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You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Scorer (Inspector of Taxes) v Olin Energy Systems Ltd [1985] UKHL 3 (21 March 1985)
URL: http://www.bailii.org/uk/cases/UKHL/1985/3.html
Cite as: [1985] AC 645, [1985] 2 All ER 375, [1985] UKHL 3

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JISCBAILII_CASE_TAX

    Parliamentary Archives,
    HL/PO/JU/18/245

    Scorer (Inspector of Taxes) (Appellant)

    v.
    Olin Energy Systems Limited (Respondents)

    JUDGMENT

    Die Jovis 21° Martii 1985

    Upon Report from the Appellate Committee to whom was
    referred the Cause Scorer (Inspector of Taxes) against Olin
    Energy Systems Limited, That the Committee had heard Counsel
    on Monday the 11th, Tuesday the 12th and Wednesday the 13th
    days of February last upon the Petition and Appeal of Kenneth
    Scorer (Her Majesty's Inspector of Taxes) of Somerset House,
    Strand, London WC2R 1LB praying that the matter of the Order
    set forth in the Schedule thereto, namely an Order of Her
    Majesty's Court of Appeal of the 19th day of December 1983
    might be reviewed before Her Majesty the Queen in Her Court
    of Parliament and that the said Order might be reversed,
    varied or altered or that the Petitioner might have such
    other relief in the premises as to Her Majesty the Queen in
    Her Court of Parliament might seem meet; as also upon the
    Case of Olin Energy Systems Limited lodged in answer to the
    said Appeal, and due consideration had this day of what was
    offered on either side in this Cause:

    It is Ordered and Adjudged, by the Lords Spiritual and
    Temporal in the Court of Parliament of Her Majesty the Queen
    assembled, That the said Order of Her Majesty's Court of
    Appeal of the 19th day of December 1983 complained of in the
    said Appeal be, and the same is hereby, Affirmed and that the
    said Petition and Appeal be, and the same is hereby,
    dismissed this House: And it is further Ordered, That the
    Appellant do pay or cause to be paid to the said Respondents
    the Costs incurred by them in respect of the said Appeal, the
    amount thereof to be certified by the Clerk of the
    Parliaments if not agreed between the parties.

    Cler: Parliamentor:

    HOUSE OF LORDS

    SCORER (INSPECTOR OF TAXES)
    (APPELLANT)

    v.

    OLIN ENERGY SYSTEMS LTD.
    (RESPONDENTS)


    Lord Fraser of Tullybelton
    Lord Keith of Kinkel
    Lord Bridge of Harwich
    Lord Brightman
    Lord Templeman

    LORD FRASER OF TULLYBELTON

    My Lords,

    I have had the advantage of reading in draft the speech
    of my noble and learned friend, Lord Keith of Kinkel. I agree
    with it and, for the reasons given by him, I would dismiss the
    appeal.

    LORD KEITH OF KINKEL

    My Lords,

    The respondents, Olin Energy Systems Ltd., formerly named
    Olin Mathieson Ltd. ("Olin"), are a wholly owned subsidiary of a
    United States corporation incorporated in the State of Delaware.
    In 1956 Olin commenced business in a trade consisting in the
    supply of specialist equipment to the coal mining industry and in
    certain other engineering activities. In 1961 Olin started another
    trade in the shape of the long-term chartering of a ship, the m.v.
    Morven, to its parent corporation. The ship had been purchased
    and equipped with the aid of a loan of $8,582,000 from another
    subsidiary of the parent corporation, carrying interest at the rate
    of 5 5/8 per cent. per annum and repayable over a period of 20
    years. In February 1967 the charter, which had also been for a
    term of 20 years, was terminated with the payment of
    compensation to Olin, the ship was sold, and the balance of the
    loan was repaid. During each of the seven years for which the
    ship-chartering business was carried on, Olin's accounts showed the
    profits of that business, described as "Shipping Division," separately
    from those of its engineering business, described as "Airbreaker
    Division." In the profit and loss accounts for each of these years
    various charges regarded as being directly attributable to either of
    the two divisions were so treated. The interest on the loan of
    $8,582,000, by contrast, was not attributed to either division, but
    was dealt with by charging it against the aggregate trading result
    of the two divisions.

    This treatment was accepted by Olin's very reputable
    auditors, but it was, as is now common ground, incorrect. By
    virtue of certain double taxation regulations which it is
    unnecessary to go into, the provisions of the Income Tax Acts
    relating to relief for losses were available to Olin in respect of

    - 1 -

    the interest payments. Accordingly it was permissible for Olin,
    under section 345 of the Income Tax Act 1952, to treat the
    payments of loan interest, having been made wholly and exclusively
    for the purposes of the Shipping Division trade, as though they
    were losses incurred in that trade. Such losses were available,
    under section 342 of the Act of 1952, to be carried forward and
    set off against the profits of that trade in future years. Similar
    relief was made available, after the introduction of corporation tax
    by the Finance Act 1965, under certain provisions of that Act and
    associated Regulations. Further, under paragraph 21 of Schedule
    15 to the Act of 1965 provision was made for the continued carry-
    forward of losses incurred before the introduction of corporation
    tax, including interest payments treated as losses under section 345
    of the Act of 1952.

    These carry-forward provisions were applicable, however,
    only in relation to the trade in respect of which the deemed losses
    in the shape of interest payments were incurred. They did not
    have the effect of making it permissible to carry the losses
    forward and set them off against the profits of a separate trade
    carried on by the same taxpayer. But this did not have a
    material effect upon the taxation position until the m.v. Morven
    was sold and the trade of the Shipping Division discontinued. As a
    matter of general principle, where a taxpayer carries on two
    trades, losses in one of them in a particular year may be set off
    against profits of the other realised in that year. So as long as
    both the Shipping Division and the Airbreaker Division were
    carrying on trade, the losses of the former were capable of being
    set off against the profits of the latter. In each of the seven
    accounting periods prior to the discontinuance of the Shipping
    Division trade the current losses in that trade, including interest
    payments deemed to be losses, were so great as to swallow up the
    profits of the Airbreaker Division, leaving Olin with a nil tax
    liability. Thus the wrong treatment of the Shipping Division losses
    in the accounts did not have any practical effect on the taxation
    position.

    The picture changed after the discontinuance of the Shipping
    Division trade in February 1967. The accumulated losses of the
    division at that time amounted to £465,457. The profits of the
    Airbreaker Division for the year ended 30 November 1968 were
    substantial. There now being only one trade, that of the
    Airbreaker Division, the terminal losses of the defunct Shipping
    Division were not capable of being carried forward and set against
    the profits of that one trade, which were thus liable to
    corporation tax. On 14 November 1969 Olin's accountants sent to
    the inspector of taxes accounts for the year to 30 November 1968
    together with tax computations. The profit and loss account for
    the Airbeaker Division in that year brought out a profit of
    £113,654. That for the Shipping Division showed a nil profit, and
    comparable figures for the preceding year (including a profit of
    £42,637) were given. The tax computation for the Airbreaker
    Division showed an adjusted profit of £115,515. The final page of
    the computations read as follows:

    "OLIN MATHIESON LTD.
    SECTION 345 INCOME TAX ACT 1952

    - 2 -


    Losses brought forward

    £465,457

    Deduct profits of Airbreaker Division

    £115,515

    Carried forward

    £349,942"


    On 17 November 1969 the inspector issued to Olin a corporation
    tax assessment for the year ended 30 November 1968 in the sum
    of £5,000, this being an estimated assessment. The accountants
    appealed against the assessment by letter dated 19 November 1969.
    The inspector raised a number of fairly minor queries on the
    accounts and computations, which the accountants answered to his
    satisfaction, and on 8 January 1970 he wrote to the accountants as
    follows:

    "I thank you for your letter of 18 December 1969 and can
    agree your suggestions. Your computations are therefore
    agreed for the chargeable accounting period ended 30
    November 1968 and the appeal is determined in accordance
    with section 510, Income Tax Act 1952."

    On 14 January 1970 the Inspector issued an amendment to the
    corporation tax assessment showing:


    "Schedule D Cases I and II

    £123,403

    (Less losses or charges treated as losses)

    £123,403

    the tax payable being

    nil

    "

    Thereafter the inspector dealing with Olin's tax affairs
    changed. The accountants had correspondence with him about
    Olin's corporation tax liability for the year ended 30 November
    1969, and he raised the point that the losses of the defunct
    Shipping Division should not have been carried forward and used to
    offset the profits of the Airbreaker Division. On 17 July 1972
    this inspector (who is the appellant in this appeal) issued an
    additional assessment to corporation tax on Olin for the year
    ended 30 November 1968. This had the effect of disallowing relief
    for carried-forward Shipping Division losses, so that tax of
    £51,019.12 became payable. The issue in the appeal is whether he
    was entitled to issue this additional assessment under section 5(3)
    of the Income Tax Management Act 1964, or whether he was
    precluded from doing so by section 510 of the Act of 1952. The
    special commissioners answered this question in Olin's favour. On
    appeal by the Inland Revenue by way of case stated Walton J.
    reversed that determination and found in their favour. Olin
    appealed to the Court of Appeal, which by a majority (Lawton and
    Fox L.JJ., Kerr L.J. dissenting) allowed the appeal and restored
    the determination of the special commissioners, but granted the
    revenue leave to appeal to your Lordships' House.

    Section 5 of the Act of 1964, which was extended to
    corporation tax by paragraph 6(1) of Schedule 6 to the Finance
    Act 1966, provides by subsection (3):

    "If an inspector or the Board discover - (a) that any income
    which ought to have been assessed to tax at the standard

    - 3 -

    rate or to surtax has not been assessed, or (b) that an
    assessment to tax at the standard rate or to surtax is or
    has become insufficient, or (c) that any relief which has
    been given is or has become excessive, the inspector or, as
    the case may be, the Board may make an assessment in the
    amount, or the further amount, which ought in his or their
    opinion to be charged."

    Section 12(4) of the Act of 1964 provides:

    "Save as otherwise provided in the Income Tax Acts or the
    enactments relating to the profits tax the determination of
    the General Commissioners or the Special Commissioners in
    any proceedings under the Income Tax Acts or the
    enactments relating to the profits tax shall be final and
    conclusive."

    By section 510(1) of the Act of 1952 it is enacted:

    "Subject to the provisions of this section, where a person
    gives notice of appeal to the General Commissioners, the
    Special Commissioners or the Board of Referees against an
    assessment to, or a decision of any kind with respect to,
    income tax other than surtax or surtax, and, before the
    appeal is determined by the Commissioners or Board, the
    surveyor or other proper officer of the Crown and the
    appellant come to an agreement, whether in writing or
    otherwise, that the assessment or decision should be treated
    as upheld without variation, or as varied in a particular
    manner or as discharged or cancelled, the like consequences
    shall ensue for all purposes as would have ensued if, at the
    time when the agreement was come to, the Commissioners
    or Board had determined the appeal and had upheld the
    assessment or decision without variation, had varied it in
    that manner or had discharged or cancelled it, as the case
    may be."

    The references to income tax in this subsection were extended to
    corporation tax by paragraph 12(2) and (4) of Schedule 6 to the
    Act of 1966.

    It was settled by Cenlon Finance Co. Ltd, v. Ellwood [1961]
    Ch. 50; [1961] Ch. 634 that where an agreement has been arrived
    at under section 510 of the Act of 1952 it is not open to the
    inspector to make an additional "discovery" assessment under
    section 5(3) of the Act of 1964 (the material provisions of which
    were at that time to be found in section 41(1) of the Act of
    1952). Such an additional assessment is, however, not precluded if
    it is founded upon a point other than the particular matter which
    was the subject of the section 510 agreement. (See the Cenlon,
    case, per Cross J., at p. 69, Upjohn L.J., at p. 651, and Holroyd
    Pearce L.J., at p. 655; Kidston v. Aspinall (1963) 41 T.C. 371, per
    Wilberforce J., at p. 386; Chancery Lane Safe Deposit and
    Offices Co. Ltd, v. Inland Revenue Commissioners
    (1965) 43 T.C.
    83, Banning v. Wright (1972) 48 T.C. 421.) In the present case the
    additional assessment dated 17 July 1972 was based upon the
    proposition that in law the carried-forward losses of the defunct
    Shipping Division were not available to be set against the profits
    of the Airbeaker Division for the accounting year to 30 November

    - 4 -

    1978. The question at issue is whether or not the availability of
    these losses for that purpose is the particular matter which was
    the subject of the section 510 agreement arrived at on S January
    1970. By his letter of that date the inspector stated: "Your
    computations are therefore agreed for the chargeable accounting
    period ended 30 November 1968 . . ." These computations plainly
    included the calculations which I have quoted, showing the set-off
    of section 345 brought-forward losses against the profits of the
    Airbreaker Division. These losses were in fact losses of the
    defunct Shipping Division. Counsel for the appellant argued,
    however, that the accounts and computations did not make this
    plain, that the provenance of the brought-forward losses was not
    clearly indicated, and that the inspector then dealing with the
    matter might have thought or assumed that they arose in the
    Airbreaker Division itself. In the circumstances the point now at
    issue was not in contemplation at the time. Reference was made
    to a passage in the judgment of Harman L.J. in the Chancery
    Lane Safe Deposit
    case, [1965] 1 W.L.R. 239, 247, where he said:
    "the point now in issue was not then raised nor was the question
    in the minds of either of the parties" and to another in the
    judgment of Wilberforce J. in Kidston v. Aspinall (1963) 41 T.C.
    371, 388: "the question as to the right of the appellant's wife to
    take capital out of the settlement was not present to the minds of
    either the appellant or the special commissioners, and no
    possibility of an assessment following upon that right was ever
    discussed or ever raised."

    In my opinion there can be no doubt that Olin's accountants
    were aware that they were putting forward a claim to have the
    carried-forward losses of the defunct Shipping Division set against
    the profits of the Airbreaker Division for the year in question.
    They clearly knew that the brought-forward losses of £465,457
    shown on the final page of their computations had arisen wholly in
    the Shipping Division. I am further of opinion that the material
    which they put before the inspector was sufficient to bring home
    to the mind of an ordinarily competent Inspector in his position
    precisely what they were claiming. The accounts made it entirely
    clear that the Shipping Division had ceased to trade and had no
    profits in the year in question. The comparative figures for the
    year to 30 November 1977 included therein showed a substantial
    compensation payment received in respect of capital loss arising on
    the sale of m.v. Morven, and also an item, in the Shipping Division
    profit and loss account, in respect of disposal expenses. The
    nature of the losses claimed was made plain by the reference to
    section 345 of the Act of 1952, and they were claimed in a
    computation separate from that relating to the Airbreaker Division
    itself. I can see grounds for an assumption that the losses
    claimed related to the Airbreaker Division specifically. Reference
    to earlier accounts, which the inspector must have had in his
    possession, would have made it even clearer that they did not.

    So there are no grounds for the view that the accountants
    did not lay before the inspector material apt to cause him to
    appreciate the nature of their claim. The situation must be
    viewed objectively, from the point of view of whether the
    inspector's agreement to the relevant computation, having regard
    to the surrounding circumstances including ail the material known
    to be in his possession, was such as to lead a reasonable man to
    the conclusion that he had decided to admit the claim which had

    - 5 -

    been made. In my opinion that question falls to be answered in
    the affirmative. I am fortified in that conclusion by the
    consideration that the argument for the Inland Revenue before the
    special commissioners, as recorded in the case stated, contains not
    the slightest hint that the inspector did not appreciate that the
    brought-forward losses the subject of the claim had been incurred
    wholly in the discontinued Shipping Division. The passage
    particularly relevant is this: "If the inspector had carried out his
    duties correctly, he could not possibly have accepted the proposal
    that losses in a trade which had ceased should be set off against
    those of a continuing trade." The fact of the matter is that he
    did agree to just that, and it is of no consequence why he did so,
    provided it was not due to misleading information. I find myself
    in respectful agreement with the following passage in the judgment
    of Fox L.J. in the Court of Appeal [1984] S.T.C. 141, 150:

    "It is true that the actual point of law was never
    formulated. But I do not think that can be necessary. The
    section is dealing with agreements as to how an assessment
    shall be dealt with. It is not dealing with the formulation
    of points of law. We do not know why the inspector agreed
    the computation. He may have made an error of law or he
    may have misunderstood the facts or he may have failed to
    think about the matter at all. Subject to the question,
    which I mention later, as to whether the taxpayer has
    provided misleading information, I do not see why the
    circumstances that the inspector has made a mistake either
    of law or fact should take the case outside section 510.
    Essentially, the question is not why he agreed but whether
    he agreed. The purpose of the section must be to protect
    the taxpayer by producing finality, and Parliament, I would
    suppose, must have contemplated that the taxpayer would be
    protected, even though the inspector made some error in his
    assessment. That is a likely, if not the most likely, event
    in which the question of going back on the agreement would
    ever arise at all."

    My Lords, for these reasons I would dismiss the appeal.
    The appellant must pay the respondents' costs in this House.

    LORD BRIDGE OF HARWICH

    My Lords,

    For the reasons given in the speech of my noble and learned
    friend Lord Keith of Kinkel, with which I agree, I too would
    dismiss this appeal.

    - 6 -

    LORD BRIGHTMAN

    My Lords,

    I also agree that this appeal should be dismissed for the
    reasons given in the speech of my noble and learned friend Lord
    Keith of Kinkel.

    LORD TEMPLEMAN

    My Lords,

    In 1957 an American subsidiary comprised in a group of
    companies controlled by a parent corporation also incorporated in
    the United States of America commissioned an Italian shipyard to
    construct a vessel to be used in the shipping activities of the
    group. In 1961 the vessel was completed at a cost of
    approximately £3m., named the Morven and registered in the name
    of the respondent, an English subsidiary of the group. The
    respondent raised money to pay for the vessel by a loan from
    another American subsidiary of the group repayable over 20 years
    with interest at 5 5/8 per cent. per annum. The Morven was
    chartered by the respondent to its American parent corporation for
    a period of 2O years on terms presumably agreeable to both.

    Prior to the acquisition of the Morven, the respondent was
    engaged in one composite trade which consisted of supplying
    specialist equipment used in the coal mining industry and
    manufacturing and supplying various other items of an industrial or
    engineering nature. After the acquisition of the Morven, the
    respondent carried on two separate trades, namely its former
    manufacturing and supply trade known as "the Airbreaker Division"
    and its new trade, so far as it could be called a trade, associated
    with its ownership of the Morven, known as "the Shipping Division"
    and involving the collection of paternal charter hire and the
    payment of fraternal loan interest.

    The acquisition by the respondent, an English subsidiary,
    with moneys provided by an American subsidiary, of a vessel
    constructed in Italy, for the purposes of a group owned by an
    American corporation, enabled the respondent's Shipping Division to
    claim for the purposes of United Kingdom tax an investment
    allowance of £1.1m. and an annual allowance of £270,000 per
    annum or thereabouts. The respondent also became entitled to pay
    the annual interest of about £160,000 on the loan of £3m. from
    its American fellow subsidiary without deduction of United
    Kingdom tax and to treat the whole of that interest as though it
    were a loss incurred by the Shipping Division.

    In these proceedings the respondent's accounts for the years
    1962, 1964 and 1968 were disclosed. From those accounts it
    appears that from 1961 when the Morven was acquired until 1967
    when the Morven was sold, the respondent made aggregate profits
    exceeding £500,000 after providing about £500,000 by way of
    depreciation and during that period the respondent did not become
    liable to pay any United Kingdom tax as a result of applying the

    - 7 -

    tax allowances and interest losses attributable to the Shipping
    Division.

    In preparing the profit and loss accounts of the Shipping
    Division, the respondent did not deduct the gross or net cost of
    the interest of £160,000 payable on the loan raised to purchase
    the Morven. That was bad acountancy practice but did not distort
    the profit and loss account of the respondent company which
    showed the interest as a deduction from the combined profits of
    the Airbreaker Division and the Shipping Division.

    In its taxation computations the respondent company
    deducted Airbreaker Division profits from interest paid on the loan
    of £3m. in the current year and also from the balance of interest
    paid in previous years. This was bad accountancy and bad law
    because the Airbreaker Division profits could not be set off
    against accumulated interest losses of the Shipping Division for
    past years. Counsel for the respondent informed the House that
    this admitted error did not prejudice the revenue because in each
    year the current Airbreaker profits did not exceed the current
    Shipping Division interest loss.

    The error in the respondent's taxation computation was
    however repeated in the 1968 accounts after the respondent had
    ceased to carry on its Shipping Division trade. The 1968 accounts
    disclosed that the Morven had been sold, that the Shipping Division
    had ceased to trade and that the only trade carried on by the
    respondent was "the manufacture and sale of high pressure
    pneumatic and hydraulic equipment." In these circumstances the
    profits of the Airbreaker Division for 1968 could not be set off
    against the interest losses attributable to the Shipping Division in
    previous years. The relevant computation asserted, however, such
    set-off. In the result the 1968 computation incorrectly claimed
    that the respondent had not made any profits liable to tax when in
    fact the respondent had made a profit for tax purposes of
    £115,515. The inspector of taxes accepted this incorrect
    computation, possibly a little bemused by the earlier incorrect
    computations and by the high reputation of the respondent's
    auditors, Peat Marwick.

    When a subsequent inspector of taxes sought to recover the
    tax which ought to have been paid for 1968, these present
    proceedings were instituted. The respondent sought to justify the
    1968 tax computation but its arguments were dismissed trenchantly
    by Walton J., were swept aside by the Court of Appeal and were
    not repeated to your Lordships.

    My Lords, it appears that tax allowances are generous to
    foreigners; that the revenue could not safely assume that the
    accounts forwarded by the respondent's auditors complied with
    elementary rules of accountancy and tax law; that the error of
    the respondent being plain on the face of the 1968 accounts, the
    respondent has escaped tax for which it ought to have been made
    liable; and that this appeal must be dismissed.

    - 8 -


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