Barclays Mercantile Business Finance Ltd v Mawson

For capital allowances under Capital Allowances Act 1990, the inquiry is directed to the trader who incurred expenditure on plant or machinery. Subject to the express restrictions in the Act, the source of the trader’s funds, the vendor’s use of the price, and an intention to obtain allowances do not alter that expenditure. A circular movement of money used to provide commercial security does not itself make a genuine sale and leaseback artificial. The Ramsay approach requires construction of the statutory concept before any composite transaction is analysed. It does not add requirements that lease finance provide up-front funds to the lessee or expose the lessor to a particular level of credit risk. A genuine finance-leasing transaction remains trading even though the lessor expects to use and pass on the benefit of capital allowances.

Barclays Mercantile Business Finance Ltd, an asset-based finance trader, bought a gas pipeline from Bord Gáis Éireann for about £91 million and leased it back. The arrangements included a sublease to Bord Gáis Éireann (UK) Ltd and security arrangements under which the purchase money ultimately returned within the Barclays group.

The Special Commissioners held that the composite arrangements had no commercial reality and that the taxpayer’s payment was not expenditure on the pipeline. Park J dismissed the taxpayer’s appeal and also held that the expenditure was not wholly and exclusively for its trade.

The taxpayer appealed to the Court of Appeal. The central issue was whether the circular security arrangements and the expected capital allowances prevented the taxpayer from satisfying section 24(1) of the Capital Allowances Act 1990.

Decision

1. Appeal allowed unanimously. Peter Gibson LJ gave the principal judgment. Rix LJ agreed, and Carnwath LJ also agreed while adding observations. The court set aside the decisions of Park J and the Special Commissioners.

2. Section 24(1) of the Capital Allowances Act 1990 required the court to examine what BMBF, as the trader, did. It incurred real expenditure when it paid the agreed price and acquired ownership of the pipeline. The source of that money and the subsequent use made of it by the vendor were immaterial. The statute did not require that the vendor should be free to use the price as working capital, nor that the lessor should retain a particular degree of credit risk.

3. The Special Commissioners’ findings that the transaction lacked commercial reality and that the benefits to BGE were funded wholly by the anticipated allowances were unsupported by the uncontradicted evidence. BGE received the price and commercially chose to invest it under the deposit arrangements. BMBF entered a genuine, arm’s-length finance lease in the course of its asset-finance trade.

4. The court applied the guidance in Macniven v Westmoreland Investments Ltd. [2001] 2 WLR 377. The Ramsay approach depends first on construing the statutory concept. Expenditure on providing an asset was analogous to payment and was a legal concept. Accordingly, the source and circular destination of the payment did not prevent expenditure being incurred. Even if the concept were commercial, the composite transaction contained no artificially inserted step without a business purpose. The acquisition of the pipeline enabled BMBF to obtain the rental stream, earn its finance-leasing profit, and obtain security.

5. The court distinguished the artificial and self-cancelling arrangements in Ensign Tankers (Leasing) Ltd v Stokes [1992] 1 AC 655. A fiscal element, including the passing of allowance benefits to a lessee through lower rentals, did not prevent the transaction from being wholly and exclusively for BMBF’s trade. The transaction was therefore not comparable to the artificial dividend-stripping structure in Lupton v FA & AB Ltd. [1968] 1 WLR 1401.

• Court of Appeal (Civil Division) allowed BMBF’s appeal and set aside the adverse decisions below: [2002] EWCA Civ 1853.
• High Court, Chancery Division (Park J) on 22 July 2002 dismissed with costs BMBF’s appeal from the Special Commissioners.
• Special Commissioners on 18 October 2001 dismissed BMBF’s appeals against determinations of trading losses and corporation-tax assessments for the accounting periods ended 31 December 1993 and 1994.