First-tier Tribunal (Tax)

[2010] UKFTT 441 (TC)

TC00706

Appeal number: TC/2009/15024

Appeal against amended self assessment- whether payments of interest eligible for relief under section 353 Income and Corporation Taxes Act 1988 – whether a loan was used wholly and exclusively for the purposes of business under section 360 (1) (b) Income and Corporation Taxes Act 1988

FIRST-TIER TRIBUNAL

TAX

MR JOHN STEPHEN TORKINGTON Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: Ms. J. Blewitt (TRIBUNAL JUDGE) Mr. A. Holden (MEMBER)

Sitting in public at Liverpool on 1 September 2010

Mr A. Gotch for the Appellant

Mr D. Weissand, HM Inspector of Taxes for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.       The Appellant appeals against an HMRC amendment dated 16 March 2009 of the Appellant’s self assessment for the year ended 5 April 2005. The Appellant’s self assessment included a claim for repayment of income tax in the sum of £24,032.96. The HMRC amendment to the assessment resulted in income tax payable in the sum of £33,855.78.

2.       The facts can be summarised as follows; the Appellant was at the relevant time a Director and Chairman of a company called Weatherwise (UK) Ltd incorporated in the United Kingdom and a wholly owned subsidiary of Openshield Ltd (“Openshield”), a company also incorporated in the United Kingdom. The Appellant owned 50% of Openshield. The remaining 50% was owned by Mr Maclean. The Appellant obtained a personal loan in the sum of 3 million Canadian Dollars (C$) from Arbitrage Research and Trading Ltd (“Arbitrage”) repayable with interest at a rate of 12% per annum. On 25 November 2003 the Appellant which loaned Weatherwise (UK) Ltd C$ 3 million on identical terms with an identical rate of interest. The loan agreements between Arbitrage and the Appellant, and the Appellant and Weatherwise (UK) Ltd recite that the purpose of the loan was to finance the development of hangar and maintenance facilities at the Lake Simcoe Regional Airport, Ontario, Canada through a Canadian company called Weatherwise Aviation Inc. Weatherwise Aviation Inc is a company registered in Canada and is wholly owned by UKcan Investments Inc (“UKcan”) which is also registered in Canada and which in turn is a wholly owned subsidiary of Weatherwise Guarantee Company in which the Appellant owns 50% of the shares and Mr Maclean owns the remaining 50%.  On 26 November 2003 Weatherwise (UK) Ltd loaned C$ 3 million to Weatherwise Aviation Inc repayable at an annual rate of interest of 15%.

3.       In arriving at the amount of his self assessment for the year ended 5 April 2005, the Appellant claimed relief for interest of £143,163.79 (sterling equivalent) paid to Arbitrage. On 14 June 2006 HMRC gave notice of its intention to enquire into the Appellant’s self assessment tax return for the year ended 5 April 2005. On 16 March 2009 HMRC concluded its enquiries and issued a closure notice under Section 28A TMA 1970. This was accompanied by a self assessment amendment disallowing the loan interest relief claimed. On 8 April 2009 the Appellant’s representatives, Duncan Boxwell and Company, appealed on behalf of the Appellant against the closure notice and amendment.

4.       The issue for this Tribunal to determine is whether the interest paid by the Appellant to Arbitrage in the year ended 5 April 2005 is eligible for relief under Section 353 of Income and Corporation Taxes Act 1988 (“ICTA”) by virtue of Section 360 (1) (b) ICTA 1988.

5.       Relief for interest paid is only available under Section 353 ICTA 1988 if it is interest eligible for relief under Section 359 to Section 365 ICTA 1988. It was agreed by both parties that only Section 360 (1) (b) could possibly grant relief to the Appellant.

6.       Section 360 (1) (b) ICTA 1988 provides that loan interest is eligible for relief under Section 353 ICTA 1988 if it is interest on a loan to an individual to defray money applied - 

“In lending money to such a close company which is used wholly and exclusively for the purposes of the business of the company or of any associated company of it which is a close company satisfying any of those conditions”

7.       HMRC accepted during the hearing that Weatherwise (UK) Ltd was a close company given that it was a company that was under the control of five or fewer participants as required by Section 414 (1) ICTA 1988.

8.       The issue for the Tribunal is whether the remainder of the criteria of s360 (1) (b) are satisfied and the Tribunal will deal with these in turn.

“...used wholly and exclusively for the purposes of the business of the company...”

9.       HMRC submit that in order to establish whether or not this requirement was satisfied, the Tribunal must first consider how the word “business” is to be interpreted or applied. HMRC indicated that the dictionary definition was “habitual occupation, profession, trade.” Although HMRC accept that there are no case authorities on the application or definition of the word “business” similar to the specific context of this case, the Tribunal was helpfully referred to the following cases in which guidance was given as to the interpretation to be applied; Town Investments Ltd v Dept of Environment [1978] AC 359 and Revenue and Customs Commissioners v Salaried Persons Postal Loans Ltd [2006] EWHC 763 (Ch).

10.    In the case of Town Investments Ltd (ibid) Lord Diplock stated that “the word “business” is an etymological chameleon: it suits its meaning to the context in which it is found,” guidance which was also followed in the latter case.

11.    HMRC submit that the context in which the word “business” is used in Section 360 (1) (b) ICTA 1988 is that of “trade” given that it refers back to  Section 13A (2) ICTA 1988. Thus, if the Tribunal accepts that submission then the Appellant’s claim for relief fails because the trade of Weatherwise (UK) Ltd was, at all relevant times, the design, supply and installation of building envelope materials including roofing, wall-cladding, glazing and curtain walling for industrial, commercial and public buildings in the UK and overseas. HMRC did not dispute that Weatherwise (UK) Ltd may have had the odd venture outside of its mainstream trade but submit that it was not the trade of the company to lend money (either overseas or to anyone).

12.    HMRC further submit that:

(a)         where a company (in this case Weatherwise (UK) Ltd) passes on the monies to a second company (in this case Weatherwise Aviation Inc), then that second company must also be a close company in accordance with Section 360 (1) (b). As Weatherwise Aviation Inc was a non resident UK company it did not satisfy the close company criteria outlined in Section 414 (1) (a) ICTA 1988. Thus, the Appellant’s claim to relief failed;

(b)        The latter words of section 360 (1) (b) “...or of any associated company of it which is a close company...” would be meaningless and unnecessary if the passing on or lending of the money was automatically a use “wholly and exclusively for the purposes of the business;”

 Weatherwise (UK) Ltd was merely an intermediary to provide finance, by way of back to back loan, to Weatherwise Aviation Inc. Thus, as the money was for the ultimate use of the Canadian company’s trade it could not be said to have been used wholly and exclusively for the purposes of the Weatherwise (UK) Ltd business.

13.    The Appellant submitted to the Tribunal that the word “business” ought not to be construed narrowly. Mr Gotch on behalf of the Appellant submitted that the words “for the purposes of...” in Section 360 (1) (b) are flexible and unrestricted and that the use of the plural “purposes” indicated a wide scope that emphasised that business may comprise several elements. The word “business” in that Section was used deliberately to refer to the entire range of activities that a company might carry on. It was submitted that the loan from Weatherwise (UK) Ltd to Weatherwise Aviation Inc was for the sole purpose of earning profits by way of a return on the loan and the provision of services to Weatherwise Aviation Inc. Thus, the use of the loan monies by Weatherwise (UK) Ltd was wholly and exclusively for the purposes of its business. All the applicable conditions of Section 360 ICTA 1988 were met as regards the loan from the Appellant to Weatherwise (UK) Ltd and he was entitled to loan interest relief under Section 353 ICTA 1988.

14.    The Tribunal was helpfully referred by Mr Gotch to a number of case authorities.

15.     Barclays Mercantile Business Finance Limited v Mawson [2004] 76 TC 446 in which the Appellate Committee laid down the approach to construing tax statutes. The Committee emphasised that “the two steps which are necessary in the application of any statutory provision: first to decide on a purposive construction, exactly what transaction will answer to the statutory description and secondly, to decide whether the transaction in question does so”.

16.    American Leaf Blending Co SDN BHD v Director General of Inland Revenue [1979] AC 676 was a case in which Lord Diplock stated:

‘in the case of a company incorporated for the purpose of making profits for its shareholders any gainful use to which it puts any of its assets prima facie amounts to the carrying on of a business…”

The case did demonstrate to the Tribunal the wide scope of what can amount to the carrying on of a “business” within the meaning of the Act. Similarly the Tribunal found the dicta outlined in the cases of Jowett v O’Neill & Brennan Construction Limited [1998] 70 TC 566 and Land Management Limited v Fox [2002] Sp.C 306, useful in deciding the meaning of the word “business” Indeed in the latter case the making of a loan on commercial terms to an associated company was identified as an activity of a business nature. The Tribunal, however, did bear in mind that these cases did not address the interpretation to be given to the word “business” in the specific context of this appeal.

17.    The case of Commissioners of Customs and Excise v Lord Fisher [1981] STC 238 was also referred to by Mr Gotch on behalf of the Appellant. We took the view after consideration of the case that it is too far removed on its facts to provide any real assistance to the issues before us.

18.    On the issue of “wholly and exclusively” the cases cited by Mr Gotch were; Bentleys Stokes & Lowless v Beeson [1952] 33 TC 491, Morgan v Tate & Lyle Limited [1954] 35 TC 367, Vodaphone Cellular Limited v Shaw [1997] 69 TC 376 and Mallalieu v Drummond [1983] 57 TC 330.

19.    Each of the cases referred to were considered carefully. We do not feel it necessary to simply rehearse the facts of these cases which it must be noted, are wholly different to those in the case before us. The well known propositions and dicta arising from the authorities cited above are long established, and have been borne in mind by the Tribunal in reaching its conclusions.

20.    What seems to us clear from the case law cited is that the Courts have regularly taken a wide approach to the interpretation of the term “business”. The question for us, bearing in mind the specific facts and legislation applicable in this case, is whether to follow that approach. Furthermore we must be satisfied that the full criteria; namely that the loan was used “wholly and exclusively for the purposes of the business” are met. In so deciding we must now turn to the facts.

Facts and Evidence

21.    The Tribunal had the benefit of hearing oral evidence from the Appellant in addition to his witness statement. The Appellant provided further detail concerning Weatherwise (UK) Ltd and explained that he was one of six Directors, namely Mr Maclean, Mr Robb, Mr Tranter, Mr Williams and Mr Gillespie. The Appellant stated that the principal trade of the company was the specialised design, supply and installation of building envelopes. Weatherwise (UK) Ltd had carried out a number of major projects in the UK, Hong Kong, China, Singapore, Thailand, Germany, Norway and Canada throughout the 1980s, 1990s and 2000s. The Appellant added that the directors had always run the company in an entrepreneurial manner and included as business activities investments in both UK and overseas projects including, but not limited to, property development, capital investments and coal importation.

22.    The Appellant described the circumstances in which Weatherwise (UK) Ltd first invested in Canada. This was a joint venture in 1988 with an ex-employee who had emigrated there some years earlier. A new Canadian holding company, UKcan Investments Inc (“UKcan”) was incorporated which took a stake in a residential business. UKcan acquired 100% of the share capital of a new commercial operating company, Weatherwise Canada Inc. The company’s objective was to extend its business activities with a view to expansion in North America. The Appellant stated that as a result of the recession in Canada in the early 1990s meant that the construction activities ceased but UKcan continued to receive property rental income. Subsequently UKcan, from the proceeds of sale of land owned, together with interest free loans from Weatherwise (UK) Ltd and bank facilities guaranteed by Weatherwise Guarantee Company Limited, incorporated a new subsidiary, UKcan II Inc.

23.    In late 2002 the opportunity arose to acquire land and develop hangar facilities at the Lake Simcoe Regional Airport, Canada. This was an opportunity to re-establish the Weatherwise brand in Canada. To this end UKcan II was renamed Weatherwise Aviation Inc, which acquired the land out of its accumulated funds. However, it was unable to raise development funds from Canadian lenders. The directors of Weatherwise (UK) Ltd decided to seek funds from a UK source. If the development went ahead the company would earn substantial design and drawing fees from work that the Canadian staff were incapable of doing.

24.    The Appellant explained that commercial lenders were unwilling to lend to Weatherwise UK (Ltd) for an overseas development project. Hence he obtained a loan personally from private financiers, Arbitrage, which was conditional upon him providing a personal guarantee. The Appellant stated that he did not wish to loan the monies directly to Weatherwise Aviation Inc because it was a Weatherwise (UK) Ltd project and he wanted any risk to be shared by Mr Maclean through their equal shareholdings. Further, if he had made the loan directly, Weatherwise Aviation Inc would have been required to deduct withholding tax from the interest payments made to him. The Appellant explained that despite some initial reluctance from the company’s directors, the decision was made to go ahead with the loan to Weatherwise Aviation Inc at a 3% interest margin. Once the loan had been made the design drawings for the first building at the airport were drawn up and a fee charged.

25.    The Tribunal was shown copies of the board meeting of Weatherwise (UK) Ltd on 25 November 2003 in which the loan agreement was approved. The Appellant explained that the board meeting followed a significant amount of discussion among the directors as to the commercial viability and potential profitability of the venture.

26.    In cross examination the Appellant accepted that the main activity of Weatherwise (UK) Ltd was not investment. However he went on to state that the company had undertaken a number of business ventures with a view  to developing diverse business activities by looking beyond its main trade. The Appellant went on to state that the directors were all in favour of making the loan to Weatherwise Aviation Inc given the potential income that could be generated for Weatherwise (UK) Ltd through its specialised design work. There was also the possibility of future development into North America, and the interest income that would be generated by the loan.

27.    The Appellant accepted that as demonstrated by the similar wording of the loan agreements and their dates, that the purpose of the loan had been pre-determined. The Appellant also accepted that a condition of the loan agreement between himself and Arbitrage was that he take out Keyman Insurance. This was also a condition of the agreement between himself and Weatherwise (UK) Ltd. The Appellant accepted that he had copied the wording of the Arbitrage agreement, which had been prepared by solicitors, had been copied. Whilst he had taken out insurance in respect of the Arbitrage agreement, he had not done so for the Weatherwise (UK) Ltd agreement.

Decision

28.    The Tribunal began by considering the legislation applicable in this case and applying it to the facts. It was common ground between the parties that Weatherwise Aviation Inc was a Canadian company. As it was not resident in the UK, it was not a close company (Section 414 ICTA 1988). Therefore the statutory provision under the latter part of Section 360 (1) (b) ICTA 1988 which states “...or of any associated company of it which is a close company satisfying any of those conditions...” is clearly not satisfied.

29.    We then considered whether the remaining requirements of Section 360 (1) (b) ICTA 1988 are fulfilled, namely; “...in lending money to such a close company which is used wholly and exclusively for the purposes of the business of the company...” It is accepted by HMRC that Weatherwise (UK) Ltd is a close company and consequently the question for the Tribunal is whether the monies loaned by the Appellant to Weatherwise (UK) Ltd were used wholly and exclusively for the purposes of its (Weatherwise (UK) Ltd) business.

30.    In assessing the business activities of the company, we took into account the wide interpretation often given to the term business. We bear in mind that we are not bound to adopt such an approach, but in considering the correct interpretation to give, we looked first at the wording of the legislation. We are urged by HMRC to refer back to Section 13A (2) ICTA 1988 and conclude that the word “business” is used in the context of Section 360 (1) (b) ICTA 1988 as “that of trade.” We do not accept that such a restrictive context should be applied where the legislation specifically refers to “purposes of the business” as opposed to “trade” in what, in our view, must have been deliberately unrestricted terminology. Taken together with the liberal interpretation regularly applied by the courts, albeit where the facts may be distinguishable, we find that intention behind the legislation must be to allow a flexible and wider approach.

31.    Nevertheless we accept that we must look at the very specific facts of this case in order to assess whether in fact any “business” in the wider context was carried out by Weatherwise (UK) Ltd, or whether it was restricted in its business activities to its principal trade.

32.    The evidence from Mr Torkington was that although the main business activity carried on by Weatherwise (UK) Ltd was the design, supply and installation of building envelopes, the company nevertheless undertook a number of other commercial projects in order to strengthen the company both operationally and financially; indeed the loan made by Weatherwise (UK) Ltd was entered into for such purposes. The fact that interest was charged at a rate which gave Weatherwise (UK) Ltd a 3% margin over the amount of interest that it was being charged by the Appellant, together with the facility and lending fees charged, corroborates that the commercial interests of the company were as stated by Mr Torkington. Further, the oral evidence of substantial fees from the design projects undertaken by Weatherwise (UK) Ltd for Weatherwise Aviation Inc was indicative of a genuine commercial transaction. The points raised by HMRC as to the pre-determined use of the loan, similarity in loan agreements and their odd structure were considered carefully, but the Tribunal took the view that whilst unusually structured, there was no evidence that would lead us to conclude that these were anything other than genuine commercial loans. Indeed it is not uncommon for investors to agree to/specify the use to which monies are put. The making of the loan by Weatherwise (UK) Ltd clearly amounted, in combination with its other activities, to carrying on a business.

33.    Having concluded that the monies were used for the purposes of the business, we the considered whether the test of “wholly and exclusively” was satisfied. Again we considered the cases referred to us carefully. The question for the Tribunal is whether the loan was made by the Appellant to Weatherwise (UK) Ltd wholly and exclusively for the purposes of its business. We found on the evidence that the loan was made in order that Weatherwise (UK) Ltd could make a return from the interest and obtain remuneration from design fees. HMRC did not point to any other possible benefit to be obtained from making the loan, and the Tribunal could not find any facts upon which it could conclude that there was duality in its purpose. In such circumstances it is hard to envisage how this could not be classed as business activity, albeit distinct from the company’s main trade, but for the purpose of making profits. All the relevant conditions of Section 360 ICTA 1988are met as regards the loan from the Appellant to Weatherwise (UK) Ltd.

34.    The appeal is allowed.

35.    This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

TRIBUNAL JUDGE

RELEASE DATE:  17 September 2010