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TMI Blog1992 (5) TMI 192X X X X Extracts X X X X X X X X Extracts X X X X ..... the Bank of England was prepared to rescue J. M. B. was not, of course, because the Bank had any particular regard for J. M. Plc.'s position, but because it considered that the collapse of J. M.B. would have extremely serious repercussions for the banking world and would therefore be contrary to the public interest. The conditions upon which the Bank of England was willing to rescue J. M. B. were first, that the whole share capital of J. M. B. should be transferred to it for a nominal consideration, and second, that J. M. Plc. would inject £50m. into J. M. B. J. M. Plc. satisfied these conditions and so brought it about that the Bank of England rescued J. M. B. and thus saved J. M. Plc.'s own business. The transfer to the Bank of England of the share capital of J. M. B. was not an end and purpose in itself, but was merely incidental to the purpose of achieving the rescue operations which was in fact achieved. The injection of £50m. into J. M. B. was on a proper analysis not the payment of the price for getting rid of a burdensome asset, but a contribution required by the Bank of England towards its planned rescue operation, the rest of the funds needed for it b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing day then the taxpayer company could not continue to trade. In these circumstances the taxpayer company agreed to sell the shares in J.M.B. to the Bank of England for £1 and to contribute the sum of £50 m. to the resources of J.M.B. The Bank of England agreed to buy the shares of J.M.B. on those terms. The Bank of England intended and the taxpayer company expected that the Bank of England would procure the sums in excess of £50m. required to satisfy J.M.B.'s creditors. The payment of £50m. by the taxpayer company was necessary and was made to enable the taxpayer company to continue to trade in platinum or at all. The objects of the taxpayer company were achieved and the taxpayer company continued to trade. Section 74 of the Income and Corporation Taxes Act 1988, repeating earlier legislation in force in 1984, provides that in computing the amount of the profits of a trade for the purposes of income tax and corporation tax "no sum shall be deducted in respect of _ (a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade. . . " The general commissioners found, and it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or arrangement to pay £50M. to J.M.B. and to release J.M.B. from any obligation to repay it. These two elements cannot be severed, the one being treated [as] the disposal for a nominal consideration of a worthless but not an onerous asset and the other as a payment made to preserve the business of the taxpayer company." In the Court of Appeal [1991] 1 WLR 558 Fox L.J., delivering the leading judgment, said, at p. 565 : "J.M.B. was a capital asset of the taxpayer company ; . . . the payment seems to me to be a payment by the taxpayer company to enable it to get rid of a capital asset. That asset was not onerous . . . but its continued retention was harmful to the taxpayer company. In my view the common sense of the matter is that the £50m. was capital expenditure." *See [1935] The facts in the present case are unprecedented but the authorities which speak of the relationship between a payment and a capital asset must be considered. In British Insulated and Helsby Cables Ltd. v. Atherton [1926] AC 205 the taxpayer company paid a lump sum as the nucleus of a pension fund for its staff. By a majority the House of Lords held that the payment was an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of business, dealing with the particular difficulty which arose on 30 September 1984 as a result of the insolvency of J. M. B., and the payment was made to enable the taxpayer company to continue to carry on business unimperilled by the association of the taxpayer company with J. M. B. In Anglo-Persian Oil Co. Ltd. v. Dale [1932] 1 KB 124, a payment terminating a disadvantageous agency contract was held to be a revenue payment. Romer L. J. pointed out, at page 146, that in applying the test laid down by Lord Cave in Atherton's case "enduring" means "enduring in the way that fixed capital endures." The advantage need not be of a positive character but may consist in the getting rid of an item of fixed capital that is of an onerous character. In Dale's case the payment got rid of a disadvantageous agency contract but did not procure any enduring capital benefit. In the present case the item of fixed capital which was got rid of, namely the shares in J. M. B., were not themselves of an onerous character. The payment of £50m. had no enduring effect on the capital of the taxpayer company. The payment of £50m. prevented the whole business of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion whether a payment is to be treated as a revenue or as a capital payment for indicia to point different ways. In the end the courts can do little better than form an opinion which way the balance lies. There are a number of tests which have been stated in reported cases which it is useful to apply, but we have been warned more than once not to seek automatically to apply to one case words or formulae which have been found useful in another. . . . Nevertheless reported cases are the best tools that we have, even if they may sometimes be blunt instruments. I think that the key to the present case is to be found in those cases which have sought to identify an asset. In them it seems reasonably logical to start with the assumption that money spent on the acquisition of the asset should be regarded as capital expenditure. Extensions from this are, first, to regard money spent on getting rid of a disadvantageous asset as capital expenditure and, secondly, to regard money spent on improving the asset, or making it more advantageous, as capital expenditure. In the latter type of case it will have to be considered whether the expenditure has the result stated or whether it should be reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd as such was properly deductible. However, Vinelott J. [1990] 1 WLR 414 allowed an appeal by the revenue from the decision of the general commissioners on the ground that the payment was to be characterised as a capital payment ; and the Court of Appeal [1991] 1 WLR 558 upheld the decision of Vinelott J., refusing leave to appeal to your Lordships' House. The taxpayer company now appeals to your Lordships with the leave of this House. I shall refer to the appellant as "J. M. Plc." to distinguish it from its former wholly owned subsidiary, Johnson Matthey Bankers Ltd., which I shall refer to as "J. M. B." The facts have been helpfully summarised by the parties in an agreed statement of facts ; indeed the facts are in any event not in dispute. The payment in question was made under an agreement reached between J. M. Plc. and the Bank of England during the night of Sunday, 30 September and Monday, 1 October 1984, which was embodied in a written agreement on Tuesday, 2 October. J. M. Plc. is a company which carries on a large trade in precious metals, mainly platinum. J. M. B. carries on a banking business, which includes dealing in bullion. In August and Sep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f England was reduced to writing in a document dated 2 October 1984. Clauses 1 and 2 of the agreement read : "1. Assets to be sold. The whole of the issued share capital of [J. M. B.] (the 'shares'), subject to [J. M. Plc.] advancing a loan of £50m. to [J. M. B.] and waiving repayment of the same today. 2. Price. The price to be paid by the Bank will be the sum of £1.'' No mention is made in the agreement of any rescue of J. M. B. by the Bank of England. I have already recorded that, in assessing J. M. Plc. to corporation tax for the year 1984/85, the revenue disallowed the deduction of £50m. as an expense of its platinum trade, on the grounds, first that it was a capital payment and not a revenue payment, and second that the money was not laid out wholly and exclusively for its platinum trade ; and further that, on J. M. Plc.'s appeal to the general commissioners, they decided both points in its favour. The second point has not been pursued ; and your Lordships, like the courts below, are concerned only with the first. The conclusion of the general commissioners was expressed as follows : "We, therefore, find on the evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the Bank was willing to acquire J. M. B. was on payment of the £50m. by the taxpayer company to J. M. B. The position was, in reality, the same as if the Bank had said 'We will take over J. M. B. if you pay us £50m.' Whichever way it was done, the payment seems to me to be a payment by the taxpayer company to enable it to get rid of a capital asset. That asset was not onerous in the sense that the leases in Mallett v. Staveley Coal and Iron Co. Ltd. [1928] 2 KB 405 were onerous, but its continued retention was harmful to the taxpayer company. In my view the common sense of the matter is that the £50m. was capital expenditure." Before your Lordships, Mr. Park for J. M. Plc. advanced the following submissions. He submitted that the expenditure of £50m. could only be a capital payment if expended as consideration for or otherwise upon (a) the acquisition of a capital asset ; or (b) the improvement of a capital asset already owned ; or (c) the divestiture of an onerous capital asset already owned. Here the question was whether the payment fell into the third of these categories. In his submission it did not, because the J. M. B. shares were a w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration to be mounted by the Bank. On this reasoning, on a true analysis of the agreement J. M. Plc. did not inject the money into J. M. B. in consideration for the rescue of J. M. B. It sold the shares in J. M. B. (with the £50m. injected into the company) to the Bank for a nominal consideration. It therefore paid the money to J. M. B. in order to achieve that transfer. This is the analysis which was accepted both by Vinelott J. and by the Court of Appeal. I must confess that at first I, too, found this analysis attractive. But on reflection I have come to the conclusion that it is too narrowly based, and ignores the reality of the situation. For the reality was that, even though the Bank did not (and no doubt could not) promise J. M. Plc. that it would rescue J. M. B., nevertheless it was plainly planning to do so, not in J. M. Plc.'s interest but in the public interest, and it exacted the £50m. cash injection by J. M. Plc. into J. M. B. as J. M. Plc.'s contribution to that rescue. That explains why the sum was not payable to the Bank, but was stipulated to be a cash injection into J. M. B. before the shares in J. M. B. were transferred to the Bank. J. M. Plc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Coal and Iron Co. Ltd. [1928] 2 KB 405 and Tucker v. Granada Motorway Services Ltd. [1979] 1 WLR 683. In Morgan v. Tate and Lyle Ltd. it was held both in the Court of Appeal and in your Lordships' House that it had been open to the general commissioners as a matter of law to find, as they did, that expenditure incurred in carrying out a propaganda campaign against nationalising the sugar refining industry was wholly and conclusively laid out for the purposes of the taxpayer's trade and was accordingly an admissible deduction for income-tax purposes. The expenditure was, as Hodson L. J. said [1953] Ch. 601, 646 : "a proper debit item to be charged against the incomings of the trade when computing the balance of the profits of it, and is none the less a proper revenue charge because it is laid out for the purpose of preserving the assets of the company." In IRC v. Carron Co., 45 TC 18, a company incorporated by charter incurred substantial expenditure in obtaining a supplementary charter which removed certain restrictions in the original charter which had become archaic and unsuited to the successful operation of a company in modern conditions. The greater par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases which have sought to identify an asset. In them it seems reasonably logical to start with the assumption that money spent on the acquisition of the asset should be regarded as capital expenditure. Extensions from this are, first, to regard money spent on getting rid of a disadvantageous asset as capital expenditure and, secondly, to regard money spent on improving the asset, or making it more advantageous, as capital expenditure. In the latter type of case it will have to be considered whether the expenditure has the result stated or whether it should be regarded as expenditure on maintenance or upkeep, and some cases may pose difficult problems." The question in this appeal is therefore whether the £50m. was paid to dispose of the shares in J. M. B. or whether it was paid to enable the taxpayer company to continue to trade by removing the danger of J. M. B.'s insolvency. My Lords, I must confess that I was attracted by the argument for the Crown that the payment was made to enable the taxpayer to dispose of the shares. However, the issue is narrow and I do not feel inclined to dissent from what I understand to be the view of the majority of your Lordships. I ..... 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