Barclays Mercantile Business Finance Ltd v Mawson (Her Majesty's Inspector of Taxes)

The House of Lords held that Barclays Mercantile Business Finance Ltd (BMBF) was entitled to capital allowances under section 24(1) of the Capital Allowances Act 1990 for its acquisition of the gas pipeline and lease back to Bord Gáis Éireann. The court applied purposive statutory construction and the principles derived from W T Ramsay Ltd v IRC, but emphasised that those principles do not permit the wholesale disregard of legally effective steps where the statute requires a legal act. The statutory test in section 24(1) focuses on the lessor's acts and purposes: if a person carrying on the trade of finance leasing has incurred capital expenditure on the provision of plant wholly and exclusively for the purposes of that trade and, by incurring that expenditure, the plant belongs to him, the allowance is available.

The House rejected the Revenue's argument that the wider scheme and circular flow of funds deprived the transaction of commercial reality for the purposes of section 24(1). The absence of "up-front finance" to the lessee or the existence of internal group arrangements did not negate the reality of BMBF's expenditure or its ownership and use of the plant in its leasing trade.

The appeal concerned entitlement to writing-down capital allowances claimed by BMBF after it purchased a cross-channel gas pipeline from Bord Gáis Éireann (BGE) for about 91m and leased it back to BGE, with BGE sub-leasing use to a UK subsidiary. The Inland Revenue contended that the transactions formed part of a larger pre-ordained scheme organised within the Barclays group which meant the 91m was not truly expended on the acquisition of plant and that the allowances should be denied.

Procedural history:

• The Special Commissioners found the transactions were a composite, pre-ordained scheme lacking commercial reality and disallowed the allowances (reported [2002] STC 1068).
• Park J (High Court) upheld that decision.
• The Court of Appeal reversed and allowed BMBF's appeal (reported [2003] STC 66; appeal from [2002] EWCA Civ 1853).
• The Revenue appealed to the House of Lords.

Nature of the claim: The Revenue sought to deny capital allowances (writing-down allowances) to BMBF under section 24(1) of the Capital Allowances Act 1990 on the ground that the wider scheme and circular funding arrangements meant BMBF had not truly incurred capital expenditure "on the provision of machinery or plant" for the purposes of its trade.

Issues framed:

• Whether, on a purposive construction of section 24(1), BMBF had incurred capital expenditure on the provision of plant wholly and exclusively for the purposes of its trade of finance leasing; and
• Whether elements of the wider group scheme which had no independent commercial purpose should be disregarded so as to defeat BMBF's statutory entitlement.

Court's reasoning: The House applied the Ramsay line of authorities but emphasised that Ramsay requires careful purposive construction of the particular statutory provision and an assessment whether the composite transaction answered the statute's description. Section 24(1) is concerned with the lessor's expenditure and its purpose; it does not include conditions about how the lessee must use the purchase price or structure its financing. The formal legal acts (the acquisition agreements, BMBF's ownership and the receipt of rent) satisfied the statutory requirements. Circularity of payments and internal arrangements of the lessee or guarantor did not, on these facts, negate BMBF's real expenditure or ownership of the plant. Accordingly the appeal was dismissed.

Appeal dismissed. The House held that section 24(1) of the Capital Allowances Act 1990 is to be construed purposively with the focus on the lessor's acts and purposes: BMBF had incurred capital expenditure on the provision of plant wholly and exclusively for the purposes of its finance-leasing trade and became owner of the plant. The wider composite scheme and circular payments did not negate that statutory entitlement under the facts of this case.

Special Commissioners: decision (anonymised) reported [2002] STC 1068; High Court (Park J) upheld Special Commissioners ([2002] STC 1068); Court of Appeal allowed BMBF's appeal (reported [2003] STC 66; appeal from [2002] EWCA Civ 1853); House of Lords dismissed the Revenue's appeal ([2004] UKHL 51).