Court Of Appeal
Lawson (Inspector Of Taxes) vs. Johnson Matthey PLC.
Fox, McCowan & Beldam, L. JJ.
13/14th February & 27th March, 1991
VINELOTT, J.:
The taxpayer company, Johnson Matthey Plc. appealed against an assessment to corporation tax made on it for the accounting period to 31st March 1985 in the sum of £ 7.5 million. The issue for determination was whether, in the circumstances in which it was made, a payment of £ 50 million by the taxpayer company to one of its subsidiary companies, Johnson Matthey Bankers Ltd. (“J. M. B.”), was of a capital or revenue nature and whether it was an allowable deduction in computing the profits of the taxpayer company’s trade for corporation tax purposes. On 9 June 1987 Holborn general commissioners gave their decision in favour of the taxpayer company holding that the payment was of a revenue nature and incurred wholly and exclusively for the purposes of the taxpayer company’s trade. On 18 December 1989 the Crown’s appeal by way of case stated pursuant to s. 56 of the Taxes Management Act 1970 was allowed by Vinelott J.
2. By a notice of appeal issued on 6 February 1990, the taxpayer company appealed on the grounds, inter alia, that (1) the judge erred in law in holding that the payment of £ 50 million was not of a revenue nature ; (2) the judge erred in law in holding that there was “only one reliable signpost” which pointed in the direction opposite to that taken by the commissioners, namely, that the means by which the taxpayer preserved its trade was to transfer the shares in J. M. B. to the Bank of England as part of a single, non-severable transaction that included the payment of £ 50 million to J. M. B. ; (3) the payment was not made in consideration of, or in return for, the disposal of the shares but was made to preserve (and achieved the effect of preserving) the taxpayer company’s trade and as such was of a revenue nature ; and (4) the judge erred in concluding that the two elements could not be severed, the one being treated as the disposal for a nominal consideration of a worthless but not an onerous asset and the other as a payment to preserve the taxpayer company’s trade. The facts are set out in the judgment of Fox L. J. Andrew Park Q. C. and Thomas Ivory for the taxpayer company. Jonathan Parker Q. C. for the Crown. Cur. adv. vult. 27 March. The following judgments were handed down. Fox L. J. This is an appeal by the taxpayer company, Johnson Matthey Plc., from a decision of Vinelott J. that a payment of £ 50 million by the taxpayer company to its subsidiary, Johnson Matthey Bankers Ltd. (“J. M. B.”), at the time when the shares of J. M. B. were sold to the Bank of England is not an allowable expense in computing the profits of the tax- payer company’s trade for tax purposes.
3. The facts as found by the general commissioners were as follows. The taxpayer company is a United Kingdom quoted company which carries on business in refining and selling precious metals, particularly platinum. It also manages a number of subsidiaries in the United Kingdom and abroad. Prior to October 1984 one of its wholly owned United Kingdom subsidiaries was J. M. B., which carried on the business of bankers including the merchanting of bullion. In August 1984 J. M. B. got into difficulties on its commercial loan business. Large advances had been made on what turned out to be inadequate security. A board meeting of the taxpayer company was held at the Bank of England (“the Bank”) on the night of 30 September/1 October 1984 to deal with the resulting crisis. At about 12.30 a.m. on 1 October the board reached the following conclusion : (i) That J. M. B. was insolvent and could not open its doors for business later that day unless further financing, which (the taxpayer company) could not afford to supply, was made available ; (ii) that the cessation of business by J. M. B., and resulting damage to confidence in ( the taxpayer company ), was likely to lead to demands by lending institutions for the repayment of metals and moneys owing to them by ( the taxpayer company) and that ( the taxpayer company ) would be unable to meet its obligations as they fell due in the absence of further financial support, which did not seem to be available : ( the taxpayer company 1 would therefore have to cease trading ; (iii) that there was no alternative to the winding up of J. M. B. and that a liquidator should be appointed ; (iv) that they should however do everything in their power to protect the interests of ( the taxpayer company’s ) shareholders and employees and to facilitate the orderly disposal of ( the taxpayer company’s ) assets in which unsecured creditors would be dealt with on an equitable basis, and that therefore they would ask for the appointment of a receiver for (the taxpayer company) ; and (v) that these decisions to ask for a liquidator for J. M. B. and a receiver for ( the taxpayer company 1 should be implemented an hour later at 1.30 a.m.”
4. The Bank was told of these decisions at once. The Bank at once made the following offer, which was not negotiable, to the board of the taxpayer company. (1) The Bank would acquire the issued share capital of J. M. B. for the sum of £ 1. (2) Prior to this sale, which would be free of all warranties, the taxpayer company would inject £ 50 million into J. M. B. The Bank also informed the taxpayer company that it was assisting in actively pursuing the provision of a standby facility for the taxpayer company in the event of the Bank purchasing the J. M. B. shares. Later that night J. M. B. assessed the necessary facility as £ 250 million. In consequence of these arrangements on the advice of its legal and financial advisers the board of the taxpayer company recognised that: “(i) J. M. B. was insolvent on the advice given by its advisers of the proper level of provision for bad and doubtful debts ; (ii) ( the taxpayer company) would be unable to provide sufficient capital for J. M. B. to enable the latter to maintain the prudential ratios appropriate for a recognised bank ; (iii) J. M. B. would be unable to open its doors for business whilst it remained a subsidiary of (the taxpayer company) ; (iv) if the proposal were not acceptable the taxpayer company I would not be able to meet its obligations if called (v) the making of the 50 million loan to J. M. B. and the waiver of repayment of such loan (the form proposed by the Bank for the £ 50 million repayment) was necessary to retain goodwill and confidence in all the remaining group companies and enable them to stay in business ; and (vi) the only practical alternative to the Bank’s proposals was to implement their previous decision to ask for the appointment of a receiver for ( the taxpayer company) and a liquidator for J. M. B.” The board of the taxpayer company resolved, conditionally on a standby facility of at least £ 250 million being agreed and existing drawings by the taxpayer company remaining in place, to accept the Bank’s proposals for the acquisition by the Bank of the whole of the issued share capital of J. M. B. for £ 1 and for the taxpayer company to make the £ 50 million loan and waiver to J. M. B.
5. The CIT’s found that the sole purpose for which, or to serve which, the taxpayer company resolved to make the payment of £ 50 million was to enable it to open the doors of its platinum trade on the Monday morning. The board’s decisions were communicated to the Bank and were implemented by the opening of business later that day and confirmed by a formal agreement between the taxpayer company and the Bank on 2 October 1984. In the taxpayer company’s accounts to 31 March 1985 it deducted the £ 50 million as an expense of its platinum trade. The Crown disputed that deduction on two grounds : (1) that it was an expense of a capital nature ; (2) that it was not paid out wholly and exclusively for the purposes of the trade. The commissioners stated : “We, therefore, find on the evidence and arguments put before us, that the 50 million payment was made to preserve the trade of ( the taxpayer company) from collapse, that it did, in fact, preserve the trade from collapse and, as a payment to preserve an existing business, it was of a revenue nature. We further find that ( it ) was not converted into a payment of a capital nature by the circumstance that it was associated with the disposal of the J. M. B. shares.” Thus, the commissioners decided both those points in favour of the taxpayer company.
6. The Crown appealed to the High Court. On the appeal the Crown did not dispute that the moneys were laid out wholly and exclusively for the trade. The Crown did, and do, however, contest the decision that the payment was a revenue expense. The judge accepted the Crown’s contention as to that. He said (1990) 1 W. L. R. 414, 420 – 421 :
‘ “The purpose of the board of the taxpayer company in agreeing to make that payment was no doubt to preserve the business of the taxpayer company. But the means by which that purpose was achieved and indeed in the situation of crisis in the early hours of 1 October the only means by which it could be achieved was to transfer the shares of J. M. B. to the Bank and as part of a single transaction or arrangement to pay £ 50 million to J. M. B. and to release J. M. B. from any obligation to repay it. These two elements cannot be severed, the one being treated as the disposal for a nominal consideration of a worthless but not an onerous asset and the other as a payment made to preserve the business of the taxpayer company. “
7. Accordingly, the judge concluded that the £ 50 million was a capital payment. From that decision the taxpayer company appeals. The question arises in determining whether a payment is to be treated as being of an income nature, whether the Court should look at the matter subjectively (what was the purpose of the transaction) or objectively (what did the transaction actually do). The authorities are not conclusive. In British Insulated and Helsby Cables Ltd. vs. Atherton (1926) A. C. 205, Viscount Cave L. C. said : “But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. “
That, as Lord Wilberforce observed in Tucker vs. Granada Motorway Services Ltd. (1979) 1 W. L. R. 683, 686, was regarded as having quasi statutory force until it was revealed that it might cover an advance more of a revenue character. In Inland Revenue Commissioners vs. Carron Co. (1968) 45 T. C. 18 Lord Reid said : 1n a case of this kind what matters is the nature of the advantage for which the money was spent.” And Lord Guest said, at p. 70 : “It is legitimate, in my view, to consider what the expenditure was intended to effect.” On the other hand, Lord Radcliffe giving the advice of the Board (Lord Radcliffe, Lord Morris and Lord Upjohn) in Commassioner of Taxes vs. Nchanga Consolidated Copper Mines Ltd. (1964) A. C. 948, 958 refers to “the undesirability of determining the nature of a payment by the motive or object of the payer.”
8. It seems to me that the Court has to consider all the circumstances of the case, one of which is the purpose of the transaction. In Inland Revenue Commissioners vs. Carron Co., 45 T. C. 18, 74 Lord Wilberforce said :
“To make the distinction between capital and revenue, by nature a commercial distinction, it is necessary to go further and to ascertain the nature and purpose of the changes made . . . ” Although it is necessary to consider all the circumstances, the problem in the end is the true nature of the transaction. Intentions may throw some light on the matter, but cannot relieve the Court from analysing in terms of capital and income account the true nature of what the parties actually did. There are numerous decided cases on the question whether a payment is to be treated as being on capital or revenue account. They vary widely in their facts. The facts in the present case are unusual and derive from very special circumstances. Authorities are accordingly of limited value, but I should refer to some of the cases cited by Mr. Park. In Morgan vs. Tate and Lyle Ltd. (1955) A. C. 21 the taxpayers were sugar refiners. They claimed to deduct in the computation of their trading profits for tax purposes the expenses incurred in a propaganda campaign designed to show that nationalisation of the sugar refining industry would be harmful to workers, consumers and stockholders alike. The commissioners found that the primary object of the campaign was to prevent the company losing its business and to preserve its assets intact. The Crown contended that, so far as that was the object of the campaign, the expenditure was not incurred directly for the earning of its profits. The commissioners held that the expenses were incurred wholly and exclusively for the purpose of the company’s trade. The House of Lords held that the commissioners were entitled so to find. Accordingly, the case was concerned with that limited issue of fact. In Southern (H. M. Inspector of Taxes) vs. Borax Consolidated Ltd. (1941) 1 K. B. 111 the taxpayer company held all the shares in an American company whose business fell to be treated for tax purposes as a branch of the company’s business. The taxpayer company acquired land in America and put the subsidiary company into possession. The company’s title was challenged and the American company incurred substantial legal costs on litigation. The commissioners found that the legal expenses were incurred wholly and exclusively by the American company for the purposes of its trade. On appeal, the High Court upheld that determination. That again was a limited issue which does not seem to me to throw light on the present case. In Inland Revenue Commissioners vs. Carron Co.,(supra) Lord Guest cited a statement of Lord Reid in Strick vs. Regent Oil Co. Ltd. (1966) A. C. 295, 313 : “the determination of what is capital and what is income must depend rather on common sense than the strict application of any single legal principle.” I quite accept that and it seems to me to be an approach of some importance in the present case.
11. Mr. Park made the following submission. (i) There is a finding of fact by the commissioners that the £ 50 million was laid out to preserve the platinum trade of the taxpayer company from collapse. (ii) There is no ground for saying that it was laid out to secure the disposal of a capital asset, the J. M. B. shares. That is because : (a) the shares were not an onerous asset (as, for example, were the leases in Mallett vs. Staveley Coal and Iron Co. Ltd. (1928) 2 K. B. 405 but were a worthless asset ; and (b) the taxpayer company did not need to pay £ 50 million or any other sum, apart from some costs, to get rid of the J. M. B. shares. The taxpayer company could have disposed of them to a shelf company or could have liquidated J. M. B. (iii) Prior to receiving the Bank’s offer the taxpayer company had, in fact, decided that it would put J. M. B. into liquidation. (iv) Accordingly, it does not represent the realities of the matter to say either that the £ 50 million was paid to dispose of the J. M. B. shares or that it achieved a disposition of the shares. (v) It is not a case of a “negative consideration or reverse premium” being paid for the J. M. B. shares. The essence of the transaction was that J. M. B. paid £ 50 million to preserve its own trade. The commissioners, it is emphasised, found that the moneys were wholly and exclusively laid out for the purpose of the tax payer company’s trade. At the end of it all, the taxpayer company lost its J. M. B. shares, which were worthless and would be lost anyway, but saved its platinum trade.
12. I think it is necessary first of all to be clear as to the position in which the taxpayer company found itself on the night of Sunday, 30 September. It was as follows. (1) J. M. B. was a wreck. It would not be able to continue trading on the Monday morning ; (2) That state of affairs, in relation to a wholly owned subsidiary, produced in turn a perilous situation for the taxpayer company because the resulting loss of confidence in the taxpayer company was likely to produce demands for repayments by its own customers which it could not meet. The core of the problem so far as the tax payer company was concerned was its close association with the insolvent J. M. B. The Bank, for its part, was presumably concerned with the stability of an English banking company. The matter was solved by the Bank taking over J. M. B. by acquiring all the taxpayer company’s shares in J. M. B. That secured financial confidence in J. M. B. The sale of the J. M. B. shares by the taxpayer company to the Bank was for a nominal consideration of £ 1 only. But the Bank was not prepared to take over the shares unless prior to the sale the taxpayer company injected £ 50 million into J. M. B. The commissioners found that the Bank also informed the taxpayer company that it was “assisting in the provision of a standby facility for ( the taxpayer company ). “
13. Mr. Park said that this was a rescue operation by the Bank, I think that is right. But the description, accurate as it is, does not take one any distance in solving the present dispute. The real question is, what was the nature of the rescue operation ? Mr. Park said, in effect, that the £ 50 million was not for, and did not have the effect of, securing the sale of the J. M. B. shares. I do not feel able to accept that. There was a single agreement. The terms of that agreement were simple. The taxpayer company would sell the J. M. B. shares to the Bank for £ 1. Prior to the sale, the taxpayer company would inject £ 50 million into J. M. B. The taxpayer company could not be extricated from its predicament unless somebody with adequate resources took over J. M. B. The Bank was ready to acquire the shares in J. M. B. but only on terms that prior to the sale, the taxpayer company paid J. M. B. £ 50 million. I can only regard that as a transaction in which the Bank acquired the shares in J. M. B. for a nominal sum on terms that the taxpayer company provided the £ 50 million to J. M. B. There was no other way in which the taxpayer company could rid itself of J. M. B. without disaster. No other terms were on offer. The taxpayer company could have got rid of the J. M. B. shares by transferring them to a shelf company or by putting J. M. B. into liquidation, but it would not have solved the taxpayer company’s problem simply to detach itself from an insolvent J. M. B. The solution offered by the Bank was the only way out. J. M. B. had to be rescued, not liquidated or ignored.
14. It is true that the purpose of the taxpayer company was to preserve its own trade. But that is not determinative of the capital/income issue. Thus, in Mallett vs. Staveley Coal and Iron Co. Ltd. (1928) 2 K. B. 405 the payments were made “for the enduring benefit of the trade” (see per Sargant L. J., at p. 420) but the expenditure was held to be of a capital nature. The position then, it seems to me, is as follows : (i) J. M. B was a capial asset of the taxpayer company ; (5) the taxpayer company disposed of J. M. B. to the Bank ; (iii) the only terms on which the Bank was willing to acquire J. M. B. was on payment of the £ 50 million by the taxpayer company to J. M. B. The position was, in reality, the same as if the Bank had said “We will take over J. M. B if you pay us £ 50 million.” Whichever way it was done, the payment seems to me to be a payment by the taxpayer company to enable it to get rid of a capital asset. That asset was not onerous in the sense that the leases in Mallett vs. Staveley Coal and Iron Co. Ltd. were onerous, but its continued retention was harmful to the taxpayer company. In my view the common sense of the matter is that the £ 50 million was capital expenditure.
15. In my opinion Vinelott J. was right. I would dismiss the appeal. MC COWAN L. J. In his skeleton argument Mr. Park said : “Given that J. M. B. was a limited company the J. M. B. shares were not an onerous asset : they were a worthless asset.” In elaboration of this in oral argument, he submitted that the £ 50 million could not be said to have been paid for the divesting by the taxpayer company of the shares in J. M. B. when the taxpayer company could easily have divested itself of any responsibility for the shares by putting J. M. B. into liquidation. To do this, he said, would have cost the taxpayer company virtually nothing. In a revealing phrase, however, he added : “But that would not have suited it, because of the knock-on effect on its own trade.” That, to my mind, is the clue to the case. Simply letting J. M. B. go into liquidation would have been extremely damaging to the taxpayer company’s financial status. It was their association with an insolvent J. M. B. that was onerous to them.
16. Mr. Park further argued that the taxpayer company would not have paid £ 50 million just to get rid of the shares in J. M. B. I agree. But what they did, and what they wanted to do, was to get rid of the shares to a body that would keep J. M. B solvent and trading. They were not of course being altruistic. Their purpose was, it is true, to preserve their own platinum trade. But that does not, in my judgment, turn the payment into a revenue payment. One of the cases cited to the Court was Mallett vs. Staveley Coal and Iron Co. Ltd. (1928) 2 K. B. 405, 420, where Sargant L. J. said : “the payment was being made for the purpose of putting an end to the existence of a disadvantage or onerous asset, for the enduring benefit of the trade.”
17. Those words, in my judgment, are most apt to describe what happened here. The J. M. B. share represented “a disadvantage or onerous asset” and the taxpayer company paid £ 50 million to put an end to the existence of that disadvantage or onerous asset for the enduring benefit of the taxpayer company’s trade. I conclude, therefore, that the £ 50 million payment can properly be described as a negative consideration for the shares.
18. Mr. Park made the further submission, however, that, as seen at the material time, what might save J. M. B. was a rescue operation, not a transfer of the shares ; and what in fact saved J. M. B. was that it was the Bank of England that did the rescuing. The answer to that, in my judgment, is that had there been no transfer of the shares there would have been no rescue operation. It was in fact a package deal ; and both parts of the package were necessary. On that analysis, it becomes plain that Vinelott, J. was right in concluding (1990) 1 W. L. R. 414, 421 : “These two elements cannot be severed, the one being treated as the disposal for a nominal consideration of a worthless but not an onerous asset and the other as a payment made to preserve the business of the taxpayer company.”
19. I would dismiss the appeal.
BELDAM. L,J. :
The taxpayer company specialises in the refining of precious metals and the production of chemicals, catalysts and by-products widely used in industry. It has divided its activities among a number of subsidiary companies. One of the most important, J. M. B., was wholly owned by the taxpayer company. It carries on business as bankers, dealing in gold bullion on the markets of the world and making loans of metals and money to its customers. Established in 1965, it was one of the five members of London gold fixing, concentrating its business on bullion and foreign exchange dealing, commercial banking and trade finance. By 1984 J. M. B.’s reputation had become so associated and its business and credit so intimately bound up with that of its parent, the taxpayer company, that the fortunes of the taxpayer company were particularly sus ceptible to any serious decline in the business or standing of its subsidiary. In the consolidated accounts for the year ended 31 March, 1984 there was no hint of any such decline. J. M. B.’s net assets were put at £ 102 million, and the value of the taxpayer company’s interest was shown as £ 99.7 million. By September 1984 there had come to light a very different state of affairs. Liabilities of J. M. B. so far exceeded its assets that it was insolvent. Unless it could be recapitalised or its operations refinanced in some other way it would have to go into liquidation. The deficiency was so great that it was beyond the resources of the taxpayer company to rescue the position. Worse, if J. M. B. was not rescued, the taxpayer company itself would be unable to survive the demands on its funds which loss of confidence would stimulate. This state of affairs had come to the attention of the Bank of England, who were concerned that the failure of J. M. B. would undermine general confidence in the banking system and might lead to disorder in the bullion markets. One solution which had been explored was a proposal by the Bank of Nova Scotia to purchase the issued share capital of J. M. B. and all save two of its subsidiaries but, according to minutes of a meeting held on 30 September 1984, the board of the taxpayer company had previously been informed by the Bank of England that “it was considered essential that agreement be reached on proposals for the recapitalisation or disposal of J. M. B. by midnight on 30 September 1984.”
The board met at 10.00 p.m. on that day, a Sunday. During the meeting it became apparent that the Bank of Nova Scotia would not go ahead and that in the absence of further finance J.M.B. was insolvent and could not open for business the following day. The board also recognised that the taxpayer company would be unable to meet its obligations when they fell due unless it could obtain further resources. With the object of securing an orderly realisation of the group’s assets, it was decided to invite the trustee of the company’s debenture stocks to appoint a receiver of the company. When the Bank of England was told of this decision, it put forward a proposal that: (a) the Bank of England would acquire the issued share capital of J.M.B. for £ 1 ; and (b) prior to the sale, the taxpayer company should inject £ 50 million cash into J. M. B.
As the taxpayer company did not have the resources to provide the £ 50 million, it accepted an offer from one of its shareholders, Charter Consolidated Plc., to subscribe for £ 25 million of convertible preference shares and arranged a standby facility from which the remaining 25 million could be raised. The board then resolved to accept the offer of the Bank of England to acquire the issued share capital of J.M.B. for £ 1 and to provide £ 50 million to J. M. B. by way of loan, “repayment thereof to be waived. ” On 2 October 1984 the taxpayer company agreed to sell to the Bank of England the whole of the issued share capital of J. M. B. “subject to (the taxpayer company) advancing a loan of £ 50 million to J. M. B. and waiving repayment of the same today” for the sum of £1. The Bank undertook to use its best endeavours to procure the release of the taxpayer company and its subsidiaries from any guarantees, indemnities and other liabilities and obligations assumed by the taxpayer company in favour of third parties in respect of J. M. B. Thus, with the backing of the Bank, catastrophe was averted ; J. M. B. was able to open on the Monday morning and the assets and business of the taxpayer company were saved.
In due course the taxpayer company was assessed for corporation tax for the year of assessment, 1 April 1984 to31 March 1985, in a sum of £7.5 million. It sought to set off as a revenue expense the £ 50 million it had paid on the disposal of J. M. B. The revenue refused to accept such a deduction, contending that the payment was a payment of a capital nature. The taxpayer company appealed to the commissioners. They found that the £ 50 million payment was made to preserve the trade of the taxpayer company from collapse, that it did in fact do so and, as a payment to preserve an existing business, it was of a revenue nature. In their view the payment was not converted into a payment of a capital nature by the circumstance that it was associated with the disposal of J. M. B. shares. They found that the payment was made wholly and exclusively for the purposes of the taxpayer company’s trade. That finding was accepted by the Revenue, but it appealed by way of a case stated to the High Court against the finding that the payment of £ 50 million was of a revenue nature. The Crown’s appeal was allowed by Vinelott J. (1990) 1 W. L. R. 414. He held that, although the purpose of the board of the taxpayer company in making the payment was to preserve the business of the taxpayer company, the means by which it was achieved was by transferring the shares of J. M. B. to the Bank and as part of a single transaction or arrangement to pay 50 million to J. M. B. and to release J. M. B. from any obligation to repay it. He said, at p. 421 : “These two elements cannot be severed, the one being treated as the disposal for a nominal consideration of a worthless but not an onerous asset and the other as a payment made to preserve the business of the taxpayer company.
8. In this argument before this Court on behalf of the taxpayer company, Mr. Park relied on the finding of the commissioners that the 50 million payment was made to preserve the trade of the taxpayer company from collapse, that it did in fact preserve the trade from collapse and, as a payment to preserve an existing business, it was of a revenue nature and he relied on statements in the judgments in Inland Revenue Commissioners vs. Carron Co., 45 T. C. 18, 68 by Lord Reid : “In a case of this kind what matters is the nature of the advantage for which the money was spent. This money was spent to remove anti quated restrictions which were preventing profits from being earned. It created no new asset. It did not even open new fields of trading which had previously been closed to the company. Its true purpose was to facilitate trading by enabling the company to engage a more competent manager and to borrow money required to finance the company’s traditional trading operations under modern conditions.”
9. And by Lord Guest, at p. 70 : “It is legitimate, in my view, to consider what the expenditure was intended to effect and the way in which the advantage was to be used.” And by Lord Wilberforce, at p. 74 : “it is necessary to go further and to ascertain the nature and the purpose of the changes made . . . ” Further, Mr. Park relied on passages in the judgments in Morgan vs. Tate and Lyle Ltd. (1955) A. C. 21, but the issue in that appeal was confined to the question whether money expended on a campaign to resist nationalisation was exclusively laid out for the purposes of the taxpayer’s trade.
10. I approach the question for decision with the words of Lord Wilberforce in his judgment in Tucker vs.Granada Motorway Services Ltd. (1979) 1 W. L. R. 683, 686 very much in mind: “It is common in cases which raise the question whether a payment is to be treated as a revenue or as a capital payment for indicia to point different ways. In the end the Courts can do little better than form an opinion which way the balance lies. There are a number of tests which have been stated in reported cases which it is useful to apply, but we have been warned more than once not to seek automatically to apply to one case words or formulae which have been found useful in another (see Commissioner of Taxes vs. Nchanga Consolidated Copper Mines Ltd. (1964) A. C. 948 ; (1965) 58 ITR 241 (PC)). Neverthless reported cases are the best tools that we have, even if they may sometimes be blunt instruments. I think that the key to the present case is to be found in those cases which have sought to identify an asset. In them it seems reasonably logical to start with the assumption that money spent on the acquisition of the asset should be regarded as capital expenditure. Extensions from this are, first, to regard money spent on getting rid of a disadvantageous asset as capital expenditure and, secondly, to regard money spent on improving the asset, or making it more advantageous, as capital expenditure. In the latter type of case it will have to be considered whether the expenditure has the result stated or whether it should be regarded as expenditure on maintenance or upkeep, and some cases may pose difficult problems. “
11. As an unaccustomed “traveller in these regions,” I have found guidance from the passages in the judgment of Dixon J. in Sun Newspapers Ltd. vs. Federal Commissioner of Taxation (1938) 61 C. L. R. 337, 363, quoted by Lord Pearce in B. P. Australia Ltd. vs. Commissioner of Taxation of the Commonwealth of Australia (1966) A. C. 224, 261 : “There are, I think . . . three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it ; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.”
12. And in the same case, 61 C. L. R. 337, 362, quoted (1966) A. C. 224, 262 : “the expenditure is to be considered of a revenue nature if its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital and that actual recurrence of the specific thing need not take place or be expected as likely.”
13. With this guidance, I return to the facts of the case. The commissioners’ finding that the payment was made to preserve the trade of the taxpayer company from collapse, and as such was of a revenue nature, selects from the complex circumstances with which the directors of the taxpayer company were faced on 30 September 1984 only one of the manifest purposes for which the payment of £ 50 million and the disposal of J. M. B. were made. The payment was made because there was no other means by which to divest the taxpayer company of the by now disastrous association with J. M. B. and to avoid the realisation of all the taxpayer company’s assets. The meeting to discuss the crisis was, according to the minutes, to consider various proposals for the refinancing of the group and the disposal of J. M. B. The discussions with the Bank were for the recapitalisation or disposal of J. M. B. It was recognised that the taxpayer company on its own was unable to provide sufficient capital for J. M. B. to maintain the appropriate liquidity ratio for a recognised bank. At the same time it was essential to provide further capital for the Taxpayer company and this was done by the issue of convertible loan stock to Charter Consolidated Plc. Had the taxpayer compay been able to raise sufficient funds, or if the amount required to recapitalise J. M. B. had been no more than £ 50 million, the method which would have been adopted would no doubt either have been to make a loan to J. M. B. or to recapitalise it in a similar way to the taxpayer company by an issue of convertible stock. If either of those courses had been adopted, the payment would unquestionably have been of a capital nature. Can it make any difference that the liabilities of J. M. B. were so extensive that the payment of £ 50 million had to be made as an outand- out payment to persuade the Bank to acquire the capital of J. M. B. ? I do not think that it can. One consequence of the payment was the preservation of their subsidiary J. M. B. as a going concern with the backing of the resources of the Bank. That, in turn “preserved the existing business” of the taxpayer company. It did so by saving its assets from realisation, by releasing it from an existing risk of catastrophic liabilities and from the consequences of being unable itself to recapitalise J. M. B. Thus merely to characterise the payment by the label “preservation of an existing business” does not determine how the payment should be regarded for accounting and revenue purposes. In short it is merely descriptive and not definitive.
14. To my mind the payment has to be seen against the background of the search by the directors for a means of recapitalising J. M. B. But for the size of sum needed the taxpayer company would have retained its interests in J. M. B. and in one way or another the sum of £ 50 million would have been reflected in its balance sheet as a long term capital asset. It was a lump sum paid to procure an immediate advantage for the long term. It did not represent an aggregation of day to day payments which would have been incurred in the ordinary way in running the business. Considering the three matters highlighted by Dixon J. in Sun Newspapers Ltd. vs. Federal Commissioner of Taxation against the background to the payment, I have no doubt it was a capital payment for tax purposes. The advantage sought was of a lasting nonrecurring nature. It was to be used once and for all to secure existing assets and to avoid liabilities which threatened immediate final collapse. The advantage was obtained by making the payment as a final provision to secure the disposal of a capital asset. It appears to me to have none of the attributes of a revenue payment and every appearance of an outlay for capital purposes.
15. I would dismiss the appeal. Appeal dismissed with costs. Leave to appeal refused.
16. 5 June. The Appeal Committee of the House of Lords, Lord Bridge of Harwich, Lord Ackner and Lord Lowry allowed a petition by the taxpayer company for leave to appeal.
[Citation : 192 ITR 453]
