B e f o r e :
THE VICE-CHANCELLOR
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| | LLOYDS UDT FINANCE LIMITED
| Claimant
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| | - and -
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| | CHARTERED FINANCE TRUST HOLDINGS PLC AND OTHERS
and
| Defendants/Part 20 Claimants
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Michael Briggs QC and Giles Goodfellow (instructed by Messrs Cameron McKenna for the Claimant)
David Ewart (instructed by the Solicitor of the Inland Revenue for The Commissioners of the Inland Revenue)
Nicholas Strauss QC and Neil Kitchener (instructed by Messrs Slaughter and May for the 1st - 5th Defendants)
John Walters QC (instructed by Messrs Eversheds for the Part 20 Defendant)
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HTML VERSION OF APPROVED JUDGMENT
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Crown Copyright ©
The Vice-Chancellor :
S. 35(2) Capital Allowances Act 1990 restricts the extent to which “any expenditure on the hiring of a motor car, the retail price of which when new exceeded £12,000,” may be deducted in computing for the purposes of tax the profits of any trade. The trade in question is that of Autolease Ltd (“Autolease”) for the year ended 31st December 1999 whereby it hired to the public motor cars in which it acquired the necessary rights pursuant to a number of finance leases. The issue for my determination is whether the restriction imposed by s.35(2) applies to payments made by Autolease pursuant to a finance lease of all motor cars of which the retail price when new was more than £12,000.
The issue arises from the sales of Autolease by Britax International GMBH to Standard Chartered UK Holdings Ltd in August 1998 and by Standard Chartered UK Holdings Ltd to Lloyds UDT Ltd in August 2000. In each case the vendor and associated companies gave tax warranties to the purchaser under which liability depends on amongst other issues that which I now have to decide. The original claim was made by Lloyds UDT Ltd, the ultimate purchaser of Autolease, against its vendor, Standard Chartered Group. The latter then joined its vendor, Britax, in Part 20 proceedings. Subsequently the Commissioners of Inland Revenue were joined, with their consent, as an additional party to the proceedings.
The way in which the business of Autolease was carried on is described in the witness statement of Mr Anthony Guest, the then finance director of Autolease. He explains how, if the vehicle leasing business is not associated with a bank, one way in which it can be financed is by back to back leasing with a funder. In the case of Autolease such finance was obtained from a number of institutions including Lloyds UDT. Though the scheme may vary in detail depending on the funder the essential features are the same. Accordingly the parties were content to take as typical the arrangements made between UDT and Autolease. I will do the same.
By a letter dated 24th November 1997 UDT agreed to provide to Autolease a revolving facility of £82.7m to purchase standard passenger cars and light commercial vehicles for use in the contract hire operations of Autolease. It stipulated that the limit of the facility would be measured by reference to the aggregate of the rent due but unpaid under the leasing arrangements made between UDT and Autolease pursuant to the facility. Those arrangements are contained in a Master Purchase, Lease and Disposal Agreement (“the Master Agreement”). The facility was to be secured by a fixed and floating charge over the sub-hire and sub-hire-purchase agreements.
There were three parties to the Master Agreement, UDT, Autolease and a sister company called Autolease Fleets Ltd (“Fleets”). The role of Fleets was to carry out the initial purchase of the vehicle and its sale to UDT and its subsequent disposal at the end of the financing period. Clause 1 of the Master Agreement dealt with the acquisition of the vehicle. The system was for Autolease to notify UDT of the vehicles it wished Fleets to buy and for Fleets to sell them to UDT so that UDT might lease them to Autolease. Following UDT’s acceptance in principle of the proposed purchase and lease Autolease provided UDT with (1) a VAT invoice from Fleets in respect of the specific vehicle, (2) a schedule showing details of that vehicle, the period of the lease and the rent to be paid in respect of it by Autolease to UDT, (3) a sub-hiring agreement in respect of that vehicle executed by a third party and (4) a copy of a signed acknowledgement of delivery of the vehicle. On receipt of those documents UDT reimbursed Fleets the cost of the vehicle. By clause 2 warranties from UDT which might otherwise arise were excluded.
The rent payable by Autolease to UDT was that shown in the schedule referred to in paragraph 5(2) above as provided in clause 3 of the Master Agreement. Punctual payment of such rent was of the essence of the agreement. Clause 4 dealt with delivery and Clause 5 with the risk in the vehicles.
Clause 6 dealt with the use of the vehicles. Subject to clause 7 Autolease was obliged to keep the vehicle in its possession, to maintain it in a proper condition and to allow UDT a reasonable opportunity to inspect it. By clause 7 Autolease was permitted to let the vehicle to third parties for a fixed period on the terms of a hiring agreement in substantially the form of that which had been approved by UDT from time to time. Clause 8 dealt with expenses and other outgoings.
Clause 9 stipulated that nothing therein contained should be construed to imply that title to the vehicle passed to Autolease at any time. Autolease was not permitted to purport to be the owner, to sell or offer for sale, assign, pledge, charge or otherwise encumber either the vehicle or the benefit of the agreement between UDT and Autolease. Clause 10 enabled UDT to terminate the Master Agreement in certain specified events. Clause 11 dealt with the payments to be made by Autolease in consequence of any such determination. Clause 12 gave power to Autolease to terminate on early repayment of all sums due to UDT and made provision for the agency of Fleets for the disposal of the vehicle at the conclusion of the agreement with UDT in respect of that vehicle. Clause 14 reiterated the prohibition on Autolease from assigning or charging any of its rights under the agreement.
Autolease acquired the rights to the vehicle for which the Master Agreement made provision and hired the vehicle to the public in accordance with its own Master Contract Hire Agreement. The terms of that agreement are not material save that Autolease warranted that it had good legal right to hire the vehicle to the customer and that the customer, performing its obligations, would enjoy quiet possession of the vehicle.
As Mr Guest pointed out in his witness statement, it is important to bear in mind that the vehicle leasing arrangements entered into by Autolease with funders such as UDT were in substance funding arrangements. No doubt it was the fact that the arrangements were for the funding of the acquisition of the vehicle that necessitated an agreement for the sub-hire of the vehicle before it was acquired by UDT and leased to Autolease. The term of the lease and the rental payable thereunder by Autolease to UDT or another funder were calculated on the basis of a loan of the purchase price for the vehicle with interest thereon repayable by equal periodical instalments over the term of the lease. The question is whether the deductibility of those instalments is limited by s.35(2) Capital Allowances Act 1990.
S.35 appears in Chapter III of Part II of Capital Allowances Act 1990. The chapter is headed “Expensive Motor Cars”. Given that the retail price of £12,000 is inclusive of vat and has not been increased since 1992 the statutory description is now inaccurate. S.34 applies where capital expenditure exceeding £12,000 is incurred in “the provision of a motor car for the purposes of a trade”. It then limits the amount of the writing down allowance available in respect of such expenditure.
S.35(2) contains a comparable restriction where the expenditure is of an income nature. So far as relevant it provides:
“(2) Where, apart from this subsection, the amount of any expenditure on the hiring of a motor car the retail price of which when new exceeds £12,000 would be allowed to be deducted in computing for the purposes of tax the profits of any trade, that amount shall be reduced in the proportion which £12,000, together with one half of the excess, bears to that retail price; but this subsection shall have effect subject to subsection (3) below.”
Subsections (3) and (4) are in the following terms:
“(3) Subsection (2) above shall not apply where the hiring is under a hire-purchase agreement under which there is an option to purchase exercisable on the payment of the sum equal to not more than 1 per cent of the retail price of the motor car when new.
(4) In subsection (3) above "hire-purchase agreement" has the meaning given by section 784(6) of the principal Act.”
By s.784(6) Income and Corporation Taxes Act 1988 hire-purchase agreement is defined as “an agreement....under which...goods are bailed or, in Scotland, hired in return for periodical payments by the person to whom they are bailed or hired...”.
S.36 contains a definition of “motor car” of which the material parts are:
“(1) In this Part "motor car" means any mechanically propelled road vehicle other than -
(a).....or
(b).....or
(c) subject to subsections (2) and (4) below, a vehicle provided wholly or mainly for hire to, or for the carriage of, members of the public in the ordinary course of a trade.
(2) Subsection (1) (c) applies to a vehicle only if -
(a) the following conditions are satisfied -
(i) the number of consecutive days for which it is on hire to, or used for the carriage of, the same person will normally be less than 30; and
(ii) the total number of days for which it is on hire to, or used for the carriage of, the same person in any period of 12 months will normally be less than 90; or
(b) it is provided for hire to a person who will himself use it wholly or mainly for hire to, or the carriage of, members of the public in the ordinary course of a trade and in a manner complying with the conditions specified in paragraph (a) above.
(3)....
(4) Subsection (2) above does not affect vehicles provided wholly or mainly for the use of persons in receipt of -
(a)..(d) [a disability or similar allowance].”
Lloyds UDT and the Inland Revenue contend that s.35(2) applies to all vehicles of the relevant description acquired by UDT and let to Autolease under the provisions of the Master Agreement and the schedule in respect of that vehicle. They submit that the rent payable by Autolease is “expenditure” and that it is paid “on a hiring” as ordinarily understood. They argue that the terms of the sub-section do not admit of any limitation on their generality and that their submission is confirmed by the terms of s.35(3) and (4) and s.36(1)(c), (2) and (4).
In the past Autolease has computed the profits of its trade and paid tax on the footing that s.35(2) applied to vehicles of the relevant description acquired under a funding lease but then retained and used by its directors or employees. Britax and Standard Chartered contend that Autolease was right to treat as excluded from the ambit of s.35(2) those vehicles of the relevant description which were acquired by Autolease under a funding lease but sub-hired to third parties. It is necessary to keep this distinction in mind; it is not contended that s.35(2) is inapplicable to any acquisition of rights to vehicles under a funding lease, only those sub-hired to third parties without any intermediate use by its directors or employees. As the arguments for Britax and Standard Chartered were not quite the same it is necessary to refer to them separately.
The essence of the argument for Britax is that (1) the true nature of the expenditure incurred by Autolease under the Master Agreement and relevant schedule, described as rent, was not on the “hiring” of a motor car and (2) on its proper construction s.35(2) does not apply to such expenditure.
With regard to the first proposition Britax emphasised that the bailment of the vehicle to Autolease, which it did not deny, was part of a larger composite transaction for the provision of back to back finance by UDT to Autolease to enable Autolease to contract hire the vehicle to its customer. It pointed out that by the time the contract of bailment between UDT and Autolease took effect there was already a contract of sub-hire in existence so that until the sub-hire determined Autolease never enjoyed possession and control of the vehicle. Thus, it was said, the Master Agreement and schedule did not confer exclusive possession and control of the vehicle on Autolease. It was submitted that the court should recognise the expenditure to be not on hiring but on obtaining back to back finance.
With regard to the second proposition Britax contended that the concept of hiring to which s.35(2) referred was a commercial not a legal concept. It relied on MacNiven v Westmoreland [2001] 2 WLR 377; General Motors Acceptance Corporation v IRC [1987] STC 122 and GM Shepherd Ltd v North West Securities Ltd [1991] SLT 499. The suggested distinction was that the legal concept would, but the commercial concept would not, include car purchase and car finance for the hirer’s own use or for contract hire. In this connection it was submitted that the legislative purpose behind s.35(2) was to restrict business use of expensive cars, a purpose which was inapplicable to an intermediate lessor.
Both propositions were supported by suggestions that the application of the restriction to an intermediate lessor, however many of them there were, would be unreasonable in unnecessarily increasing the cost to the ultimate user. It is suggested that it would be offensive to the ordinary notions of fiscal fairness to restrict the right to deduct the revenue costs of finance from the rental income it produced. In this connection reliance was placed on the judgment of Sir Thomas Bingham in R v IRC ex p Unilever [1996]STC 681, 690g.
The argument for Standard Chartered was slightly different. It was contended that s.35(2) should be construed (1) by excluding from the word “hiring” in s.35(2) funding arrangements by way of intermediate lease, and/or (2) excluding from the class of motor car to which s.35(2) applies those which are acquired as either trading stock or plant. Standard Chartered contended that the first submission was supported by MacNiven v Westmoreland [2001] 2 WLR 377 and the second by all those authorities, such as O’Rourke v Binks [1992] STC 703, which indicate that such limitations may be implied to avoid absurdity. The suggested absurdity is the application of the restriction to all the intermediate lessors, who have no opportunity to use the motor car, when the purpose of the provision was to discourage the use of expensive motor cars for business purposes.
In MacNiven v Westmoreland [2001] 2 WLR 377 the House of Lords was concerned with whether there had been a payment of interest so as to be deductible in the computation of the payor’s profits. As the alleged payment was part of a circular transaction the case also involved elements of tax avoidance. Lord Hoffmann, with whom the other members of the Appellate Committee agreed, drew attention (paragraphs 33 to 35) to the fact that legislation may apply to “business or commercial concepts which may not be capable of being held within the confines of purely juristic analysis”. He cited, as examples, “profits or gains of the year of assessment”, “loss”, “disposal” and “financial assistance”. He warned (paragraph 50) that though a word might have a “recognised legal meaning, the legislative context may show that it is in fact being used to refer to a broader commercial concept”. He emphasised (paragraph 58) “that the first and fundamental step in the process of construction [is] to identify the concept to which the statute refers”.
The principle, as so expounded, cannot be and is not in dispute. But it does not follow, and Lord Hoffmann did not suggest, that every concept to which legislation applies has both a legal and a, different, commercial content. The question is what is meant by “the hiring of a motor car” in the context of s.35(2). Authorities on the meaning of that or cognate phrases in other legislation are of very limited value. Britax relied on General Motors Acceptance Corporation v IRC [1987] STC 122; GM Shepherd Ltd v North West Securities Ltd [1991] SLT 499 and Frazer v Trebilcock (1964) 42 TC 217.
In General Motors Acceptance Corporation v IRC one issue was whether cars were let on hire for the purposes of para. 29(2)(c) Sch.5 Finance Act 1976 when they were in the hands of dealers on a “sale or return” basis. It was held that they were not because although the contract between the relevant parties was one of bailment it could not be regarded as one of hire. It is not disputed that it is possible to have a contract of bailment which is not one of hire. I do not find that case of any assistance in resolving the problem in this case.
In GM Shepherd Ltd v North West Securities Ltd the question was whether there was to be implied into a contract of hire a term as to the hireworthiness of the chattel. It was held by the Court of Session that no such implication could be made in the circumstances of that case. That case is of no help either. It was common ground that the transaction was one of hire.
In Frazer v Trebilcock (1964) 42 TC 217 one issue was whether the car acquired for use in a driving school was provided wholly or mainly for hire to or for the carriage of members of the public. The Commissioners considered that it was. Buckley J disagreed. He referred to the definition of a hire of chattels in Halsbury’s Laws of England namely
“a contract by which the hirer obtains a right to use the chattel hired in return for the payment...The proprietary interest in the chattel is not changed, but remains in the owner. But upon delivery the hirer becomes legally possessed of the chattel hired, so that if it is lent for a time certain, even the true owner is debarred during that time from resuming possession against the will of the hirer...”
He concluded (page 227) that there was no contract of hire because the pupil
“never obtained any right or interest in the car of a kind which could be said to amount to a hiring.”
I agree with counsel for Lloyds UDT that this case is of relevance in demonstrating that one element of a contract of hire is the right to exclusive possession against the true owner/hirer. But it does not, in that respect, advance the submissions for Britax.
The normal meaning of hire is, in my judgment, to obtain from another the temporary use of a chattel for a stipulated payment. See New Shorter Oxford English Dictionary (1993) Ed. The concept involves obtaining the right to possession of the chattel for the period of the hire to the exclusion of the hirer. See the definition quoted in paragraph 26. I can see nothing in the terms of Chapter III of Part II of Capital Allowances Act 1990 to suggest that the concept of hiring to which s.35(2) applies is so limited as to give rise to any of the exclusions for which Britax or Standard Chartered contend.
First, Chapter III only applies to motor cars of a specific description acquired wholly and exclusively for the purposes of a trade. See ss.34(1) and 35(2) Capital Allowances Act 1990 and s.74(1)(a) Income and Corporation Taxes Act 1988. If it is acquired for that purpose then I see no justification for importing any further more limited purpose such as for use rather than sub-hire or otherwise than as stock in trade or plant.
Second, it is common ground that had Autolease bought the motor cars with funds borrowed from its bank or found from its own resources any claim for writing down allowances would have been restricted in accordance with s.34(3). It is obvious that one of the purposes of s.35(2) is to prevent the avoidance of the statutory restrictions in respect of “expensive motor cars” by the simple expedient of paying by instalments the price for the car with interest on the unpaid balance for the time being. It would be odd if an implied limitation by reference to the use to be made of the motor car by the acquirer should be implicit in s.35(2) but not in s.34(1).
Third, the terms of s.35(3) recognise that hiring under a hire-purchase agreement is, generally, a hiring for the purposes of s.35(2). This is a necessary implication from the fact that it is only certain types of hire-purchase, that is where the option to purchase is for less than 1 per cent of the retail price, which are excluded by s.35(3). All others are included. It was suggested by counsel for Britax that this was an argument from redundancy and so of little weight. Walker v Centaur Clothes Group [2000] STC 324, 331a. I do not agree. The terms of s.35(3), being of limited application, confirm Parliamentary recognition of the inclusion in s.35(2) of hire-purchase agreements generally. It was also suggested that in the case of hire-purchase agreements only the revenue element in the instalment is deductible anyway. This seems to me to be beside the point which is the recognition that hire-purchase is hiring for the purpose of s.35(2).
Fourthly, s.36(1)(c) recognises that but for that provision a motor vehicle acquired wholly or mainly for hire to the public would be subject to the restriction imposed by s.35(2). Thus a sub-hire would not exclude the hiring from the operation of s.35(2) unless it was of the limited duration specified in s.36(2). But that duration is something less than a permanent sub-hire. It follows that ss.36(1)(c) and (2) specifically recognise that a permanent sub-hire of a motor car does not preclude the deductibility of the costs of its acquisition or of the rights necessary for the sub-hire being subject to the restrictions imposed by s.34(3) or s.35(2). In addition s.36(4) contains provisions for the different treatment of expensive motor cars in the light of their intended use. The restrictions Britax and Standard Chartered seek to imply are also dependent on intended use. I see no reason to make any such implication in the face of the express limitation for use by the disabled.
Fifthly, the terms of a funding lease do confer on the person to whom the motor car is let the right to exclusive possession as against the funder. It is this aspect of the transaction which enables that person to confer the appropriate rights on the sub-hirer. The sub-hire cannot take effect until the transaction between the funder and the hirer has been effected, the former is the exploitation of the rights acquired under the latter. It would be absurd if the operation of the restriction imposed by s.35(2) depended on the interposition of a period of use by the hirer between the transaction with the funder and the commencement of the sub-hire.
Sixthly, if the transaction under which the relevant expenditure is incurred is a hiring within the meaning of that word in s.35(2), as I consider that it is, it is irrelevant that the hiring is part of a larger composite transaction. Again it would be absurd if the restriction could be avoided by incorporating the transaction into some larger composite arrangement.
Seventhly, the fact that Autolease is an intermediate lessor appears to me to be immaterial if, as I believe, the purpose of s.35(2) is to limit the deductibility of expenditure incurred in hiring an expensive motor car for the purposes of a trade. It may be that the effect is to increase the cost to the end-user; but the provisions of Chapter III are not directed to increasing or minimising cost to an end-user. The object of the Chapter is to limit the contribution made by the general body of taxpayers to the acquisition for the purposes of a trade by whatever means and for whatever more limited purpose of what Parliament defined as “expensive motor cars”. If that restriction is imposed with sufficient clarity, as I believe it is, then the objection based on ordinary notions of fiscal fairness (paragraph 20 above) are misplaced for it is always open to Parliament to provide otherwise.
For all these reasons I see nothing in the concept of a funding lease such as that entered into by Autolease with UDT or in s.35(2) Capital Allowances Act 1990 to justify the implications or restrictions for which Britax or Standard Chartered contend. In my judgment s.35(2) applies to all the rental payments made by Autolease to UDT pursuant to the Master Agreement and the schedule relating to the particular vehicle provided that the retail price of that motor car when new exceeded £12,000. I will make a declaration to that effect and such order as may be needed in the unusual circumstances of this case.
