Whitehead v Tubbs (Elastics) Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 08 December 1982 |
| Date | 08 December 1982 |
| Court | Chancery Division |
Chancery Division.
Mr. M. Hart (instructed by the Solicitor of Inland Revenue) for the Crown.
Mr. Robin Matthew (instructed by Messrs. Penley, Millward & Bayley) for the taxpayer company.
Before: Vinelott J.
Corporation tax - Whether expenditure on capital or revenue account - Payment made to secure modification of restrictive terms associated with loan arrangement - Whether payment secured any asset of an enduring nature - Income and Corporation Taxes Act 1970 section 130 subsec-or-para (f)Income and Corporation Taxes Act 1970, sec. 130(f).
This was an appeal by the Crown from a decision of the Special Commissioners. The Commissioners had found that a payment of £20,000 by the taxpayer company was on revenue account; the Crown contended that it was of a capital nature.
The payment in issue was made by the taxpayer company to secure a variation in a 1975 arrangement made by it with a finance company (ICFC). In 1975 ICFC agreed to lend the company £80,000 repayable in instalments over nine years with interest at a fixed rate of 17.5 per cent. The terms of the written agreement required the company to execute a debenture in favour of ICFC and imposed a number of onerous restrictions on the company. Those restrictions, inter alia, imposed an overdraft limit, limited the company's power to borrow from other sources and provided that ICFC should receive quite extensive reports on the company's business activities. The associated debenture set out the repayment terms, which included a right to repay the whole of the balance of the loan after 31 March 1982, on payment of accrued interest plus one year's additional interest. The debenture was secured over a considerable portion of the company's assets.
In 1978 it appeared to the company that the arrangement unduly restricted its efficient management and future growth potential. Accordingly, on 30 June 1978, a further agreement was entered into with ICFC. Under that agreement, secured for a consideration of £20,000, the 1975 agreement and debenture were cancelled and the terms imposed on the company were considerably relaxed. The repayment terms were not altered.
The Commissioners decided that the £20,000 paid by the company for that relaxation of terms was of a revenue nature, because no asset of an enduring nature had been acquired in consequence of that expenditure. In their view the only asset that existed was the right to use the borrowed money and that was a right which the company had both before and after the 1978 agreement.
The company sought to support the Commissioners' conclusion on the ground that the 1975 debenture and the 1975 agreement should be treated as separate transactions. It was claimed that the debenture, embodying the terms of the long-term borrowing was substantially unchanged by the 1978 agreement, whereas the restrictive terms of the collateral agreement were altered by the 1978 agreement. It was argued that the restrictions of the 1975 agreement were similar to the restrictions imposed by the charter in the case of I.R. Commrs. v. Carron CompanyTAX45 T.C. 18 - the case on which the Commissioners had based their decision.
Held, appeal upheld.
1. The Commissioners were incorrect in applying the principle stated in the Carron Company case to a case of a different character. Here, what was in question was the modification of the terms of a capital liability. It was misleading to identify the asset acquired as "the right to the use of the borrowed money". The advantage to the company is, in this case, the alteration in the terms affecting the loan capital. The 1978 agreement relieved the company from the restriction on raising further finance and freed the majority of the company's assets from the charges in the 1975 debenture. Those were enduring advantages for the balance of the loan repayment period.
2. The company's argument that the 1975 debenture and the 1975 agreement should be treated as separate transactions is not accepted. The restrictions in the 1975 agreement were...
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Whitehead v Tubbs (Elastics) Ltd
...and Corporation Taxes Act 1970, sec. 130(f). This was an appeal by the taxpayer company from the finding of Vinelott J. (reported at [1983] BTC 28) that a payment of £20,000 was of a capital nature, securing enduring advantages to the company and freeing a large amount of the company's prop......
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