Barclays Mercantile Business Finance Limited (Respondents) v. Mawson (Her Majesty's Inspector of Taxes (Appellant)

Tax legislation is construed purposively and applied to the transaction viewed realistically. The approach associated with W T Ramsay Ltd v Inland Revenue Commissioners creates no special doctrine permitting every tax-motivated or commercially purposeless step to be disregarded.

For a finance lessor to obtain writing-down allowances under section 24(1) of the Capital Allowances Act 1990, it must incur capital expenditure to acquire machinery or plant for leasing in its trade, and the asset must belong or have belonged to it because of that expenditure. The provision concerns the lessor’s acts and purposes. It does not require the transaction to provide usable up-front finance to the lessee, nor does it regulate the lessee’s use of the purchase price. Preordained security and payment arrangements therefore do not defeat the allowance when the lessor genuinely acquires the asset, pays the price and earns taxable rent in its leasing trade.

BMBF, a finance-leasing company, paid about £91 million to BGE for a gas pipeline and leased it back. The wider preordained scheme required most of the purchase price to remain within deposit and security arrangements which funded future rent. The special commissioners and Park J held that the payment was not expenditure on the pipeline for section 24(1) of the Capital Allowances Act 1990, because the scheme supplied no usable up-front finance to BGE and lacked commercial reality.

The Court of Appeal, in [2002] EWCA Civ 1853, unanimously reversed that decision. The Inland Revenue appealed. The central question was whether, on a purposive construction of section 24(1) and a realistic view of the composite arrangements, BMBF had incurred capital expenditure on plant for the purposes of its finance-leasing trade.

1. Appeal dismissed unanimously. The Committee—Lord Nicholls of Birkenhead, Lord Steyn, Lord Hoffmann, Lord Hope of Craighead and Lord Walker of Gestingthorpe—gave a single opinion to which all members contributed. It upheld the Court of Appeal’s conclusion that BMBF was entitled to the writing-down allowances.

2. The Committee held that the principle associated with W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 is an application of ordinary purposive statutory construction. The court must identify the transaction described by the provision and then decide whether the actual transaction, viewed realistically and as a whole where its elements were intended to operate together, answers that description. There is no separate revenue-law doctrine under which every transaction or element lacking a business or commercial purpose is disregarded.

3. The Committee held that the suggested distinction between statutory concepts that are inherently “commercial” and those that are “legal” may sometimes assist, but it cannot replace close analysis of the particular provision. Circularity, tax-avoidance purpose and preordination matter only insofar as the statute, purposively construed, makes them relevant.

4. The Committee held that section 24(1) of the Capital Allowances Act 1990 grants the allowance where a trader incurs capital expenditure to provide machinery or plant wholly and exclusively for the trade, and the asset belongs or has belonged to the trader in consequence. In finance leasing, this requires expenditure to acquire the asset for leasing in the course of the lessor’s trade. The allowance reflects the depreciation borne by the lessor as owner.

5. The Committee held that the statutory requirements concern the lessor’s acts and purposes. They impose no condition that the lessee receive usable up-front finance, and say nothing about the lessee’s use of the purchase price, source of rent or use of the plant. BMBF paid £91 million, acquired ownership of the pipeline in its ordinary finance-leasing trade and received taxable rent. The preordained deposits, guarantees and circular payments did not alter those facts and were not necessary elements of the statutory entitlement.

1. House of Lords: The Inland Revenue’s appeal was dismissed unanimously. The Court of Appeal’s decision was upheld.
2. Court of Appeal: In [2002] EWCA Civ 1853, reported at [2003] STC 66, Peter Gibson, Rix and Carnwath LJJ unanimously allowed BMBF’s appeal and set aside Park J’s order and the special commissioners’ decision.
3. High Court: Park J, whose decision was reported at [2002] STC 1068, agreed with the special commissioners that the expenditure was not incurred on providing the pipeline for BMBF’s trade because the transaction lacked commercial reality.
4. Special commissioners: They found that the arrangements were preordained and formed a composite whole. They rejected the claim to capital allowances on the basis that the payment was not expenditure on the pipeline.