Revenue And Customs v Lloyds TSB Equipment Leasing (No 1) Ltd

Under section 123(4) of the Capital Allowances Act 2001, the question is whether obtaining an allowance determined without reference to section 109 was a main object. The provision is not confined to cases involving a comparison between a 25% and a 10% allowance. It may apply where the only alternatives are a 25% allowance and no allowance.

A genuine commercial purpose does not prevent obtaining tax allowances from also being a main object. A tribunal must assess the significance of the tax objective. It cannot conclude that the objective was merely subservient solely because the transactions had commercial purposes. The distinct statutory test in Melluish does not answer the section 123(4) inquiry.

The respondent, a finance lessor, claimed writing-down capital allowances for expenditure on two LNG vessels. The First-tier Tribunal allowed its appeal on issues 1, 2 and 4, but rejected its argument on issue 3: [2012] UKFTT 47 (TC). The Upper Tribunal dismissed HMRC’s appeal and upheld the decision on issue 4 by a casting vote: [2013] UKUT 0368 (TCC).

HMRC appealed on issue 4, concerning whether obtaining the allowances was a main object of the relevant chartering transactions under section 123(4). The respondent issued a respondent’s notice on issue 3, concerning whether section 123(4) applied where the alternative to a 25% allowance was no allowance.

Disposition. The court dismissed LEL’s respondent’s notice on issue 3. It allowed HMRC’s appeal on issue 4, set aside the First-tier Tribunal’s decision on that issue and remitted LEL’s appeal on issue 4 to the same tribunal judges for reconsideration. Lord Justice Patten and Lord Justice Kitchin agreed with Lord Justice Rimer.

1. Issue 3. The words without regard to section 109 in section 123(4) require an inquiry into whether the intended allowance was to be determined without reference to section 109. They do not require a comparative intention to obtain a 25% allowance rather than a 10% allowance. Section 123(4) can therefore apply where section 109 could not provide an alternative because the only alternatives were a 25% allowance and no allowance.
2. That conclusion was reinforced by the legislative history. The Capital Allowances Act 2001 restated earlier provisions with minor changes. The earlier structure treated the 10% allowance provision as subject to the provision denying allowances altogether. The reference to section 109 therefore had no limiting effect that would exclude a nil-allowance case.
3. Issue 4. The inquiry under section 123(4) differs from the inquiry under paragraph 3(1)(c) of Schedule 8 to the Finance Act 1971, considered in Barclays Mercantile Industrial Finance Ltd v Melluish (Inspector of Taxes). That earlier decision was of no assistance in answering the present statutory question. The fact that each transaction served a genuine commercial purpose did not mean that obtaining capital allowances could not also be a main object.
4. The tribunal was entitled to identify and rank the competing objectives. It nevertheless had to explain why the allowance objective was not sufficiently significant to be a main object. The reasoning in paragraph 427 of the First-tier Tribunal’s decision largely asserted that the commercial objectives were paramount and the tax objective was subservient. It did not adequately evaluate the extensive and precise tax advice or explain why that objective was not a main object. The decision was therefore unsafe and had to be set aside and remitted.

1. Court of Appeal (Civil Division): HMRC’s appeal on issue 4 allowed; the First-tier Tribunal’s decision on that issue set aside and remitted to the same judges. LEL’s respondent’s notice on issue 3 dismissed.
2. Upper Tribunal (Tax and Chancery Chamber): HMRC’s appeal dismissed and the First-tier Tribunal’s decisions on issues 1, 2, 3 and 4 upheld, with the decision on issue 4 carried by the casting vote of Newey J: [2013] UKUT 0368 (TCC).
3. First-tier Tribunal (Tax): LEL’s appeal allowed on issues 1, 2 and 4 and dismissed on issue 3: [2012] UKFTT 47 (TC).