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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Revenue And Customs v Lloyds TSB Equipment Leasing (No 1) Ltd [2014] EWCA Civ 1062 (30 July 2014) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2014/1062.html Cite as: [2014] EWCA Civ 1062 |
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ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
Mr Justice Newey and Judge Howard M. Nowlan
[2013] UKUT 0368 (TCC)
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE PATTEN
and
LORD JUSTICE KITCHIN
____________________
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS |
Appellants |
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- and - |
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LLOYDS TSB EQUIPMENT LEASING (NO 1) LIMITED |
Respondent |
____________________
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Jonathan Peacock QC and Mr Michael Ripley (instructed by Norton Rose Fulbright LLP) for the Respondent
Hearing dates: 24 and 25 June 2014
____________________
Crown Copyright ©
Lord Justice Rimer :
Introduction
The facts
(1) Novation agreements between the shipbuilders, K-Line, LEL and Northern LNG under which certain of K-Line's obligations under the shipbuilding contracts were assumed by LEL and some by Northern LNG and K-Line; the substance was that LEL became the purchaser of the vessels;
(2) Headleases in respect of each vessel granted by LEL to Northern LNG under which each vessel was leased on finance terms for a primary period of 30 years from delivery, with a right for the lessees to renew the leases for one-year secondary periods. The effect of these leases was to vest the equity reversionary value in the vessels in Northern LNG;
(3) Bareboat charters in respect of each vessel granted by Northern LNG to K-Euro under which K-Euro was entitled to possession and use of the vessels over the 20-year bareboat charter period. That period could, under options exercisable by K-Euro, be extended for a term of five years. The hire payable by K-Euro was fixed for the first 12 years and was expressed to be a fair commercial rate;
(4) Time charter novation agreements between K-Line, the Snøhvit Sellers and K-Euro, under which the time charters entered into in respect of the vessels on 19 December 2001 were novated by K-Line to K-Euro, which became the disponent owner;
(5) Detailed and complex security arrangements were put in place in order to safeguard the interests of the different parties and the flow of payments under the lease and ancillary arrangements.
(1) The K-Euro LNG business, apart from the leases in respect of the two vessels, was transferred to K-Line LNG Shipping (UK) Ltd, a fellow subsidiary ('K LNG');
(2) The Bulk shipping business was transferred to K-Line Bulk Shipping (UK) Ltd;
(3) A new company, K-Line (Europe) Ltd, was incorporated;
(4) The agency business in respect of the car carrier and container vessels was transferred to the new K-Euro company.
The applicable capital allowances legislation
'(b) if the plant or machinery is a ship, aircraft or transport container, the use of the ship, aircraft or transport container for a qualifying purpose under section 123 or 124 …'.
Paragraph (b) reflects the further policy in Chapter 11, by way of a qualification of its main policy, to encourage and support, inter alia, the UK's shipping industry; and this case is concerned with ships. Put simply, capital expenditure on a ship used for a 'qualifying purpose' will not be restricted to the 10% section 109 capital allowance limit. There is no question of section 109 applying to this case. That is either because the plant in play is ships used for a 'qualifying purpose' within the meaning of section 123, in which case the 25% allowance is available; or the plant was not so used, in which case it cannot even qualify for a 10% allowance under section 109.
''(1) A ship is used for a qualifying purpose at any time when it is let on charter in the course of a trade which consists of or includes operating ships by a person who is –
(a) resident in the United Kingdom or carries on the trade there, and
(b) responsible for navigating and managing the ship throughout the period of the charter and for defraying –
(i) all expenses in connection with the ship throughout that period, or
(ii) substantially all such expenses other than those directly incidental to a particular voyage or to the employment of the ship during that period.
(2) Subsection (1) applies, with the necessary modifications, in relation to aircraft as it applies in relation to ships.
(3) For the purposes of subsection (1)(b) a person is responsible for something if he –
(a) is responsible as principal, or
(b) appoints another person to be responsible in his place.
(4) Subsections (1) and (2) do not apply if the main object, or one of the main objects –
(a) of the letting of the ship … on charter,
(b) of a series of transactions of which the letting of the ship … on charter was one, or
(c) of any of the transactions in such series,
was to obtain a writing-down allowance determined without regard to section 109 (writing-down allowance at 10%) in respect of the expenditure incurred by any person on the provision of the ship or aircraft.'
Issue 3
'… shall have effect, subject to subsection (4) below, as if the reference in subsection (2) of section 44 to 25 per cent were a reference to 10 per cent'.
Section 70(4), there referred to, was the forerunner of section 110 of the 2001 Act and provided for the circumstances in which no first-year allowances, balancing allowances or writing-down allowances were available at all.
'Subsection (5) above does not apply if the main object, or one of the main objects, of the letting of the ship … on charter, or of a series of transactions of which the letting on charter was one, or of any of the transactions in such a series was to obtain a writing-down allowance of an amount determined without regard to section 70(2) of the Finance Act 1982 in respect of expenditure incurred on the provision of the ship …'.
'(8) Subsection (6) above does not apply if the main object, or one of the main objects, of the letting of the ship … on charter, or of a series of transactions of which the letting on charter was one, or of any of the transactions in such a series was to obtain –
(a) …
(b) if the expenditure in question is new expenditure, a writing-down allowance of an amount determined without regard to section 42(2),
in respect of expenditure incurred on the provision of the ship … '.
'(2) In their application to expenditure falling within subsection (1) above, sections 24, 25 and 26 as they have effect –
(a) in accordance with section 41, or
(b) in accordance with section 80, or
(c) in accordance with section 34, or
(d) with respect to any motor car to which section 35(1) applies, or
(e) with respect to machinery or plant to which section 35(1) applies,
shall have effect, subject to subsection (3) below, as if the reference in section 24(2) to 25 per cent were a reference to 10 per cent.'
'357 … to the circumstances where the taxpayer's claim (if he is unable to show a "qualifying purpose") is to 10 per cent allowances and to let the more "mischievous" taxpayer (who is denied all allowances if he is unable to show a "qualifying purpose") escape its clutches.'
'361. … The reference to "a writing-down allowance of an amount determined without regard to section 42(2)" in section 39(8) is not to be seen as limiting the operation of section 39(8) to the situation where the 10 per cent allowances are available, but, because of the inter-related subsections of section 42, to the situation where there is expenditure which falls within subsection (1) of section 42 (which is expenditure which may qualify for 10 per cent allowances or nil allowances as subsection (2) has effect, including where it has effect subject to subsection (3)).
362. In the course of re-writing these provisions as they appear in [the 2001 Act], sections 109 and 110 … have been "disconnected" – effectively each is made to stand alone, which has had the apparent consequence (unintended, since there was no purpose to change the law) of giving the reference to section 109 … in section 123(4) … a limiting significance which is not found in the corresponding reference to section 42(2) [of the 1990 Act] in section 39(8) [of that Act].
364. We consider that we should construe section 123(4) … having regard to the provisions of which it is a re-statement, so that the reference to section 109 … does not have the limiting or restricting effect which on its face it has. That gives a sensible result which accords with the scheme of the legislation.'
'364. … If what the taxpayer sought to obtain was a 25 per cent writing-down allowance then that does not involve an allowance that is determined under section 109 … – section 109 … is not in point. If section 109 … is not in point either because it could not apply or because it could only apply if 25 per cent allowances were not available, then the exercise of determining whether or not the taxpayer sought to obtain a 25 per cent writing-down allowance can be carried out without regard to section 109 …'.
'69. We agree with the FTT's conclusion [and it then referred to the passage I have quoted from paragraph 357 of the FTT's judgment] … In our view, all that section 123(4) requires is that a main object of a relevant transaction was to obtain a writing-down allowance other than an allowance such as section 109 provides for. Section 123(4) does not say – as it could have – that the subsection applies where a main object was to prevent a writing-down allowance being reduced to the rate laid down in section 109. As it is, the focus is rather on whether there was an attempt to obtain an allowance determined otherwise than by reference to section 109. In the circumstances, the subsection will apply where a main object was to obtain a 25% writing-down allowance regardless of whether a 10% allowance (under section 109) could have been an alternative: either way, the parties will have been seeking a "writing-down allowance determined without regard to section 109" since section 109 would have played no part in the determination of the allowance.'
Issue 4
'218. Once K-Line was engaged in the tender process arranged by Statoil in 2001 it sought advice from a number of financial institutions as to the ways in which it might finance the purchase of the Vessels. Apart from other considerations, K-Line needed to have a good sense of possible financing costs in order to include, in its bid in the tender, a Capital Element within the hire rental in the proposed time charter to the Snøvhit Sellers. Consideration was given to debt financing, securitising ship rentals, and a variety of lease financing structures based in different jurisdictions.
219. In September 2001 K-Line mandated a leasing arranger, New Boston Partners (a subsidiary company of a major Japanese bank), to arrange the financing of the Vessels. The London firm of solicitors, Watson Farley Williams, was engaged to provide legal advice.
220. K-Line was advised on the benefits of a UK finance lease where capital allowances are available to the lessor. There was also discussion of the availability of the tonnage tax rules. K-Line had no previous experience of UK finance leases and relied on its advisers as to the requirements which must be met if a UK finance lease lessor is to claim allowances, and the basis on which those allowances are reflected in the finance lease provisions and financing terms.
221. Both New Boston Partners and Watson Farley Williams advised in the course of autumn 2001 that a "bona fide UK shipping company" was required to operate the Vessels if the "qualifying purpose" conditions were to be met. They advised that such a company should, if possible, be a company owned by K-Line or by the joint venture partners having the economic ownership of the Vessels (i.e. the shareholders of Northern LNG). They advised that it would be necessary for the ship operator to be in place as from the delivery of the Vessels, and that it should be a ship operator and not merely a manager of the Vessels. They also advised that it would be helpful if the ship operator had a trading history and could demonstrate that the operation of the Vessels was an extension of its existing trading activities. This advice was specifically given with reference to the terms of section 123 [of the 2001 Act], including section 123(4) ….
222. In the early stages of the tender process K-Line had indicated to the Snøhvit Sellers that K-Euro would have a role in the management of the Vessels (to meet the requirement of the Snøhvit Sellers that the Vessels should be managed from a base in a European time zone). In those early stages the exact way in which K-Euro would carry out the role was not decided upon. From the discussions between K-Line and its advisers K-Line was aware that for capital allowances to be available it was necessary that K-Euro should operate (and not merely manage) the Vessels in the UK finance lease structure.
223. In the course of email exchanges between K-Line and its UK advisers in relation to these matters and the role of K-Euro, K-Line sought advice as to the "proper profit level" of K-Euro if it were to act as ship operator, and whether there was any UK tax requirement in this respect – a concern which K-Line had was that, given the limited LNG carrier market, there was little by way of example to judge levels of profitability for a ship operator (as against a ship manager). Based on that advice, it was anticipated that K-Euro would make a profit margin of about 10 per cent of the Operating Cost Element of the hire received under the time charter.
224. K-Line also sought advice as to whether the establishment of a bulk and gas division by K-Euro would result in K-Euro being a ship operator for the purposes of the UK capital allowances legislation, and, in that context, whether there was a critical timescale in which that division had to be established.
225. K-Line was also advised as to the risks which K-Euro should bear for it to comprise a ship operator which would satisfy the requirements of the UK capital allowances provisions, and that the costs flowing from such risks should they materialise could ultimately and indirectly be borne by the shareholders of K-Euro (including the Snøhvit Sponsors should they become such shareholders) by reason of their respective shareholdings.
226. At this time K-Line also considered entering into a joint venture with a third party ship management company with experience in managing LNG carriers, in order to establish a ship operator in the UK, using the expertise and business of the joint venture party to establish rapidly a full service shipping company with LNG expertise. That idea was rejected by K-Line on the grounds that it did not fit with K-Line's strategy for growth of the Bulk and gas businesses at local level within the K-Line group and that it might not be acceptable to Statoil. K-Line recognised that it would be necessary to grow K-Euro's business organically so that it could function as a ship operator.
227. As mentioned, the documentation entered into between K-Line and the Snøhvit Sellers on 19 December 2001 anticipates that K-Line might wish to arrange financing of the Vessels in the form of a UK finance lease, and the leasing structure which that would likely require, including K-Euro as the disponent owner of the Vessels.
228. In January 2002 prospective UK lessor banks were approached, including the Lloyds TSB group. They were advised of the shipbuilding and time charter arrangements in place and of the leasing structure which was proposed should the financing of the Vessels be effected by a UK finance lease. Prospective lessors were informed that the Vessels would be used for a "qualifying purpose" by reason of K-Euro, as ship operator, satisfying the requirements of section 123 [of the 2001 Act].
229. On 16 April 2002 Lloyds TSB Leasing Ltd entered into heads of terms with K-Line and the other Snøhvit Sponsors and with Northern LNG setting out the terms under which it was prepared to offer a UK lease facility in respect of the financing of the Vessels, subject to negotiation of satisfactory documentation.
230. Negotiations were completed in September 2002 (by which time parliamentary consent had been obtained in Norway for the Snøhvit project), and the lease documents, as set out above, were entered into on 19 September 2002.'
'it appears with respect to the sale, or with respect to transactions of which the sale is one, that the sole or main benefit which, but for this sub-paragraph, might have been expected to accrue to the parties or one of them was the obtaining of an allowance under Chapter I of this Act …'.
'Paragraph (c) as I see it is aimed at artificial transaction [sic] designed wholly or primarily at creating a tax allowance.'
'377. The [Melluish] case shows that if the taxpayer claiming capital allowances is engaged in a commercial transaction where the allowances are nevertheless a significant factor in rendering that transaction commercially viable, obtaining the allowances is not a main purpose of the transaction.'
'387. An incentive, by its nature, is designed to influence behaviour – to encourage a person to choose a particular course of action he might otherwise not have chosen to take. To an extent (and that extent will vary according to the circumstances of the person concerned) the obtaining of that incentive will be the prime motive for the course of action chosen. In some situations the incentive will be the prime motive, as where a taxpayer would not have made a particular capital investment without the benefits provided by capital allowances. In other situations the incentive will shape a transaction, rather than bring it about, as where a taxpayer intends, entirely for commercial reasons, to make a capital investment, and chooses to structure it one way rather than another so that capital allowances are available to him or to another person who can take the immediate benefit of those allowances. In yet other situations a taxpayer will make a capital investment entirely for commercial reasons, and the capital allowances will be a welcome, but incidental, benefit, perhaps influencing marginally the timing of the investment, but nothing more. There is a wide spectrum here, and every taxpayer's circumstances will place him at a particular point in that spectrum. Section 123(4) [of the 2001 Act] must be applied with these factors in mind.
388. We consider, therefore, that it is not fatal to a taxpayer's claim to capital allowances, where that claim is based on section 123(1) …, that the taxpayer has taken steps which seek to secure or bolster his likelihood of obtaining those allowances. The question which has to be answered is whether a main object of the relevant transactions was the obtaining of those allowances, and this envisages that there may be a range of objectives motivating the transactions, and that they must be assessed in some sort of priority or hierarchy and then some basis applied to separate those which are of sufficient significance to count as "main" from those which are not. The issue is then which side of the line falls any objective of obtaining the allowances.'
'391. Both the Special Commissioners and Vinelott J accepted the taxpayer's submission that its main object was to make a profit by acquiring and leasing the film, and this was so even though it was probable that it would not have been in a position to offer a lease on acceptable terms had it not been able to obtain and utilise the first-year allowances. Vinelott went further, stating: "Paragraph (c) as I see it is aimed at artificial transactions designed wholly or primarily at creating a tax allowance".'
'403. … K-Euro had an established presence in the UK and European coastal shipping market (but not in respect of bulk and gas carriers operating in the Atlantic Basin) and it was the natural choice of entity through which the K-Line group could realise its plans generally and specifically in respect of its involvement in the Snøhvit project.'
'405. … disregards the wider business aims of the K-Line group evident in its strategy, and it also disregards the commercial reality and substance of what actually happened. In the period up to the 2006 reorganisation K-Euro expanded its business in a genuine, methodical and commercial way and to a substantial extent. By the time of that reorganisation it had (in addition to the Vessels) nine bulk or gas carriers which it was operating or managing or which it was committed to operate or manage on their eventual delivery. To argue that such an enterprise was undertaken principally to give credence to a claim for capital allowances in relation to the Vessels was not sustainable.
406. Again, therefore, taking the broader view we conclude that K-Euro's participation in the chartering of the Vessels was undertaken in order to pursue commercial objectives by entering into commercial transactions which were the more commercially attractive in that they were indirectly funded by financings whose costs were reduced by the tax allowances taken elsewhere.'
'420. We conclude therefore that a main object of the letting of the Vessels on charter, and of the grant of the bareboat charter to K-Euro and the novation of the timecharter to K-Euro, was to secure for K-Euro a commercial benefit, that commercial benefit accruing from operating the Vessels on charter with the intention of realising a profit for K-Euro. We also conclude that K-Euro entered into those transactions as part of, and in order to achieve, a wider commercial objective, namely the development of its business, in pursuant of the business strategy of the K-Line group, of operating and managing ships transporting bulk and gas products within, or to and from, the Atlantic Basin.
421. The question then is whether it was also a main object of the transactions to obtain the writing-down allowances. In arguing that this was so, the Commissioners pointed to the extensive and detailed advice as to UK tax and capital allowances which K-Line obtained during the period in which it was planning the arrangements for the financing of the Vessels.
422. The nature, extent and timing of that advice is set out in paragraphs 218 to 227 above. K-Line had no prior knowledge of the UK tax regime as it related to capital allowances, and relied on expert advice to assist it in its consideration of the funding possibilities available to it for the purchase of the Vessels. By the time K-Line entered into the Preliminary Stage in December 2001 it had concluded that a UK tax lease offered the most favourable funding option, and from January 2002 its advisers began the process of seeking possible finance lessors on the expressed basis that capital allowances would be available for their expenditure on the Vessels by reason of section 123 [of the 2001 Act].
423. What is clear from the extensive and detailed emails between K-Line (its finance department in particular) and its advisers is that K-Line required the most precise and thorough advice as to the conditions which had to be met in relation to the chartering of the Vessels if the capital allowances were to be available. Much of that advice related to what was required in order that a company should be a "bona fide commercial UK shipping company" (shorthand for a person who lets a ship on charter in the course of trade within the scope of section 123(1) ….). K-Line even sought advice as to the profit margin which such a company would be expected to earn.
424. [LEL] says that once K-Line was aware that in principle capital allowances were available for the financing of the Vessels within the context of arrangements which accorded with the K-Line group's commercial intentions, it was merely prudent for K-Line to satisfy itself that it could and would meet the complex "qualifying purpose" conditions.
425. The Commissioners say that the purpose of seeking such detailed advice, which spilled over into matters such as the profitability of K-Euro which were commercial matters entirely within the competence and experience of K-Line, was to tailor the structure of the leasing of the Vessels so as to give the basis for a claim for the capital allowances.
426. It is clear that K-Line was intent on securing finance lease funding of the Vessels. Such funding offered certain non-tax commercial benefits (such as full funding without any initial deposit) and a UK finance lease prospectively offered the further commercial benefit of reduced cost of funding by reason of the capital allowances available to the finance lessor and shared by means of reduced rentals. The parties, in entering into the transactions for the letting of the Vessels on charter, had as an objective that the capital allowances should be obtained. K-Line sought advice so that it knew what the circumstances and conditions were that must obtain or be met in order that that objective could be achieved. We would characterise K-Line's attitude in seeking advice as being one of due diligence – the course of action was decided upon, but needed to be as certain as it could before approaching prospective lessors that the arrangements it intended should be implemented would indeed secure the benefits to be derived from the capital allowances.
427. The objective of obtaining capital allowances was not a main objective of the transactions for the letting of the Vessels on charter. In our judgment the commercial objective we have identified above was paramount. Each transaction in the series of transactions relating to the letting of the Vessels on charter had a commercial purpose: it created an economic interest, transferred or shared a commercial risk, or was in pursuance of a genuine business endeavour. Overall, it is the case that the main objective of the transactions whereby, in September 2002, K-Euro took on the rights and obligations which would, on delivery of the Vessels, make it the disponent owner of the Vessels, was to achieve a commercial benefit distinct from, and not dependent upon, obtaining capital allowances. The capital allowances were a route to reduced cost of funds for the financing of transactions already decided upon. The parties knew this to be the case if the capital allowances proved to be available, and they wanted to obtain the benefit of such allowances, by ensuring that, in carrying out their commercial objectives, they would comply with the necessary conditions upon which the capital allowances were dependent. In terms of priority or hierarchy, that was subservient to, or of lesser importance than, achieving the commercial purposes of the relevant transactions.
428. We therefore conclude that the obtaining of writing-down allowances was not the main object, or one of the main objects, of the letting of the Vessels on charter or of any of the transactions in a series of transactions of which the letting of the Vessels on charter was one.'
'112 … in 'the crucial paragraph 427 of the Decision, where the FTT concluded that the tax objective was not a major object, no explanation was given for this other than the feature that the commercial object was paramount.'
Judge Nowlan's view was, in short, that the FTT's reference to and reliance upon Melluish had confused the FTT in the different inquiry that it was required to carry out under section 123(4) of the 2001 Act. He said that:
'121 … The FTT were clearly laying a trail in their early references to context and Melluish, all the attention was then given to commercial claims (not of itself at all objectionable of course), but there was no evaluation of the object, admitted to be an object, of obtaining the allowances. When the advice in relation to capital allowances was described as due diligence advice, simply designed to ensure that allowances available on a structure for commercial reason would indeed be available, Judge Nowlan considers this description to have been untenable. When the decision that the obtaining of the allowances was an object, but not a main object of the identified transactions, is then explained by reference to the primacy of the commercial objects, Judge Nowlan considers that it is principally by furthering and following the wrong trail laid in relation to context and Melluish that led the FTT to apply the test wrongly, as an error of law. When the question posed by section 123(4) all relates to the significance, as a main object or not, of the admitted object of obtaining the allowances, there must have been an error of law when the Decision failed to evaluate the significance of the tax advice, other than by describing it "in terms of priority or hierarchy, … as subservient to, or of lesser importance than, achieving the commercial purpose of the relevant transactions".'
Lord Justice Patten :
Lord Justice Kitchin :