1992 P T D 1259

[1989 (3) WLR 1]

[House of Lords]

Before Lord Keith of Kinkel, Lord Brandon of Oakbrook,

Lord Templeman, Lord Oliver of Aylmerton and Lord Goff of Chieveley

BEAUCHAMP (INSPECTOR OF TAXES)

versus

F.W. WOOLWORTH PLC

Income-tax---

----Profits, computation of---Foreign currency exchange transactions ---Five year loans made to assist trading company with cash shortage---Company incurring exchange losses on purchasing foreign currency to repay loans-- Whether loans capital or revenue transactions---Whether exchange losses deductible in computing profits.

The tax-payer company ran a number of retail shops throughout the United Kingdom. In 1971 and 1972 it raised two loans each of 50 million Swiss francs repayable at par after five years or earlier. The loans were raised to provide the tax-payer company with cash for general trading purposes and its intention was to repay them out of the profits generated in the course of its trade. On receipt the tax-payer company converted the loans into sterling and used the sums in part to meet capital expenditure and in part to meet the daily running expenses of its business. In repaying the loans the tax-payer company incurred substantial losses caused by the depreciation in the value of sterling during the periods the loans were outstanding. The tax-payer company appealed against assessments to corporation tax for accounting periods from 1973 to 1978 claiming that it was entitled to deduct the exchange losses in computing its taxable profits. The special commissioners concluded that the tax-payer company had negotiated the loans to tide it over a short-term cash flow problem, that as such they represented temporary facilities, not capital, and that accordingly the exchange losses were deductible in computing the company's profits. Hoffmann, J. reversed their decision on the ground that the loans constituted additions to capital. The Court of Appeal allowed an appeal by the tax-payer company and restored the commissioners decision.

On appeal by the revenue:---

Held, allowing the appeal that the computation of the profits of a trade was arrived at after setting against receipts the expenditure necessary to earn them according to the ordinary principles of commercial accounting that, while expenses incurred in earning profits might be deducted for the purposes of assessing income or corporation tax on the profits of a trade-such expenses as might be incurred in respect of capital transactions, and a fortiori capital losses, were not so deductible; that a loan was only a revenue transaction if it was part of the ordinary day to day incidence of carrying on the business; that the question whether the loan transactions were of a revenue or capital nature was a question of law to be determined in the light of the facts found by the special commissioners; that the borrowing of 100 million Swiss francs for a fixed period of five years did not form part of the day to day activities of the tax-payer company in earning profits but provided an increase in the capital employed in its trade during that period, and, accordingly, the currency exchange loss was a loss in connection with capital transactions.

Docta of Viscount Cave L.C in British Insulated and Helsby Cables Ltd. v. Atherton (1926) A.C. 205, 213, H.L. (E) and Lord Hanworth M.R. in European Investment Trust Co. Ltd. v. Jackson (1932) 18 T.C. 1, 13, CA. doubted.

Dictum of Lord Reid in Strick v. Regent Oil Co. Ltd. (1966) A.C. 295, 324, H.L. (E), considered.

(1989) 1 WLR 50 reversed.

Anglo-Continental Guano Works v. Bell (1894) 3 T.C. 239, D.C.; Ascot Gas Water Heaters Ltd. v. Duff (1942) 24 T.C. 171; British Insulated and Helsby Cables Ltd. v. Atherton (1926) A.C. 205, H.L. (E.); Davies v. Shell Co. -- China Ltd. (1951) 32 T.C. 133; CA.; European Investment Trust Co. Ltd. v. Jackson (1932) 18 T.C. 1, CA.; Gresham Life Assurance Society v. Styles (1892) A.C. 309, H.L. (E.); Inland Revenue' Commissioners v. Carron Co. (1968) 45 T.C. 18, Ct. of Sess. and H.L. (SC); Inland Revenue Commissioners v. Rolls-Royce Ltd. (1962) 1 W.L.R. 425; [1962) 1 All E.R. 801; 40 T.C. 443, H.L. (E.); Scottish North American Trust Ltd. v. Farmer (1912) A.C. 118; (1911) 5 T.C. 693, Ct. of Sess. and H.L. (SC); Scottish Provident Institution v. Farmer (1912) 6 T.C. 34, Ct. of Sess; Strick v. Regent Oil Co. Ltd. (1966) A.C. 295; (1.965) 3 W.L.R. 636; (1965) 3 All E.R. 174; 43 T.C. 1, H.L. (E.); Texas Land and Mortgage Co. v. Holtham (1894) 3 T.C. 255, D.C.; Tucker v. Granada Motorway Services Ltd. (1979) 1 W.L.R. 683; (1979) 2 All. E.R. 801; 53 T.C. 92, H.L. (E); Vallambrosa Rubber Co. Ltd v. Farmer (1910) 5 T.C. 529, Ct. of Sess. and Ward v. Anglo-American Oil Co. Ltd. (1934) 19 T.C. 94 ref.

B.P. Australia Ltd. v. Commissioners of Taxation of the Commonwealth of Australia (1966) A.C. 244; (1965) 3 W.L.R. 608; (1965) 3 All E.R. 209, P.C. : Bolam v. Regent Oil Co. Ltd. (1956) 37 T.C. 56; Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. (1964) A.C. 948; (1964) 2 W.L.R. 339; (1964) 1 All E.R. 208, P.C.: Edwards v. E3airstow (1956) A.C. 14; (1955) 3 W.L.R. 410; (1955) 3 All E.R. 48; 36 T.C. 207, H.L. (E.); Inland Revenue Commissioners v. Scottish & Newcastle Breweries Ltd. (1982) 1 W.L.R. 322; (1982) 2 All E.R. 230; 55 T.C. 252, H.L. (SC); O'Kelly v. Trusthouse Forte Plc. (1984) O.B. 90; (1983) 3 W.L.R. 605; (1983) 3 All E.R. 456, C.A.; Usher's Wiltshire Brewery Ltd. v. Bruce (1915) A.C. 433; 6 T.C. 399, H.L. (E.) cited.

This was an appeal by the revenue by leave of the Court of Appeal from a judgment of the Court of Appeal (Sir Nicolas Browne-Wilkinson V.C., Nourse and Stuart-Smith L.J.J.) (1989) 1 W.L.R. 50 on 28th July 1988 allowing an appeal by the tax-payer company, F.W. Woolworth Plc., from a decision of Hoffmann, J. (1987) S.T.C. 279 on 8th April 1987 whereby he allowed the revenue's appeal by case stated from a decision dated 19th November 1981 of the special commissioners allowing the company's appeals against assessments to corporation tax.

The facts are stated in the opinion of Lord Templeman.

Christopher McCall Q.C. and Launcelot Henderson for the Revenue.

Andrew Park Q.C. and David Goy for the Tax-payer Company.

Dates of hearing: 8th to 11th May, 1989.

Date of decision: 8th June, 1989.

Their Lordships took time for consideration.

JUDGMENT

LORD KEITH OF KINKEL ---My Lords, I have had the opportunity of considering in draft the speech to be delivered by my noble and learned friend, Lord Templeman. I agree. with it, and for the reasons he gives would allow the appeal.

LORD BRANDON OF OAKBROOK---My Lords, for the reasons set out in the speech to be -delivered by my noble and learned friend, Lord Templeman, I would allow the appeal and restore the order of Hoffmann, J.

LORD TEMPLEMAN---My Lords, section 1 of the Income and Corporation Taxes Act, 1970, now section 1 of the Income and Corporation Taxes Act 1988 which reproduces earlier enactments, directs, inter alia, that income tax shall be charged in respect of profits described in Schedule set out in section 108 of the-Act of 1970. That section directs, inter alia, that tax shall be charged in respect of the annual profits arising or accruing to any person residing in the United Kingdom from any trade. The expression "profits" is not defined, and here is no express provision for the deduction of the expenses incurred in earning profits, but it is only possible to arrive at the computation of the profits of a trade after setting against the receipts the expenditure necessary to earn them according to the ordinary principles of commercial accounting: see Lord Herschell in Gresham Life Assurance Society v. Styles (1892) A.C. 309, 323. The expression "annual profits" confirms that income tax is to be charged on profits of an income nature as opposed to capital profits: see Scottish Provident Institution v. Farmer (1912) 6 T.C. 34, 38. Moreover, by section 130 (f) of the Act of 1970, in computing the amount of the profits of a trade, no sum shall be deducted in respect of any sum employed or intended to be employed as capital "but so that this paragraph shall not be treated as disallowing the deduction of any interest". It follows that while expenses incurred in earning profits may be deducted for the purposes of assessing income tax on the profits of a trade, such expenses as may be incurred in respect of capital transactions are not so deductible. fortiori, capital losses are not deductible from income profits. The question, which arises in the present case is whether an expense or loss was incurred by a trader in earning profits, or was incurred in the course of a capital transaction.

The trader in question is the respondent tax-payer company F.W. Woolworth Plc. By section 238 of the Act of 1970, a compay is not chargeable to income tax, but its profits are chargeable to corporation tax "profits" include income and by section 250 the amount of any income shall for the purposes of corporation tax be computed in accordance with income tax principles. The tax-payer is resident in the United Kingdom and carries on the trade of providing and selling by retail a wide range of articles from its numerouswell known chains of shops. In 1971 the tax-payer borrowed 50 million Swiss francs repayable in five years time or earlier at the option of tax-payer, subject to a premium for early repayment. The tax-payer converted the Swiss francs into sterling. In 1976 the tax-payer purchased 50 million Swiss francs and repaid the loan to the lender, a Swiss bank. In 1972 the tax-payer borrowed a further 50 million Swiss francs and converted them into sterling. In 1977 the tax-payer purchased and repaid 50 million Swiss francs. As a result of a fall in the value of sterling in relation to Swiss currency, the proceeds of converting 100 million swiss francs into sterling in 1971 and 1972 were L11.4m. less than the cost to the tax-payer of purchasing and repaying 100 million Swiss francs in 1976 and 1977. The tax-payer undoubtedly incurred a currency exchange loss of b 11.4 in. The tax-payer claims that this loss is deductible from the profits of the retail trade carried on by the tax-payer during the period of the loan. If the loans of 100 million Swiss francs were revenue transactions, then the currency exchange loss is deductible in computing the profits of the taxpayer's trade. If the loans were capital transactions the currency exchange loss is a capital loss and is not deductible from profits. The taxpayer submits that the loans were revenue transactions; the Inland revenue submit that the loans were capital transaction. The special commissioners found in favour of the tax-payer. Hoffmann J. held (1987) S.T.C. 279 that the commissioners had misdirected themselves in law. The Court of Appeal (Sir Nicolas Browne-Wilkinson V.C. and Nourse and Stuart-Smith L.JJ.)(1989) 1 W.L.R. 50 restored the order made by the special commissioners on the grounds that the question was one of fact and that the facts found by the commissioners were not such that no person acting judicially and properly instructed as to the relevant law could come to the conclusion that the loans were revenue transactions. The Inland Revenue appeal.

My Lords, the weight of authority supports the view that the question whether, the transactions in the present case were of a revenue or capital nature is a question of law to be determined in the light of the facts found by the commissioners, and that a trader who borrows 100 million Swiss francs for a fixed period of five years thereby enlarges the capital employed in the trade.

Mr. Park who appeared for the tax-payer relied on the statement by Viscount. Cave L.C. in British Insulated and Helsby Cables Ltd. v Atherton (1926) A.C. 205, 213 that the question whether a contribution to form the nucleus of a pension fund was revenue or capital expenditure was "a question of fact which is proper to be decided by the commissioners upon the evidence brought before them in each case:" And Lord Hanworth M.R. said much the same thing in European Investment Trust Co. Ltd. v. Jackson (1932) 18 T.C. 1, 13. These dicta are inconsistent with the fact that in a multitude of cases there have been disputes before the Courts involving the consideration and determination of the question whether expenditure is capital or income, and that in some cases the commissioner were upheld and in other cases the commissioners were reversed, and the Courts do not appear to have been inhibited from reaching their own conclusion. In Davies v. Shell Co. of China Ltd. (1951) 32 T.C. 133, 151, Jenkins L.J. said:

"I think it is recognised that these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend no doubt to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts..."

In Inland Revenue Commissioners v. Rolls-Royce Ltd. (1962) W.L.R. 425 this House, overruling the special commissioners, held that a sum received on the sale of "know-how" was capital. Viscount Simonds said, at pp. 426-427:

"It is common ground between the parties that the Court, while paying proper regard (as to which see Edwards v. Bairstow (1956) A.C. 14) to the facts found by the commissioners and to the inferences drawn by them from those facts, must ultimately determine as a question of law alike whether receipts by the tax-payer are capital or income for purposes of income tax and whether expenses incurred by, him are for the same purposes to be treated as incurred on income or capital account."

In Strick v. Regent Oil Co. Ltd. (1966) A.C. 295 the question was whether lump sums paid by an oil company to a garage owner on a lease and lease-back arrangement which tied the garage to the oil company's products were revenue or capital expenditure. Lord Reid said, at p. 313:

"The question is ultimately a question of law for the Court, but it is a question which must be answered in light of all the circumstances which it is reasonable to take into account, and the weight which must be given to a particular circumstance in a particular case must depend rather on common sense than on strict application of any single legal principle."

In Inland Revenue Commissioners v. Carron Co. (1908) 45 T.C. 18 the question was whether expenditure incurred in removing restrictions in the company's charter which obstructed profitable trading was expenditure on income account or was capital expenditure Lord Wilberforce said, at p. 73:

"The second question, whether the expenditure had the character of capital or of revenue expenditure, is difficult, as this type of question invariably is. It is a, question of law, so that the special commissioners' decision is open to review.

In Trucker v. Granada Motorway Services Ltd. (1979) 1 W.L.R. 683 the question was whether a sum paid to secure a reduction in rent was an income or a capital expenditure. Lord Wilberforce said, at p.688:

"I add one word as to the decision of the special commissioners, who took the opposite view, it seems to me clear that to reverse their decision involves no interference with any finding of fact within their exclusive competence. The finding submitted by them to the Court-- clearly one of fact-has been accepted throughout. It is only on the consequence of that finding that the Courts are taking a different view. That involves a pure question of law on the decided cases."

In the same case Lord Edmund-Davies, discussing the findings of the commissioners put forward in the form of propositions, said at p.692:

"In respect of each of these propositions the special commissioners cited authorities in support. In so far as the propositions embody statements of fact they must be treated as unassailable unless they do not measure up to the well-known test propounded by Viscount Simonds in Edwards v. Bairstow (1956 A.C. 14, 29). But the relevance of any facts found. The means adopted in evaluating them and finally the acceptability of the test evolved by the special commissioners in determining whether the expenditure was of a capital or revenue nature are all questions of law and as such, freely appealable."

On principle and in the light of the judicial pronouncements, which I have cited, the question involved in the present case is one of law, and was rightly so dealt with by Hoffmann, J. who held that the commissioners had misdirected themselves.

My Lords, in the course of business a trading company of the type exemplified by the tax-payer can only earn profits if it provides for the payment of trading expenses and, for the receipt of trading revenue. The most common form of provision is by means of a current account, which may be in credit when earnings are received and in debit when expenses are paid out. The bank charges for providing the facilities afforded by the current account and for the sums involved in accepting cheques drawn on the account when it is overdrawn. The temporary and fluctuating borrowings incurred in transacting business are revenue transactions. On the other hand, a trading company which borrows unconditionally a fixed amount for a definite period may use the money generally for the purposes of its business or for any other purpose authorised by its constitution, and even when the money is employed in the business, the money may be laid out on income expenditure or capital expenditure. The tax payer could do as it pleased with 100 million borrowed Swiss francs, provided that the application of the money was intra vires the objects of the tax-payer company. The commissioners found as a fact that the tax-payer intended to use the 100 million Swiss francs to overcome a difficulty which was hoped to be of short duration and which was caused by the fact that stocks were high and trade depressed. But there was nothing to stop the tax-payer pending the whole or part of the money on capital items and indeed part was spent on capital items. For my part, I do not attach any importance in the present circumstances to the intentions of the tax-payer or to the actual use made of the money in the present circumstances. The 100 million Swiss francs, worth some $l0m., were available to the tax-payer as additional capital. Mr. Park, on behalf of the tax-payer, said that the tax-payer's capital was enormous, $l0m, was a small sum and the taxpayer had carried on business for so many years that it was preposterous to think that the tax-payer needed extra capital. In my opinion, these assertions are interesting but irrelevant the capital of the company was increased by $10m. in 1971 and 1972. True it is that the $10m. was loan capital, but it was capital nevertheless; it was not income. The capital of the company was reduced by $21.4m. in 1976 and 1977 when the loans were repaid, and in the result the tax-payer made a capital loss of $11.4m.

Mr. Park agreed that a premium paid by an oil company for the lease of a garage for five years was a capital payment even though the payment was made for the purpose of ensuring that the oil company's petrol would be traded and sold at the garage. Mr. Park argued that a premium paid by a trader for an unconditional loan of 100 million Swiss francs for five years was not a capital payment, but he was unable to give any reason supporting this argument save that Swiss francs unlike a petrol tie can be converted and spent. Mr. Park conceded that a premium paid by a trader for a loan of 100 million Swiss francs for ten years would be a capital payment, but he was unable to give any reason save that ten years is twice as long as rive years.

The authorities do not support the proposition that a borrowing of a definite sum for a fixed term of five years can be an income transaction. In Anglo-Continental Guano Works v. Bell (1894) 3 T.C.239 a trader in guano borrowed large sums of money from a bank of fluctuating amounts to enable the trader to pay cash for cargoes of guano. The sums advanced by the bank were not repayable at fixed date, but were short loans, interest-bearing, repayable and repaid from time to time as suited the convenience of both parties. The Divisional Court held that the interest was interest on capital employed in the business. Cave, J. said, at pp. 245-246:

"It is contended by Mr. Finlay that in order to ascertain the balance of profits or gains of such trade you must take into consideration .the question whether the trader is trading with borrowed money, or with capital of his own. It seems to me that that is not so--that the gains of the trade are quite independent of the question of how the capital money is found, that the gains of the trade are those which are made by legitimate trading after paying the necessary expenses which you have necessarily to incur in order to get the profits; and that you cannot for that purpose take into consideration the fact that the firm or trader has to borrow some portion of the money which is employed in the business."

In Texas Land and Mortgage Co. v. Holtham (1894 3 T.C.255) a mortgage company engaging in the business of lending money claimed to deduct the expenses of issuing debentures as "part of the expense of carrying on the business of the company, because before they can lend money they have to raise it." Cave, J., in argument, said at p. 260: "To the extent that you borrow you increase the capital of the company" and Matthew, J., delivering judgment, said, at p. 260:

"in this case this company raised money by shares with the intention of lending money on mortgage. To increase its capital it raised money on debentures. The argument is that the cost of raising the money ought to be deducted from the profits in a particular year. We are clearly of opinion that that cannot be done. The amount paid in order to raise the money on debentures, comes off the amount advanced upon the debentures, and, therefore, is so much paid for the cost of getting it, but there cannot be one law for a company having sufficient money to carry on all its operations and another which is content to pay for the accommodation."

In Scottish North American Trust Ltd. v. Farmer (1911) 5 T.C. 693 a company's main business was the purchase and sale of investments. When the company bought securities they were deposited with a bank and the purchase price was paid out of the company's bank account. When the company sold securities, the sale price was paid into the bank account. The bank account was allowed to be overdrawn and the amount of the overdraft fluctuated from time to time as the company bought and sold securities. The company also operated a loan account with the bank where under the sum lent might fluctuate from time to time up to a limit of $200.000. The commissioners held that the sums of money raised by loan and overdraft were additional capital. In the Court of Session Lord Johnston said at pp. 697-698:

"The question is whether, in striking the balance of profits or gains of this company, the company is entitled to debit their profit with interest paid to bankers in New York on short loans ...They were short in the sense that they were for short and indefinite periods, borrowed as occasion repuired and repaid as opportunity permitted. They were, in fact, banking facilities or advances such as are represented by the ups and downs of a banking overdraft account...It is fully recognised that the profits or gains of a trade in the sense of the Income Tax Acts are not the profits which reach the partners or the net profits, but the profits which the business, regarded as an entity, makes by the employment of its capital, and that its capital may be supplied by borrowing as well as be contributed by the partners ...It may be well said that if money is borrowed on a permanent footing, as from year to year, the capital of the concern is in a commercial sense enlarged thereby, and the business extended whereas no commercial man would consider that his banking facilities were part of his capital, or the consideration he paid for them anything but an expense of his business ....Where the interest is payable in respect of an obligation having a tract of future time, it may, in the sense of the statute be understood as annual, and where not, not."

Lord Atkinson, on appeal to this House, said (1912) A.C.118, 127 that the authorities showed:

"that money borrowed by such a company as the respondent company in this case trade in the fluctuating temporary manner in which it has been borrowed by them -- the daily borrowing and lending of money being part of their trade and business -- is not to be treated under the joint Stock Companies Act as `capital' There is nothing to show that that word should bear a different meaning in the Income Tax Acts when applied to the proceedings of joint stock companies. The interest is, in truth, money paid for the use or hire of an instrument of their trade, as much as is the rent paid for their office or the hire paid for a typewriting machine. It is an outgoing by means of which the company procures the use of the thing by which it makes a profit, and, like any similar outgoing, should by deducted from the receipts to ascertain the taxable profits and gains which the company earns:'

Lord Atkinsom distinguished the decision in Anglo Continental Guano Works v. Bell, 3 T.C. 239 by saying, at pp. 128-129:

"It does not appear to me that the reasoning on which this decision-is based can apply to a bank whose business is the borrowing and lending of money, or to an investment company whose business is conducted as is that of the respondents in the present case."

In Vallambrosa Rubber Co. Ltd. v. Farmer (1910) 5 T.C. 529, 536 the Lord President said:

"in a rough way I think it is not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year:"

Similarly, in a rough way, it is not a bad criterion of what is a capital borrowing as against what is an income borrowing to say that capital borrowing is a thing that is going to be borrowed once and for all, and income borrowing is a thing that is going to recur every year.

In European Investment Trust 'Co. Ltd. v. Jackson, 18 T.C.1 a company bought motor cars and sold them on hire purchase with a capital of 1,000 Sterling and 10,000 Sterling borrowed from its parent company and then borrowed further large sums from its parent company as and when the company purchased motor cars. The advances for the purchase of motor cars were paid out of the hire-purchase instalments as and when they were received the moneys advanced were held to be moneys employed or intended to be employed as capital in the trade.

In Ward v. Anglo-American Oil Co. Ltd. (1934) 19 T.C. 94 a company carrying on business in the United Kingdom borrowed dollars and issued interest bearing gold notes repayable after one year, partly to enable the compay to purchase a rival business, and partly for the general purpose of the company, and in the event suffered an exchange loss. The company was not allowed to deduct the interest or the exchange control loss because the loans were capital employed in the business. Singleton, J. reversing the commissioners, held that the interest, the expenses of issue of the notes and the amount of the exchange losses were not admissible deductions in arriving at the company's profits for income tax purposes. He said, at pp.108-109:

"....I conceive the scheme of that part of the Act and of Schedule D, which deals with profits or gaims from trade and deducti6ns which can be made therefrom, to be this: that one must arrive at profits or gains in the ordinary commercial or business sense. Interest on ordinary bankers, overdrafts, which has arisen for ordinary trading purpose is a legitimate deduction, because it is money wholly and exclusively laid out or expended for the purpose of trade. On the other hand, interest on an issue of notes, whether for one year or for a longer period, may fall, and in the circumstances of this case does fall, into an entirely different category. It seems to me to savour much more of a capital nature or of some fund employed or intended to be employed as capital, and I do not think the issue of notes on which interest accrued would be regarded by businessmen as of the same nature as facilities obtained for ordinary trading purposes."

In Ascot Gas Water Heaters Ltd. v. Duff (1942) 24 T.C. 171 a company purchased stock in trade from a supplier which at first allowed nine months--but later reduced the period of credit-and demanded and received a personal guarantee, from one, Nakib, up to $200,000. Nakib charged a commission of three per cent. per annum for his guarantee. The company also borrowed 150.000 Sterling from the Prudential Company, and payment of this loan was guaranteed by Mendelsshon for a commission. It was held' that the commission paid to Nakib was deductible, but the commission payable to Mendelsshon was not. Lawrence, J. said. at p. 176:

"The principle, therefore, which the commissioners ought to have applied in each of these cases was whether the sums in respect of which the commission dealt with in these two cases was payable, were sums which, although capital, were temporary in their nature and might be regarded as an ordinary incident of carrying on the business of the company."

Mr. Park prayed in aid certain observations of Viscount Cave L.C. in British Insulated and Helsby Cables Ltd. v. Atherton (1926) A.C. 205. In the course of deciding that a once for all contribution of 30,000 Sterlong by a company to form the nucleus of a pension fund for its employees was capital expenditure, Lord Cave said, at pp. 213-214:

"when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital."

Mr. Park submitted that an asset or advantage, which only endured for five years was not enduring, although a loan which endured for 10 years would be sufficiently enduring. But when a tax-payer borrows money for five years, he obtains an asset or an advantage which endures for five years and the authorities show that such a loan increases the capital of the tax-payer for that period. A loan is only a revenue transaction if it is part of the ordinary day to day incidence of carrying on the business. Mr. Park also relied on the observations of Lord Reid in Strick v. Regent Oil Co. Ltd. (1966) A.C. 295. Dealing with sums paid for petrol ties for five or six years duration, Lord Reid said, at p. 324:

"A business cannot simply be managed on a day to day basis. There must be arrangements for future supplies and sales, and it may not be unreasonable to look five or six years ahead one hears of five years plans in various connections. So I would think that making arrangements for the next five or six years could generally be regarded as an ordinary incident of marketing and 1hat the cost of making such arrangements would therefore be part of the ordinary running expenses of the business:"

But a petrol tic has become, or is imagined to have become, an integral and essential method of trading in petrtoleum products, and the petrol a lie has indeed become "an ordinary incident of marketing". A loan is not an "ordinary incident of marketing" unless, as the authorities show, the loan is temporary and fluctuating and is incurred in meeting the ordinary running expenses of the business.

In their stated case the special commissioners (1987) S.T.C. 279, 289 290, said:

"the issue we have to decide is whether the borrowing took place in such circumstances that the borrowed moneys are to be regarded as an addition to the tax-payer company's capital resources or whether the borrowing formed part of the day to day activities in the earning of profits in the business."

In my opinion, that question only permitted one answer: the borrowing itself did not form part of the day to day activities of the tax-payer in earning profits. The special commissioners came to the contrary conclusion and summarised their reasons as follows, at p. 292:

"we find the loans to have been loans arranged to tide the tax-payer company over a short-term problem namely the failure of the tax payer company's trading activities to generate a sufficient cash flow to cover the tax-payer company's commitments and day to day needs. We find that more efficient stock control and better trading results were expected within a short time to solve the problem. On that basis we hold the loans represented temporary facilities rather than permanent capital and we attach significance to the following circumstances: (1) that the five-year term was a Bank of England requirement; (2) that the formalities associated with the loans appear to have been dealt with as simply and accepted as readily by the board of the tax-payer company as might be the documentation required to secure a. bank overdraft; (3) that for accounting purposes the loans appear to have been placed in the same category as the five-year 5m Sterling loan from National Westminster Bank; (4) that proposals for raising permanent capital were not pursued but the loans were regarded as adequate to meet the tax-payer company's needs; (5) that the evident intention of the tax-payer company was to repay the loans out of profits generated in the course of the tax-payer company's trade; (6) that the loans were no part of the shareholders funds and were not intended to provide additional funds with which to trade:"

After no more than two days, and without reserving judgment, Hoffmann, J. referred to all the relevant authorities and arguments and succinctly and correctly reversed the special commissioners saying (1987) S.T.C. 297, 295:

"It seems to me that in attaching importance to what the lax-payer company was seeking to do, rather than to what it actually did, the commissioners misdirected themselves. The fact that the object of the borrowings was to deal with a temporary shortage of cash is irrelevant if the solution actually adopted was to make an addition to the tax payer company's liquid resources sufficiently permanent to be regarded as an accretion to its capital. In cases where there is no fixed term for repayment, or where the term is of a borderline nature, the use to which the money was put may throw some light on whether or not it was an accretion to capital. But this is not a doubtful case. The terms of the loans arc in my judgment sufficient to make it clear that they constitute additions to the capital employed by the tax-payer company, and it does not matter whether they were intended to be employed in the making of payments of a revenue or of a capital nature. In this case evidence on that question would be of little help because it is clear from the evidence before the commissioners and the documents to which I have referred that the money was not intended to be used, and nor was it actually used, specifically,, for purposes of one character or the other. It was simply an addition to the tax-payer company's general funds. It follows that there are in my judgment no relevant factors pointing to the borrowing being a revenue receipt which can displace the inference to be drawn from the terms upon which the money was actually borrowed."

In the Court of Appeal (1989) 1 WLR 50, 57 Nourse L.J.,with whose judgment the other members of the Court agreed, rightly accepted:

"The basic principle in regard to loans is that if they are a means of fluctuating and temporary accommodation, they are to be regarded as revenue transactions and not accretions to capital..."

Nourse L.J. accepted the argument of Mr. Park based on Strick v. Regent Oil Co. Ltd. (1966) A.C. 295 and accepted, at pp. 59-60:

"In the present case the question is whether .the tax-payer company's loss is of a revenue or capital nature, and the answer depends on the nature of the liability which the tax-payer company incurred which in turn depends on the nature of the advantage to be acquired by the transaction which created the liability. That advantage was the furtherance of the tax-payer company's trade over five-year periods."

But the tax-payer's trade was furthered over a five-year period by an increase of capital during that period and not by fluctuating and temporary accommodation.

The tax-payer undoubtedly made a loss of 11.4 Sterling, but that loss was a loss in connection with a capital transaction. Unfortunately the capital gains legislation does not apply to a currency exchange profit as a chargeable gain and does not apply to a currency exchange loss as an allowable loss. I understand that the legislation is under review.

As the law now stands I would allow the appeal and restore the order made by Hoffmann, J.

LORD OLIVER OF AYLMERTON.--My Lords, I have had the advantage of reading in draft the speech delivered by my noble and learned friend, Lord Templeman. I agree that the appeal should be allowed for the reasons, which he has given.

LORD GOFF OF CHIEVELEY.--My Lords, for the reasons given in the speech delivered by my noble and learned friend, Lord Templeman, I would allow the appeal and restore the order of Hoffmann, J.

M.B.A./1608/T Appeal allowed with costs.

Solicitors: Solicitor, Inland Revenue; Lovell White Burrant.