United Kingdom House of Lords Decisions

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

Scorer (Inspector of Taxes) (Appellant)

v.
Olin Energy Systems Limited (Respondents)

JUDGMENT

Die Jovis 21° Martii 1985

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

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

Cler: Parliamentor:

HOUSE OF LORDS

SCORER (INSPECTOR OF TAXES)
(APPELLANT)

v.

OLIN ENERGY SYSTEMS LTD.
(RESPONDENTS)




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

LORD FRASER OF TULLYBELTON

My Lords,

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

LORD KEITH OF KINKEL

My Lords,

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

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



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

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

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

"OLIN MATHIESON LTD.
SECTION 345 INCOME TAX ACT 1952

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Losses brought forward	£465,457
Deduct profits of Airbreaker Division	£115,515
Carried forward	£349,942"




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

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

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




"Schedule D Cases I and II	£123,403
(Less losses or charges treated as losses)	£123,403
the tax payable being	nil

"

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

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

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

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

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

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

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

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

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

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



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

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

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



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

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

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

LORD BRIDGE OF HARWICH

My Lords,

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

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LORD BRIGHTMAN

My Lords,

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

LORD TEMPLEMAN

My Lords,

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

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

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

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



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tax allowances and interest losses attributable to the Shipping
Division.

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

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

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

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

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

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