue payment?
Whether a payment is a capital or a revenue payment is a question of law: see Strick v Regent Oil Co. Ltd. [1966] AC 295per Lord Reid at p. 313; Inland Revenue Commissioners v Carron Co. (1968) 45 TC 18per Lord Wilberforce at p. 73; Tucker v Granada Motorway Services Ltd. [1979] 1 WLR 683per Lord Wilberforce at p. 688; Beauchamp v Woolworth plc [1990] 1 AC 478per Lord Templeman at p. 492.
There is no single test or infallible criterion for distinguishing between capital and revenue payments.: see Van denBerghs Ltd. v Clark [1935] AC 431per Lord Macmillan at pp. 428–9; Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd. [19864] AC 948per Lord Radcliffe at p. 959; Strick v Regent Oil Co. Ltd. (supra) per Lord Reid at p. 313. On the contrary, there are many factors which tend in one direction or the other, some of which are more relevant in some situations and some in others. Some factors are particularly relevant when the question arises on an acquisition and others are of particular relevance when the question arises on a disposal, as it does in the present case.
Two matters are of particular importance: the nature of the payment; and the nature of the advantage obtained by the payment. The fact that the payment is a lump sum payment is relevant but not determinative. In a case such as the present, where the payment is made in order to get rid of a liability, a useful starting point is to inquire into the nature of the liability which is brought to an end by the payment. Where a lump sum payment is made in order to commute or extinguish a contractual obligation to make recurring revenue payments then the payment is prima facie a revenue payment.
In Hancock v The General Reversionary Society [1919] 1 KB 25 the payment of a lump sum in order to commute an annual pension was held to be an income payment because it merely anticipated payments which if not commuted would have been income payments. In such a case
"the lump sum might be regarded as of the same nature as the ingredients of which it was composed"
see Van denBerghs Ltd. v Clark (supra) at p. 431 per Lord Macmillan.
In Anglo-Persian Oil Co. Ltd. v Dale [1932] KB 124 the payment of a lump sum in order to secure the cancellation of an agency agreement which was onerous to the principal and would otherwise have endured for a further ten years was held to be a revenue payment. It
"neither enlarged the are of its operations, nor improved its goodwill, nor embarked upon a new enterprise; it merely effected a change in its business methods and internal organisation, leaving its fixed capital untouched"
per Lawrence LJ at p. 270.
But the principle that a payment made in order to commute or discharge a liability to make recurring revenue payments is itself a revenue payment is subject to an important qualification. If the liability to make recurring revenue payments is reduced or brought to an end by the modification or disposal of an identifiable capital asset, then any payment made for the modification or disposal is itself a capital payment.
In Tucker v Granada Motorway Services Ltd. (supra) Lord...
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