Whittles (Inspector of Taxes) v Uniholdings Ltd (No 3)
| Jurisdiction | England & Wales |
| Judgment Date | 14 May 1996 |
| Date | 14 May 1996 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Nourse, and Aldous L JJ and Sir John Balcombe.
Christopher McCall QC and Launcelot Henderson QC (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
Craven (HMIT) v White ELRTAX[1989] AC 398; [1988] BTC 268
Department of Health and Social Security v Envoy Farms Ltd [1976] 1 WLR 1018
Edwards (HMIT) v Bairstow ELR[1956] AC 14
Farrand (HMIT) v Satterthwaite TAX(1929) 14 TC 469
Furniss (HMIT) v Dawson ELRTAX[1984] AC 474; [1984] BTC 71
Fitzwilliam v IR Commrs WLRTAX[1993] 1 WLR 1189; [1993] BTC 8003
Gresham Life Assurance Society Ltd v Bishop ELR[1903] 2 KB 171
IR Commrs v Burmah Oil Co Ltd TAXTAX(1982) 54 TC 200; [1982] BTC 56
Marren (HMIT) v Ingles WLR[1980] 1 WLR 983
Ramsay (WT) Ltd v IR Commrs ELR[1982] AC 300
Whittles (HMIT) v Uniholdings Ltd TAX[1993] BTC 388
Whittles (HMIT) v Uniholdings Ltd (No. 2) TAX[1993] BTC 460
Corporation tax - Chargeable gains - Forward contract to purchase dollars to protect against loss on dollar borrowings if sterling depreciated - Company assessed to tax on currency gain on forward contract - Whether Ramsay principle applied, so that gain was cancelled by non-allowable loss on repayment of loan - Capital Gains Tax Act 1979 section 19 subsec-or-para (1) section 27 subsec-or-para (1) section 29Capital Gains Tax Act 1979, ss. 19(1)(a), 27(1), 29(Taxation of Chargeable Gains Act 1992 section 16 section 21 section 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 forward contract made to mitigate the possibility of such a loss.
On 14 May 1982 the company borrowed the equivalent of some £14m in US dollars (US$25.5m) from a bank. The loan was repayable on 15 March 1983. On the same day the company purchased the same amount of dollars 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 borrowed dollars to obtain a lower rate of interest than would have been available on a sterling loan. It 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 £17m 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 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 and no 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 [1982] AC 300. The company said 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. Intending to advance the Ramsay argument on appeal, the company successfully applied to the court for an order that the case be remitted to the special commissioner for clarification and further findings of fact. In the event the case was remitted twice. At the second remittal hearing, it became common ground that there was an understanding between the company and the bank that the dollars purchased under the forward contract would be used to repay the dollar loan. It was also agreed that the company could not assign or deal with the forward contract without the consent of the bank. The commissioner found that there was "linkage" between the loan and forward contract, but no express or implied contractual obligation on the company not to deal with the forward contract without the consent of the bank. He held that the two contracts did not cancel each other out, but decided the case in favour of the company on another ground.
On the substantive appeal, the court held that the true and only reasonable conclusion to be drawn from the facts found by the commissioner was that the agreement between the company and the bank was a single composite agreement under which the company could not deal with the forward contract without the consent of the bank and, secondly, the bank was to be at liberty to use the dollars purchased in discharge of the dollar loan. The company, therefore, did not make any profit on the forward purchase of dollars and made no sterling loss on the repayment of the dollar loan. The judge concluded that the parties had entered into a single composite contract resulting in no gain or loss when the forward contract matured and the loan was finally discharged.
The Revenue also appealed against Sir John Vinelott's order that the costs of the hearings when the case was remitted to the special commissioner should be paid by the Revenue.
Held, allowing the Revenue's appeal by a majority (Aldous LJ dissenting):
1. If the loan and forward contract had been completed as separate and independent transactions, the effect of the relevant provisions of the Capital Gains Tax Act 1979Capital Gains Tax Act 1979 would have been that the company would be treated as having acquired the dollars on 14 May 1982 for the price which it paid for them under the contract when it was completed on 15 March 1983 (Capital Gains Tax Act 1979 section 27 subsec-or-para (1)s. 27(1)). The dollars were an asset (Capital Gains Tax Act 1979 section 19 subsec-or-para (1)s. 19(1)(a)) and a chargeable gain would have accrued to the company on their disposal. On the repayment of the loan, however, there was no "disposal of an asset" to give rise to an allowable loss (Capital Gains Tax Act 1979 section 29s. 29).
2. In order to treat the two transactions as a single composite transaction the material statutory provisions would have to be displaced, either because there was a contractual link between them (which it was agreed there was not) or by an application of the Ramsay principle. The loan was taken in dollars for the real, commercial purpose of relieving the company from paying a higher rate of interest; the forward contract was entered into for the real, commercial purpose of providing the company with the funds needed to repay the loan on the due date; the consequence of obtaining a loan in dollars rather than sterling was that there had been two transactions instead of one; the bank's ability to prevent dealings with the forward contract and to apply the dollars purchased under it in discharge of the loan did not cause a merger of the two transactions into one. While the forward contract balanced the loan contract, it did not negate it. The Ramsay principle therefore had no application.
3. Per Sir John Balcombe: The Ramsay principle might in appropriate circumstances be applied in favour of a taxpayer. However, in this case the loan and the forward contract, although linked together, did not result in a single composite transaction different from its constituent parts.
4. The court had discretion to award costs "of and incidental to" proceedings in the High Court under the Supreme Court Act 1981 section 51Supreme Court Act 1981, s. 51. While the remittal proceedings might not be capable of being described as "of" the proceedings in the High Court, they were costs "incidental to" those proceedings. Accordingly, the judge had been entitled to make the order as to costs before the special commissioner.
Nourse LJ: Introduction
This is a case about gains and losses for capital gains tax purposes which has been made to look more difficult than it is. Its unusual feature is that it is the taxpayer company, not the Crown, which seeks to rely on the Ramsay principle (see WT Ramsay Ltd v IR Commrs [1982] AC 300 and later decisions of the House of Lords), a principle which has no application here, in my judgment.
The proceedings have had a long history, including three hearings in the High Court and two intervening remittals to the special commissioner (Mr DC Potter QC) in order to clarify findings and make further findings of fact. All this can be gathered from the reports of the hearings in the High Court (see Whittles (HMIT) v Uniholdings LtdTAX [1993] BTC 388; Whittles (HMIT) v Uniholdings Ltd (No. 2)TAX [1993] BTC 460 and Whittles (HMIT) v Uniholdings Ltd (No. 3)TAX [1995] BTC 119, in particular the last of these where the case stated and the supplemental and further supplemental cases are fully set out). The outcome was that on 25 November 1994 Sir John Vinelott, sitting as a judge of the Chancery Division...
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