Tax case - Ramsay applied

Ramsay applied

The appellant company, which conducted a finance leasing business, entered into contracts for it to purchase a natural gas pipeline between Scotland and the Irish Republic from the Irish Gas Board for the sum of £91 million and there were bills of sale transferring the ownership of the pipeline to it. The appellant then entered into a lease agreement with the Irish Gas Board leasing the pipeline back to it on finance lease terms. The appellant claimed that it was entitled to capital allowances for expenditure of £91 million on the pipeline contending that the expenditure was, within the meaning of section 24(1), Capital Allowances Act 1990 Act, incurred on the provision for the purposes of its trade of an item of machinery or plant, namely the pipeline.

However there were associated transactions by which the purchase price of £91 million was deposited with a Jersey company not in the finance lessor's group but nevertheless in broad terms part of its structure. By virtue of successive onward deposits of the money, it found its way back to a group company in the United Kingdom.

The Special Commissioners dismissed the taxpayer's appeal holding that account had to be taken of the entire series of operations of which the purchase contracts and finance lease were only parts and that the expenditure of £91 million was not therefore incurred in purchasing the pipeline. The company appealed.

In the High Court, Mr Justice Park said that the relevant words in the Capital Allowances Act 1990 - 'has incurred capital expenditure on the provision of machinery or plant' - embodied a commercial concept rather than a legal (or juristic) concept. Incurring expenditure on the provision of something was not legal terminology. The expenditure by the company, looked at commercially and from the point of view of what it was really for, was not incurred on the provision of the pipeline. The expenditure was really incurred on the creation of a complex network of agreements under which, in an almost entirely secured way, money flows would take place annually over the next 32 years or so to recoup to the company its outlay of £91 million plus a profit. Mr Justice Park accepted that finance lessors usually wish to limit the credit risk to which they are exposed, but there are cases where that risk is so comprehensively eliminated that the result is that no money is laid out on a leasing transaction at all. In the present case the £91 million never passed out of the network created by the agreements. It was on the rights to the money flows that, as a commercial matter, the company really expended the £91 million which it had borrowed.

Therefore the company's appeal was dismissed.

(Barclays Mercantile Business Finance Ltd v Mawson, Chancery Division, 22 July 2002)

Issue: 3868 / Categories: