Whitehead v Tubbs (Elastics) Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 08 November 1983 |
| Date | 08 November 1983 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal.
Mr. Robin Mathew (instructed by Messrs. Penley Milward & Bayley) for the taxpayer company.
Mr. Michael Hart (instructed by the Solicitor of Inland Revenue) for the Crown.
Before: Dunn, Oliver and Fox L.JJ.
Corporation tax - Whether expenditure of capital or revenue nature - 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 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 property from fixed and floating charges over it.
The payment in question was made in 1978 in order to secure a variation in a loan arrangement entered into with a finance company (ICFC) in 1975. Under the 1975 agreement ICFC agreed to loan the company £80,000 at 171/2 per cent interest, the capital being repayable by instalments over nine years. The loan was secured by a debenture creating a first and fixed charge of all the company's freehold property, goodwill and uncalled capital and a floating charge over the company's other assets. Under the arrangement the loan could not be repaid in full before 31 March 1982 and ICFC were to be given a considerable amount of information about the company's business. Also ICFC had to approve any borrowings by the company, save for bank loans of up to £35,000, and had an option to subscribe at a fixed price for 15 per cent of the company's issued equity capital.
By 1978 the company began to consider that its progress was being impeded by the borrowing and other restrictions placed on it under the 1975 arrangement. Some disquiet was also felt because ICFC was also financing another company in the same line of business. Accordingly, on 30 June 1978 a further agreement was entered into with ICFC, releasing the company from the onerous terms of the 1975 agreement and freeing all the company property, with the exception of its premises at Sherston, from the fixed and floating charge under the debenture. The company paid ICFC £20,000 as consideration. The repayment terms of the original loan were not altered.
The Special Commissioners found that the payment of £20,000 was a revenue expense for tax purposes, concluding that the sum had been paid simply in order to secure the release of restrictions inhibiting the efficient management of the business. I.R. Commrs. v. Carron Co.TAX(1968) 45 T.C. 18 was cited in support of that finding.
Vinelott J. reversed that decision on the basis that the company had secured an enduring advantage for the remaining period of the loan by altering the terms affecting the loan capital and by relieving the company from the risk that it might lose the right to repay by instalments - the company's bank borrowings in fact having been in excess of the £35,000 stipulated in the 1975 agreement.
Before the Court of Appeal the claim was made for the taxpayer company that Vinelott J. was incorrect in finding that the 1978 agreement relieved it from the risk of the loss of the right to repay by instalments as there was no finding of fact or inference that ICFC would or might have foreclosed on the loan and, accordingly, that so-called "advantage" should not have been treated as if it were an asset acquired by the company. Further claims on behalf of the company are incorporated in the "Grounds of Appeal" set out below.
For the Crown it was submitted that the mere fact that the payment removed restrictions on the day-to-day management of the company was not determinative of whether the price paid for release from those restrictions was of a revenue or capital nature. The restrictions were the price or premium paid by the company for the loan and the £20,000 was, in effect, a lump sum commutation of the price paid.
Held, appeal dismissed.
1. The decision of Vinelott J. did not rest solely on the advantage received by the company in removing the possible risk of foreclosure by ICFC. It rested also on the advantage obtained by freeing the bulk of the company's property from the fixed and floating charge under the debenture and on the advantage to the company in being able to carry on business free from the restrictions imposed by the 1975 agreement.
2. The cases relied on by the Commissioners do not provide any compulsive or convincing analogy pointing to a conclusion that the expenditure here was of a revenue nature. This case is more closely analagous to Tucker v. Granada Motorway Services Ltd. TAX(1979) 53 T.C. 92, where a payment in commutation of a variable rent in the lease of the taxpayer's premises was held to be of a capital nature.
3. Analysing both the purpose and effect of the transaction, what emerged from the 1978 agreement were two clearly identifiable and enduring advantages. First, the alteration of the terms affecting the loan capital and secondly, the release of the charges on the bulk of the company's assets enabling them to be used for raising further loan capital if required. These advantages enabled the company to trade better and to increase its profits, but were nevertheless of a capital nature, in that the company could use its capital assets in a way not previously available to it and could continue to enjoy the benefit of instalment repayment of the loan without the disadvantages imposed by the 1975 agreement.
4. The above findings preclude any necessity to consider the alternative Crown argument, based on Income and Corporation Taxes Act 1970 section 130 subsec-or-para (f)sec. 130(f) of the Income and Corporation Taxes Act 1970, that the £20,000 paid was a payment "in respect of" loan capital.
The taxpayer company appealed against the decision of VinelottJ. whereby he had allowed the Crown's appeal from the Special Commissioners, adjudging that £20,000 paid by the taxpayer company pursuant to an agreement dated 30 June 1978 was capital expenditure and on that account was not deductible from the profits of the taxpayer company.
By notice of appeal dated 6 January 1983 the taxpayer company appealed on the grounds that:
(2) Vinelott J. erred in deciding that the purpose, or the nature and benefit received as a result, of the payment made under the agreement dated 30 June 1978 ("the 1978 Agreement") was other than that expressly found by the Special Commissioners;
(3) Vinelott J. misdirected himself in finding that the 1978 Agreement relieved the taxpayer company of the risk of the loss of the right to repay the loan by instalments there being no finding of fact or inference in the case stated that ICFC, the lender, threatened or intended to call in the loan or foreclose or that this was a material danger to the taxpayer company (Vinelott J. having expressly excluded such a possibility from consideration in his judgment);
(4) Vinelott J. misdirected himself in failing to take any or sufficient account in his judgment of the fact found by the Special Commissioners that the taxpayer company paid the £20,000 in order to secure a release from certain of the terms of the Agreement dated 10 October 1975 ("the 1975 Agreement") which were inhibiting the efficient day-to-day management of its business and were liable to jeopardise its continued profitable expansion;
(5) Vinelott J. misdirected himself in failing to take any or sufficient account in his judgment of the facts found by the Special Commissioners that the increased turnover of the taxpayer company after 1978 would probably not have been achieved if the taxpayer company had not secured the release of the restrictive provisions in the...
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