Whittles (Inspector of Taxes) v Uniholdings Ltd (No 3)
| Jurisdiction | England & Wales |
| Judgment Date | 09 December 1994 |
| Date | 09 December 1994 |
| Court | Chancery Division |
Chancery Division.
Sir John Vinelott.
Launcelot Henderson (instructed by the Solicitor of Inland Revenue) for the Crown.
Andrew Thornhill QC and Giles Goodfellow (instructed by Herbert Smith) for the taxpayer.
The following cases were referred to in the judgment:
Aberdeen Construction Group Ltd v IR Commrs ELR[1978] AC 885
Edwards (HMIT) v Bairstow & Anor ELR[1956] AC 14
Edwards v Skyways Ltd WLR[1964] 1 WLR 349
R v General Commrs for Brentford, ex parte Chan TAXTAX(1985) 57 TC 651; [1986] BTC 50
Ramsay (WT) Ltd v IR Commrs ELR[1982] AC 300
Rose and Frank Co v J R Crompton & Bros Ltd ELR[1923] 2 KB 261
Whittles (HMIT) v Uniholdings Ltd TAX[1993] BTC 388
Whittles (HMIT) v Uniholdings Ltd (No. 2) TAX[1993] BTC 460
The following cases were referred to in the judgment on costs:
Department of Health and Social Security v Envoy Farmers LtdWLR[1976] 1 WLR 1018
Farrand (HMIT) v Satterthwaite TAX(1929) 14 TC 469
Gresham Life Assurance Society v Bishop (Surveyor of Taxes);ELR[1903] 2 KB 171
Manchester Corp v Sugden (Surveyor of Taxes)
This was an appeal by the Revenue against a decision of a special commissioner that there was no liability to corporation tax on chargeable gains in respect of a gain realised on a forward contract to buy US dollars specifically entered into as a hedge against any loss as a result of the depreciation of sterling arising on repayment of a large dollar loan.
On 14 May 1982 the company borrowed the equivalent of some £14m in US dollars (US$25.5m) from a bank which was 30 per cent owned by the company's parent. The loan was repayable on 15 March 1983. On the same day the company purchased the same amount from the same bank for completion on 15 March 1983 at a price payable on that date of slightly less than £14m. The purpose of the second transaction was to eliminate the risk of a currency loss when the loan became repayable.
The company had no wish to borrow dollars rather than sterling but was offered a lower rate of interest than would have been available on a sterling loan and would have been unwilling to borrow dollars without the hedge afforded by the forward contract.
In the event, the value of sterling fell during the life of the loan. Some £17.5m was required to repay the loan, while the US dollars agreed to be purchased under the forward contract were worth a similar amount. The loss on the dollar borrowing, as intended, was cancelled by the gain on the forward contract.
The company never received the dollars under the forward contract. Instead the forward contract was modified by arrangement with the bank so that the company's right to receive the $25m purchased for delivery on 15 March 1983 was replaced by the right to extinguish an equivalent amount of the dollar loan.
The company appealed against an assessment made on the basis that it had realised a chargeable gain on the difference between the price paid for the dollars under the forward contract (under £14m) and the disposal price of £17.5m while the loss suffered on repayment of the loan was not an allowable loss.
At a hearing before a special commissioner the company contended that there was no gain or loss resulting from the two transactions since they were to be regarded as a single composite transaction following the principle set out in WT Ramsay Ltd v IR Commrs ELR[1982] AC 300. The company said that there was a common understanding between the company and the bank that the forward contract would not be dealt with for any other purpose than for repayment of the loan.
The commissioner found that although the loan agreement and the forward contract were each "part and parcel of a composite transaction", nevertheless the Ramsay principle did not apply as the company contended. However, the appeal was allowed on other grounds.
The Revenue appealed against the commissioner's decision. The company, intending to advance the Ramsay argument on the appeal, successfully applied to the court for an order that the case stated be remitted to the special commissioner for clarification and further findings of fact. In the event the case was remitted to the commissioner twice.
At the third hearing before the special commissioner the Revenue conceded that there was an understanding between the company and the bank, and the commissioner found that it was well known to both parties that it was generally accepted in the foreign exchange market that the benefit of a forward contract with a bank for the purchase of foreign currency could not be assigned without the consent of the bank.
The only question when the substantive appeal came before the court was whether the special commissioner was entitled on the facts to find that there was no binding contract under which the company agreed not to assign or otherwise deal with the forward contract to the extent that the dollar loan remained outstanding, and that on the maturity of the dollar loan the dollars purchased by the forward contract would be used in discharge of it.
The Revenue submitted first that there was no contract in the absence of any record of the "understanding". Secondly, in view of the fact that the parent of the company held 30 per cent of the share capital of the bank a contract would not have been considered necessary. Thirdly, the existence of a market practice that such contracts were non-assignable could be relied on in the absence of a binding contract.
The company asked for its costs, not only of the appeal itself but of the two applications to remit the case to the special commissioner and of the two remitted hearings. The Revenue contended that the court had no jurisdiction to award costs of proceedings before the special commissioners.
Held, dismissing the Revenue's appeal:
1. To create a contract there had to be a common intention of the parties to enter into a legal obligation, mutually communicated or implied, and the onus was on the party who asserted that no legal effect was intended. If the intention was implied, such an inference would not be lightly drawn. In deciding whether it was possible to infer from the language used and the surrounding circumstances an intention not to enter into a binding contract, significance could not be attached to the absence of any written agreement. Nor did the relationship between the bank and the company afford any ground for the inference that the bank was willing to rely on an understanding in honour only, particularly as the company's parent did not control the bank. Finally, the existence of a market practice that a forward contract for the purchase of currency from a bank could not be assigned without the consent of the bank tended to confirm the inference that the parties would be bound.
2. The true and only conclusion to be drawn from the facts was that the agreement between the company and the bank amounted to a binding agreement under which the company could not deal with the forward contract without the consent of the bank and under which the bank was to be at liberty to use the dollars purchased in discharge of the dollar loan. It followed that the company did not make any profit on the forward purchase of dollars and made no sterling loss on the repayment of the dollar loan as a result of the obligations under the contract and it was not necessary to decide whether the Ramsay principle would have applied if the agreement to link the two transactions had been binding in honour only.
3. The court had a discretion to order costs before the commissioners. The Revenue was ordered to pay the costs of the remitted hearings as well as the costs of the substantive appeal and the applications to the court to remit the case to the special commissioner.
1. Sitting in London, Mr D C Potter QC, a single commissioner for the special purposes of the Income Tax Acts, on 20, 21 and 22 January 1992 heard the appeal of Uniholdings Ltd ("the company") against an assessment to corporation tax in the estimated sum of £1m for the accounting period being the calendar year 1983. The corporation tax was the tax on an alleged chargeable gain realised by the company in that year.
2-4 [Paragraphs 2-4 stated that Mr K H Wallis, a director and chairman of the company, gave evidence and listed the documents before the commissioners.]
5. Arguments were addressed to the commissioner by Mr A Thornhill QC and Mr G Goodfellow of counsel on behalf of the company and Miss D Lawunmi of the office of the Solicitor of Inland Revenue on behalf of the Revenue before us.
6. The commissioner reserved his decision and gave it in writing on 12 March 1992, deciding the appeal in principle in favour of the company. The parties then agreed the figures, and on 28 April 1992 he determined the appeal by reducing the assessment to nil. A copy of the decision was annexed and formed part of the case.
7. By letter dated 15 May 1992 Miss Lawunmi on behalf of the Revenue expressed dissatisfaction with the determination and required the commissioner to state and sign a case for the opinion of the High Court.
8. At the request of the company and with the consent of the Revenue the commissioner recorded the following facts (using the wording submitted on behalf of the company):
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(2) "Mr Wallis was at the material time the chairman both of Uniholdings and of Gencor (UK). As chairman of Gencor (UK) Mr Wallis acted as chief executive of all the UK companies."
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(3) "Uniholdings carried on business as an investment holding and dealing company. An investment in Trans-Atlantic Insurance Holdings Ltd ("TIH") was made as part of its investment holding activities."
9. At the request of the company and with the consent of the Revenue the commissioner recorded the following (fourth) submission made on behalf of the company (using the wording submitted on behalf of the company):
This submission was to the effect that even if Uniholdings acquired...
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Whittles (Inspector of Taxes) v Uniholdings Ltd (No 3)
...28Taxation of Chargeable Gains Act 1992, ss. 16, 21, 28). This was an appeal by the Revenue against the decision of Sir John Vinelott ([1995] BTC 119) that a loss arising on repayment of a dollar loan as a result of the depreciation of sterling could be set off against a gain realised on a ......