‘(b) if the plant or machinery is a ship, aircraft or transport container, the use of the ship, aircraft or transport container for a qualifying purpose under section 123 or 124 …’
‘‘(1) A ship is used for a qualifying purpose at any time when it is let on charter in the course of a trade which consists of or includes operating ships by a person who is – (a) resident in the United Kingdom or carries on the trade there, and (b) responsible for navigating and managing the ship throughout the period of the charter and for defraying – (i) all expenses in connection with the ship throughout that period, or (ii) substantially all such expenses other than those directly incidental to a particular voyage or to the employment of the ship during that period. (2) Subsection (1) applies, with the necessary modifications, in relation to aircraft as it applies in relation to ships. (3) For the purposes of subsection (1)(b) a person is responsible for something if he – (a) is responsible as principal, or (b) appoints another person to be responsible in his place. (4) Subsections (1) and (2) do not apply if the main object, or one of the main objects – (a) of the letting of the ship … on charter, (b) of a series of transactions of which the letting of the ship … on charter was one, or (c) of any of the transactions in such series, was to obtain a writing-down allowance determined without regard to section 109 (writing-down allowance at 10%) in respect of the expenditure incurred by any person on the provision of the ship or aircraft.’
‘… shall have effect, subject to subsection (4) below, as if the reference in subsection (2) of section 44 to 25 per cent were a reference to 10 per cent’
‘(2) In their application to expenditure falling within subsection (1) above, sections 24, 25 and 26 as they have effect – (a) in accordance with section 41, or (b) in accordance with section 80, or (c) in accordance with section 34, or (d) with respect to any motor car to which section 35(1) applies, or (e) with respect to machinery or plant to which section 35(1) applies, shall have effect, subject to subsection (3) below, as if the reference in section 24(2) to 25 per cent were a reference to 10 per cent.’
‘357 … to the circumstances where the taxpayer’s claim (if he is unable to show a “qualifying purpose”) is to 10 per cent allowances and to let the more “mischievous” taxpayer (who is denied all allowances if he is unable to show a “qualifying purpose”) escape its clutches.’
‘361. … The reference to “a writing-down allowance of an amount determined without regard to section 42(2)” in section 39(8) is not to be seen as limiting the operation of section 39(8) to the situation where the 10 per cent allowances are available, but, because of the inter-related subsections of section 42, to the situation where there is expenditure which falls within subsection (1) of section 42 (which is expenditure which may qualify for 10 per cent allowances or nil allowances as subsection (2) has effect, including where it has effect subject to subsection (3)). 362. In the course of re-writing these provisions as they appear in [the 2001 Act], sections 109 and 110 … have been “disconnected” – effectively each is made to stand alone, which has had the apparent consequence (unintended, since there was no purpose to change the law) of giving the reference to section 109 … in section 123(4) … a limiting significance which is not found in the corresponding reference to section 42(2) [of the 1990 Act] in section 39(8) [of that Act]. 364. We consider that we should construe section 123(4) … having regard to the provisions of which it is a re-statement, so that the reference to section 109 … does not have the limiting or restricting effect which on its face it has. That gives a sensible result which accords with the scheme of the legislation.’
‘69. We agree with the FTT’s conclusion [and it then referred to the passage I have quoted from paragraph 357 of the FTT’s judgment] … In our view, all that section 123(4) requires is that a main object of a relevant transaction was to obtain a writing-down allowance other than an allowance such as section 109 provides for. Section 123(4) does not say – as it could have – that the subsection applies where a main object was to prevent a writing-down allowance being reduced to the rate laid down in section 109. As it is, the focus is rather on whether there was an attempt to obtain an allowance determined otherwise than by reference to section 109. In the circumstances, the subsection will apply where a main object was to obtain a 25% writing-down allowance regardless of whether a 10% allowance (under section 109) could have been an alternative: either way, the parties will have been seeking a “writing-down allowance determined without regard to section 109” since section 109 would have played no part in the determination of the allowance.’
‘Paragraph (c) as I see it is aimed at artificial transaction [sic] designed wholly or primarily at creating a tax allowance.’
‘377. The [Melluish] case shows that if the taxpayer claiming capital allowances is engaged in a commercial transaction where the allowances are nevertheless a significant factor in rendering that transaction commercially viable, obtaining the allowances is not a main purpose of the transaction.’
‘387. An incentive, by its nature, is designed to influence behaviour – to encourage a person to choose a particular course of action he might otherwise not have chosen to take. To an extent (and that extent will vary according to the circumstances of the person concerned) the obtaining of that incentive will be the prime motive for the course of action chosen. In some situations the incentive will be the prime motive, as where a taxpayer would not have made a particular capital investment without the benefits provided by capital allowances. In other situations the incentive will shape a transaction, rather than bring it about, as where a taxpayer intends, entirely for commercial reasons, to make a capital investment, and chooses to structure it one way rather than another so that capital allowances are available to him or to another person who can take the immediate benefit of those allowances. In yet other situations a taxpayer will make a capital investment entirely for commercial reasons, and the capital allowances will be a welcome, but incidental, benefit, perhaps influencing marginally the timing of the investment, but nothing more. There is a wide spectrum here, and every taxpayer’s circumstances will place him at a particular point in that spectrum. Section 123(4) [of the 2001 Act] must be applied with these factors in mind. 388. We consider, therefore, that it is not fatal to a taxpayer’s claim to capital allowances, where that claim is based on section 123(1) …, that the taxpayer has taken steps which seek to secure or bolster his likelihood of obtaining those allowances. The question which has to be answered is whether a main object of the relevant transactions was the obtaining of those allowances, and this envisages that there may be a range of objectives motivating the transactions, and that they must be assessed in some sort of priority or hierarchy and then some basis applied to separate those which are of sufficient significance to count as “main” from those which are not. The issue is then which side of the line falls any objective of obtaining the allowances.’
‘391. Both the Special Commissioners and Vinelott J accepted the taxpayer’s submission that its main object was to make a profit by acquiring and leasing the film, and this was so even though it was probable that it would not have been in a position to offer a lease on acceptable terms had it not been able to obtain and utilise the first-year allowances. Vinelott went further, stating: “Paragraph (c) as I see it is aimed at artificial transactions designed wholly or primarily at creating a tax allowance”.’
‘403. … K-Euro had an established presence in the UK and European coastal shipping market (but not in respect of bulk and gas carriers operating in the Atlantic Basin) and it was the natural choice of entity through which the K-Line group could realise its plans generally and specifically in respect of its involvement in the Snøhvit project.’
‘405. … disregards the wider business aims of the K-Line group evident in its strategy, and it also disregards the commercial reality and substance of what actually happened. In the period up to the 2006 reorganisation K-Euro expanded its business in a genuine, methodical and commercial way and to a substantial extent. By the time of that reorganisation it had (in addition to the Vessels) nine bulk or gas carriers which it was operating or managing or which it was committed to operate or manage on their eventual delivery. To argue that such an enterprise was undertaken principally to give credence to a claim for capital allowances in relation to the Vessels was not sustainable. 406. Again, therefore, taking the broader view we conclude that K-Euro’s participation in the chartering of the Vessels was undertaken in order to pursue commercial objectives by entering into commercial transactions which were the more commercially attractive in that they were indirectly funded by financings whose costs were reduced by the tax allowances taken elsewhere.’
‘420. We conclude therefore that a main object of the letting of the Vessels on charter, and of the grant of the bareboat charter to K-Euro and the novation of the timecharter to K-Euro, was to secure for K-Euro a commercial benefit, that commercial benefit accruing from operating the Vessels on charter with the intention of realising a profit for K-Euro. We also conclude that K-Euro entered into those transactions as part of, and in order to achieve, a wider commercial objective, namely the development of its business, in pursuant of the business strategy of the K-Line group, of operating and managing ships transporting bulk and gas products within, or to and from, the Atlantic Basin. 421. The question then is whether it was also a main object of the transactions to obtain the writing-down allowances. In arguing that this was so, the Commissioners pointed to the extensive and detailed advice as to UK tax and capital allowances which K-Line obtained during the period in which it was planning the arrangements for the financing of the Vessels. 422. The nature, extent and timing of that advice is set out in paragraphs 218 to 227 above. K-Line had no prior knowledge of the UK tax regime as it related to capital allowances, and relied on expert advice to assist it in its consideration of the funding possibilities available to it for the purchase of the Vessels. By the time K-Line entered into the Preliminary Stage in December 2001 it had concluded that a UK tax lease offered the most favourable funding option, and from January 2002 its advisers began the process of seeking possible finance lessors on the expressed basis that capital allowances would be available for their expenditure on the Vessels by reason of section 123 [of the 2001 Act]. 423. What is clear from the extensive and detailed emails between K-Line (its finance department in particular) and its advisers is that K-Line required the most precise and thorough advice as to the conditions which had to be met in relation to the chartering of the Vessels if the capital allowances were to be available. Much of that advice related to what was required in order that a company should be a “bona fide commercial UK shipping company” (shorthand for a person who lets a ship on charter in the course of trade within the scope of section 123(1) ….). K-Line even sought advice as to the profit margin which such a company would be expected to earn. 424. [LEL] says that once K-Line was aware that in principle capital allowances were available for the financing of the Vessels within the context of arrangements which accorded with the K-Line group’s commercial intentions, it was merely prudent for K-Line to satisfy itself that it could and would meet the complex “qualifying purpose” conditions. 425. The Commissioners say that the purpose of seeking such detailed advice, which spilled over into matters such as the profitability of K-Euro which were commercial matters entirely within the competence and experience of K-Line, was to tailor the structure of the leasing of the Vessels so as to give the basis for a claim for the capital allowances. 426. It is clear that K-Line was intent on securing finance lease funding of the Vessels. Such funding offered certain non-tax commercial benefits (such as full funding without any initial deposit) and a UK finance lease prospectively offered the further commercial benefit of reduced cost of funding by reason of the capital allowances available to the finance lessor and shared by means of reduced rentals. The parties, in entering into the transactions for the letting of the Vessels on charter, had as an objective that the capital allowances should be obtained. K-Line sought advice so that it knew what the circumstances and conditions were that must obtain or be met in order that that objective could be achieved. We would characterise K-Line’s attitude in seeking advice as being one of due diligence – the course of action was decided upon, but needed to be as certain as it could before approaching prospective lessors that the arrangements it intended should be implemented would indeed secure the benefits to be derived from the capital allowances. 427. The objective of obtaining capital allowances was not a main objective of the transactions for the letting of the Vessels on charter. In our judgment the commercial objective we have identified above was paramount. Each transaction in the series of transactions relating to the letting of the Vessels on charter had a commercial purpose: it created an economic interest, transferred or shared a commercial risk, or was in pursuance of a genuine business endeavour. Overall, it is the case that the main objective of the transactions whereby, in September 2002, K-Euro took on the rights and obligations which would, on delivery of the Vessels, make it the disponent owner of the Vessels, was to achieve a commercial benefit distinct from, and not dependent upon, obtaining capital allowances. The capital allowances were a route to reduced cost of funds for the financing of transactions already decided upon. The parties knew this to be the case if the capital allowances proved to be available, and they wanted to obtain the benefit of such allowances, by ensuring that, in carrying out their commercial objectives, they would comply with the necessary conditions upon which the capital allowances were dependent. In terms of priority or hierarchy, that was subservient to, or of lesser importance than, achieving the commercial purposes of the relevant transactions. 428. We therefore conclude that the obtaining of writing-down allowances was not the main object, or one of the main objects, of the letting of the Vessels on charter or of any of the transactions in a series of transactions of which the letting of the Vessels on charter was one.’
‘112 … in ‘the crucial paragraph 427 of the Decision, where the FTT concluded that the tax objective was not a major object, no explanation was given for this other than the feature that the commercial object was paramount.’
‘121 … The FTT were clearly laying a trail in their early references to context and Melluish, all the attention was then given to commercial claims (not of itself at all objectionable of course), but there was no evaluation of the object, admitted to be an object, of obtaining the allowances. When the advice in relation to capital allowances was described as due diligence advice, simply designed to ensure that allowances available on a structure for commercial reason would indeed be available, Judge Nowlan considers this description to have been untenable. When the decision that the obtaining of the allowances was an object, but not a main object of the identified transactions, is then explained by reference to the primacy of the commercial objects, Judge Nowlan considers that it is principally by furthering and following the wrong trail laid in relation to context and Melluish that led the FTT to apply the test wrongly, as an error of law. When the question posed by section 123(4) all relates to the significance, as a main object or not, of the admitted object of obtaining the allowances, there must have been an error of law when the Decision failed to evaluate the significance of the tax advice, other than by describing it “in terms of priority or hierarchy, … as subservient to, or of lesser importance than, achieving the commercial purpose of the relevant transactions”.’