“[64] I have come to the conclusion that, putting it at its lowest, there is a very real concern that the FTT misdirected itself in its approach to the s 123(4) inquiry and that its decision is too unsafe to be allowed to stand. The most striking feature of the FTT’s decision is that whilst it is, on its face, as painstakingly meticulous and comprehensive as they come, when the decision comes down to an assessment of whether or not the obtaining of the capital allowances was a s 123(4) ‘main object’, it is virtually unreasoned. The FTT opened its crucial [427] by asserting that the objective of obtaining capital allowances was not a main objective. It does not, however, then explain why it made that assessment save by explaining that the commercial objectives of the transactions were paramount, with each transaction in the relevant series having a commercial purpose. The thrust of [427] was that the achieving of each of those commercial purposes was the primary objective, and that obtaining the capital allowances was, in terms of priority, subservient to or of lesser importance than achieving such commercial purposes. The FTT also said in [427] that ‘[t]he capital allowances were a route to reduced cost of funds for the financing of transactions already decided upon.’ If, however, that was intended to suggest (and it may be that it was not) that the leasing arrangements that would enable the obtaining of the capital allowances were decided upon before it was realised that such allowances would be obtainable, that is inconsistent with the course of events that the FTT had explained in [218] to [230], which I have earlier set out. [65] The apparent deficiency in [427] is, in my judgment, that although the FTT was no doubt entitled to find that each transaction in the relevant series served a genuine commercial purpose, it does not follow that the obtaining of the capital allowances was incapable of also being a main object of the transactions, even if it was not the main object of the transactions. The FTT does not explain why it was not such a main object. In my view, the likely explanation for this omission is, as Judge Nowlan concluded, that the FTT was wrongly influenced by Melluish into the assessment that, provided all the transactions were entered into for genuine commercial reasons, the obtaining of the capital allowances was necessarily an immaterial, subservient consideration. In my view, however, that does not follow. Even if each of the transactions was entered into for a genuine commercial purpose, it may still be the case that a main object of structuring them in the way they were was to obtain the capital allowances; and the FTT’s findings in [218] to [230] might be said to provide a factual basis for a finding that it was.” [original emphasis] 22. The matter was therefore remitted to the FTT in order that they could reconsider their conclusions about issue 4. For the reasons we have given, that has not proved possible. The issue before us 23. The parties recognise that we have not heard the evidence ourselves and that it is not practical for us to re-hear it. They do, however, agree that the FTT’s decision sets out accurately and in detail the extensive evidence which was before them, including the oral testimony of four witnesses of fact. We had, moreover, a transcript of the hearing before the FTT, as well as all of the documentation which was available to them. The parties also agree that, with the exception of those recorded at [426] and [427], which we have set out above, the FTT’s findings of fact are to be taken as they stand. In those circumstances the formulation of the issue which we must now decide is also agreed, as follows: “In the light of the Court of Appeal’s judgment, the evidence before the FTT and the findings of fact in the FTT’s first decision at paragraphs 1 to 257, 287 to 311 and 321 to 338, was it the main object or one of the main objects of any transaction or series of transactions which includes the letting of the vessels on charter to obtain writing-down allowances at 25%?” 24. Before going further we should mention what we consider to be a point which introduces a caveat, even if only a precautionary one, to that formulation. Whatever the deficiencies in the FTT’s reasoning about the obtaining of capital allowances might be, it is plain that they found, at [427] and implicitly if not expressly elsewhere, that the paramount purpose of the transactions, at least taken as a whole, was commercial, namely the operation of the vessels by K-Euro with the objective of earning a profit and expanding its Atlantic basin business. We do not see anything in Rimer LJ’s judgment which calls into question the soundness of that finding; rather, the criticism was of the FTT’s failure to explain why the obtaining of capital allowances was not also a main object, even if not the paramount object, of the transactions or any of them. Although, as we understand it, HMRC at one time took the view that the finding of paramountcy might be challenged, they now accept that it is correct, or at least is a finding supported by the evidence. 25. It is also agreed that the transactions on which it is necessary to focus are the grant of the bareboat charters by Northern LNG to K-Euro (step (3) of those identified by Rimer LJ at [13]) and the novation of the time charter to K-Euro (step (4)). The effect of those steps was to insert K-Euro into the leasing chain as disponent owner—that is, the party with the responsibility for the commercial and technical management of the vessels, and exposure to the risks of operating them, including the possibility of a shortfall between the time charter fees received and the bareboat hire charge to be paid. HMRC’s case is no more than that one of the main purposes of these steps was to secure writing-down allowances; they do not now argue that the FTT was wrong to conclude that they also had a commercial purpose. 26. The question divides into three elements: the identification of the correct test, in the light of the Court of Appeal’s conclusions; the extraction of the evidence and findings relevant to this issue from the FTT’s decision; and the application of the test to the facts. We should add, in case there should be any doubt about it, that we are not required to review the FTT’s decision on issue 4, for example by determining whether it was supported by the evidence, but to reach our own conclusion on the re-formulated question set out above. 27. Nevertheless, LEL, represented before us by Mr Jonathan Peacock QC leading Mr Michael Ripley, argued that the FTT came to the right answer for the right reasons and we should ourselves adopt the same reasons. Mr Peacock added that although the Court of Appeal had set aside the FTT’s decision on issue 4, they had done so not because it was plainly wrong but because it was inadequately explained. In particular, Rimer LJ said, at [64] (quoted above) that the FTT might have wrongly thought that if all of the transactions were entered into for genuine commercial reasons it necessarily followed that the obtaining of capital allowances was a subservient condition. That statement, however, seemed to disregard what the FTT said in the opening sentence of [421] (also quoted above) which made it clear that they had well in mind the possibility that there could be more than one main object, and that the question they had to address was whether, on the facts as they had found them, the gaining of the allowances was such an object. Viewed in that light, it could be seen that the reasoning was in fact sound, and that it should lead us to the same conclusion. 28. HMRC, represented by Mr David Ewart QC leading Mr Raymond Hill and Ms Stephanie Barrett, initially argued that the FTT’s conclusion that securing the allowances was not a main object of the transactions or any of them was a finding which it was not open to them to make. That argument was not pursued before the Court of Appeal, and HMRC do not now say that it is an impossible conclusion. Their position (which in reality may not be very different) is that, when they are properly analysed, the findings of fact the FTT made do not support any conclusion other than that the obtaining of the allowances was a main object of the transactions. The test of a main object 29. At [41] Rimer LJ said “that I do not regard section 123(4) as a cleverly drafted piece of legislation”, a proposition with which we respectfully agree. As he also indicated at [64], it is implicit in the wording of the subsection that a series of transactions, or one transaction of a series, may have more than one main object. In addition, the possibility that one of those objects might be more important than the other or others, yet that all are properly to be regarded as main objects, is left open; if it were otherwise the FTT’s finding that the commercial objectives were paramount would represent the end of the enquiry, but as the Court of Appeal has said, that is not what the subsection provides. What it also does not do is offer any guide to the boundary between an object which is a main object and one which, though necessarily still an object, is not a main object. 30. At [370] of their decision the FTT said: “The question we have to determine is whether the main object, or one of the main objects, of the letting of the Vessels on charter, or of a series of transactions of which the letting of the Vessels on charter was one, or of any of the transactions in such a series, was to obtain the 25 per cent writing-down allowances claimed by the Appellant in respect of its expenditure on the provision of the Vessels. If that is the case, the writing-down allowances cannot be claimed.” 31. At [51] Rimer LJ agreed with that straightforward summary, but with a rider: “I make it clear that there is no doubt that, at [370], the FTT had earlier correctly summarised the effect of section 123(4), and, therefore, the question they had to determine. At [386], however, which was the second paragraph of their discussion of the rival arguments, they expressly adopted the submission of Mr Peacock for LEL that section 123(4) ‘cannot have been intended to emasculate the incentives available through the capital allowances legislation by reason of section 123(1) …’. I would respectfully question the soundness of that observation, which perhaps carries with it what I would regard as an unwarranted suggestion that the ordinary interpretation and application of the inquiry mandated by section 123(4) must in some manner be diluted, whereas it would appear to me that, difficult though its determination may be in any particular case, the inquiry required by section 123(4) is clear.” 32. Mr Ewart referred us to the more expansive observations of the Upper Tribunal, in a part of their decision reflecting their unanimous view: “[77] In the course of the Decision, the FTT observed (in paragraph 386) that the relevant statutory regime (of capital allowances) is designed ‘to encourage taxpayers to make capital expenditure on certain assets (including ships)’, so that ‘section 123(4) ... cannot have been intended to emasculate the incentives available through the capital allowance legislation by reason of section 123(1)’. Furthermore the ‘main object’ test should be distinguished from others that addressed ‘the main object of obtaining some form of tax advantage’. [78] Mr Ewart took issue with these remarks, and in our view he was justified in doing so. In the first place, while the capital allowance legislation is in general terms designed to provide an incentive for the acquisition of various assets (by accelerating tax depreciation as against the normal basis of depreciating assets for accounting purposes), section 123 appears in a group of sections designed to reduce, or in the present context to deny, capital allowances for acquisitions of assets that are ultimately leased to non-UK residents, ie for ‘overseas leasing’. We accept that section 123 itself is designed to provide a qualification to that policy objective ( ie still to concede 25% allowances to the parties intended to benefit from section 123), but when the ‘main object’ test clearly qualifies the ambit of the ‘let-out’, and reinstates the clear policy of reducing or denying allowances for overseas leasing, it would be wrong to proceed on the basis that the main object test should be construed narrowly so as not to conflict with the policy objective of the capital allowance legislation in general. [79] A second point concerns the reference to ‘emasculat[ing] incentives available through the capital allowance legislation by reason of section 123(1)’. There would have been no risk of HMRC’s contentions in this case undermining the claim for 25% allowances in the situation most obviously designed to benefit from the protection afforded by section 123, viz that of a UK resident shipping company (whether in a UK or a non-UK group) purchasing a ship outright with a view to time chartering it to an overseas customer. In a case of that kind, 25% allowances would plainly have been available. There would have been no question of a ship being bought without capital allowances being available, so that it could never have been said that any main object of the purchase (or any other related transaction) was to secure such allowances.” 33. Those observations make it clear that the draftsman did not intend to confine the application of sub-s (4) to those who enter into artificial or contrived arrangements, or transactions with no other purpose than the securing of an allowance. Rather, the aim was to limit the availability of allowances to established UK ship operators undertaking overseas leasing, while excluding those who take steps to bring themselves into a position to satisfy the conditions imposed by sub-s (1), even if they do so for parallel commercial reasons; indeed, what Rimer LJ said at [64] makes it clear that even a paramount commercial purpose does not exclude the operation of sub-s (4). The Upper Tribunal’s comments show that the circumstances in which writing-down allowances should be available in the case of overseas leasing are intentionally limited. 34. Mr Peacock nevertheless argued that such an interpretation, if taken literally, would make it virtually impossible in any case of overseas leasing to avoid the effect of the subsection since the availability or non-availability of an allowance has so great an effect on the economics of transactions such as those in issue here that no sensible businessman would leave the incidence of the allowances out of account when deciding on the form his transactions should take. Despite what Rimer LJ and the Upper Tribunal said, he argued, it cannot have been the intention that an allowance should be available only if the relevant transactions were structured in such a way as to satisfy s 123(1) by accident rather than by design—in other words, it could not have been intended that any conscious attempt to meet the requirements of sub-s (1) necessarily engaged sub-s (4). We shall have more to say about this point later. 35. Although Rimer LJ said that that the enquiry required by s 123(4) was “clear”, he did not go on to offer an explanation of the correct approach to that enquiry as he saw it. There is, however, some earlier case law, on which the parties made submissions, and assistance can also be drawn from some further observations Rimer LJ made about how, as he saw it, the FTT had fallen into error. 36. Mr Peacock’s starting point was to refer to what he described as the leading authority on the test for determining what constitutes a main object, IRC v Brebner[1967] 2 AC 18 . The statutory provision in issue in that case wass 28(1) of the Finance Act 1960 , an anti-avoidance provision relating to transactions in securities which also used the phrase “main object, or one of [the] main objects”
“The ‘object’ which has to be considered is a subjective matter of intention.”
“… when the question of carrying out a genuine commercial transaction, as this was, is reviewed, the fact that there are two ways of carrying it out — one by paying the maximum amount of tax, the other by paying no, or much less, tax — it would be quite wrong, as a necessary consequence, to draw the inference that, in adopting the latter course, one of the main objects is, for the purposes of the section, avoidance of tax. No commercial man in his senses is going to carry out a commercial transaction except upon the footing of paying the smallest amount of tax that he can.” 37. Mr Peacock relied, too, on the analysis of the appropriate approach undertaken by Judges Berner and Brannan, in this tribunal, in Versteegh Ltd v Revenue and Customs Commissioners[2013] UKFTT 642 (TC) ,[2014] SFTD 547 at [139] to [160] (an analysis which was not challenged in the appeal to the Upper Tribunal: see Spritebeam Ltd and others v Revenue and Customs Commissioners[2015] UKUT 75 (TCC) ,[2015] STC 1222 ). In summary, the fact that a tax advantage is an inevitable consequence of a certain step, even if the taxpayer is aware of the advantage, does not carry with it the implication that obtaining the advantage is the taxpayer’s purpose; therefore while the existence of a commercial purpose does not always override a tax purpose, the fact that the tax consequences inform a transaction does not necessarily mean that obtaining an advantage was a main object. In other words, purpose cannot be inferred from effect—thus the tax consequences of a transaction cannot be considered in isolation and it is necessary to examine all of the taxpayer’s reasons for entering into the transactions. While “main” clearly means more than “important”, the determination of whether a purpose is a main purpose is a question of degree. Mr Peacock accepted, however, that the significance of the tax advantage to the taxpayer, by comparison to the other advantages of the transaction, is a factor in the assessment. 38. Mr Ewart’s argument began with an analysis of Rimer LJ’s criticism of the manner in which the FTT dealt with the identification of the test. The starting point was what the FTT said at [387] and [388]: “[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 a 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) CAA 2001 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) CAA 2001, 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.” 39. Rimer LJ did not criticise that proposition: “[52] As it seems to me, the alternative situations that the FTT was describing in the third, fourth and fifth sentences of [387] covered respectively: (i) a case in which the obtaining of the allowance was a main object; (ii) a case in which it may, or may not, have been a main object; and (iii) a case in which it will not be a main object. In [388], the FTT then explained that in any particular case there may be a hierarchy of objectives motivating the transaction, including the obtaining of a capital allowance, and that the inquiry must then be as to which of them are ‘main’ and which are not. I would not disagree with that approach”. 40. What he did criticise, at [65] (see para 21 above), was the FTT’s failure to heed their own guidance. They had, in substance, treated the existence of a commercial purpose as one which necessarily implied that any tax purpose was subservient when the two could co-exist as main purposes. So much was clear, said Mr Ewart, from what was said by Judge Short, in this tribunal, in A H Field (Holdings) Ltd v HMRC[2012] UKFTT 104 (TC) at [172]: “there are cases where tax, while not the only component, is a substantial component of the decision and therefore cannot be ignored”. 41. HMRC did not disagree, Mr Ewart continued, that the object of the transaction must be determined from subjective intention. However, the manner in which s 123 is worded leads to two riders. First, the focus is not on the object of an individual taxpayer, but on “the letting of the ship” or on a “series of transactions” of which the letting of the ship was one, or on any individual transaction within the series. Thus what must be examined is the subjective intention of all of the parties to the transaction or series of transactions. Second, the fact (which HMRC accept in this case) that the transactions, taken as a whole, have an overall or primary commercial object is relevant but not determinative; and even if the obtaining of a writing down allowance was not a main object of the transactions taken as a whole, sub-s (4) is engaged if it was a main object of any one of them. 42. HMRC also do not disagree with the statement in Versteegh that the fact that tax consequences have informed the choice of transaction does not always carry with it the implication that obtaining an advantage was a main object. The approach to this part of the enquiry was spelt out by Lightman J in IRC v Trustees of the Sema Group Pension Scheme[2002] EWHC 94 (Ch) ,[2002] STC 276 (in a passage later approved by the Court of Appeal: see[2002] EWCA Civ 1857 ,[2003] STC 95 ). At [53] Lightman J drew attention to the need “to consider with care the significance to the taxpayer of the tax advantage. The tax advantage may not be a relevant factor in the decision to purchase or sell or in the decision to purchase or sell at a particular price. Obviously if the tax advantage is mere ‘icing on the cake’ it will not constitute a main object. Nor will it necessarily do so merely because it is a feature of the transaction or a relevant factor in the decision to buy or sell. The statutory criterion is that the tax advantage shall be more than relevant or indeed an object; it must be a main object. The question whether it is so is a question of fact … in every case.” 43. Although the primary focus must be on the facts at the time at which the parties entered into the transactions subsequent events could not be ignored if they threw light on the parties’ motives. Judge Nowlan had dealt with this point at [137] to [141]. He made various observations about a letter sent in January 2003 by a senior official of K-Line to the Snøhvit Sponsors, in which he wrote of K-Euro’s becoming a participant, in a manner which suggested, if not more, that additional costs had been incurred when “[i]n accordance with the K-Euro Business Plan, K-Euro strengthened its organisation to be regarded as a UK bona fide company which was not considered in Original Understanding”, meaning the arrangements entered into in December 2001. Judge Nowlan went on to say, at [140], “This letter seems to be suggesting, almost exactly as HMRC contended in its most extreme contention against Lloyds Leasing, that K-Euro’s role was driven by the need and the desire to fulfil a tax role and that the company’s business was built up to support that objective. At the very least it is suggesting that at least one of the reasons for inserting K-Euro into the structure was to support the tax objectives.” 44. Judge Nowlan then turned to the 2006 reorganisation described by Rimer LJ at [15] and [16]. At [141] he said “The related terms of the 2006 reorganisation were similarly significant. The FTT agreed that a later transaction might throw light on the relevant objectives back in 2002, principally when the later transaction was contemplated in 2002. It is clear that the 2006 reorganisation was not so contemplated. It is still however highly significant that the 2006 reorganisation involved the abandonment of every feature of the 2002 structure of any commercial significance, but it carefully preserved the technical ability to claim the allowances. K-Euro, through its alphabet share rights, ceased to be a K-Line company, its A shares being under common control with Northern LNG I, and its B shares with Northern LNG II. All the ‘other activities’ inserted into K-Euro were removed, and because K-Line and not the Northern LNG companies were obviously meant to be responsible for maintenance and manning, those functions, while alone left in K-Euro, were sub-contracted to a different K-Line UK company. The feature, therefore, that every commercial objective was then abandoned, and the tax objective hopefully preserved in the changed conditions appears to throw some light, in retrospect, on the significance of the tax objective, if not indeed on the whole issue of primacy.” 45. Those observations, said Mr Ewart, were entirely correct, and although the Court of Appeal did not adopt them in terms, it is plain from what Rimer LJ said at [64] that he considered that there was substance in them. 46. Mr Peacock did not accept the proposition that the enquiry must be into the subjective intentions of all the parties. It had been accepted by HMRC before the FTT, he said, that the requisite examination was into the subjective intention of the party or parties who actually made the decisions, which this case was K-Line alone; what the other parties hoped to achieve was a factor influencing K-Line’s decisions, and relevant in that sense, but no further. HMRC had argued before the Upper Tribunal and the Court of Appeal, he said, that the FTT should have considered the intentions of others, but had been unsuccessful. The argument was rejected by Newey J at [107] and [108] (Judge Nowlan did not deal with it as an issue) and by Rimer LJ at [63]. We interpose that although Newey J did indeed reject the argument, he did so in the light of the FTT’s finding of fact that the decisions had all been taken by K-Line, a finding with which, he said, the Upper Tribunal could not interfere. We observe also that although Rimer LJ mentioned the argument at [63] he did not refer to it again and we are not persuaded in those circumstances that he did reject it, even impliedly. 47. It is convenient to deal with this area of disagreement now, and upon the assumption that we are not bound by what Newey J said and that the Court of Appeal was neutral on the point, or did not decide it. We recognise, following Brebner , that the test is subjective intention, but it is important to remember, as Mr Ewart said, that sub-s 123(4) focusses not on the parties to the transactions but on the transactions themselves. If one party to the transaction under examination is indifferent to its form, because he is unaffected by the tax consequence or because he can simply pass any tax burden on to another party, it is unlikely that, from his perspective, the transaction has the object of obtaining a tax advantage such as the allowances in issue here. But from the perspective of a party who is affected by the availability of a tax advantage, the shaping in a case such as this of a transaction, or series of transactions, in one way which meets the s 123(1) requirements rather than in another which does not must mean that from his perspective one of the objects (though not necessarily a main object) of the transaction or transactions is the obtaining of that allowance. If the legislation is to be interpreted sensibly, it must be the perspective of the shaper of the transaction which is to be examined in order to answer the statutory question. 48. We can therefore accept Mr Peacock’s argument, to the extent of agreeing that the primary focus must be on the intentions of the person or persons who took the decision to enter into a particular transaction, or into one form of transaction or structure rather than another. But we do not think that in the circumstances of this case the argument takes us very far. We are not persuaded that Mr Peacock is right to say that the intentions or aims of others are relevant only to the extent that they influenced the decision-maker. It is plain—indeed Mr Peacock made the point himself—that the tax consequences of transactions such as these affect their economics, and it is in our view unrealistic to proceed from the proposition that, save for K-Line, the parties to the relevant transactions were unconcerned about the incidence of tax: on the contrary, they were all affected by it to a greater or lesser extent. In other words, it does not seem to us to matter much whether one looks directly at the intentions of the parties other than K-Line, or examines them through K-Line’s eyes; K-Line must have been well aware that the incidence of tax was a consideration for all the parties. 49. Mr Peacock argued too that one should not be deflected by Lightman J’s reference to “icing on the cake” to the view that when the benefit was greater there was an implication that securing the benefit was a main object. That was not what he had said; he had used the phrase as no more than an example of a result following from something plainly less than a main object, leaving room between such a case and one in which it is clear that the obtaining of the tax advantage was a main object. In addition, HMRC’s reliance on A H Field was misplaced; the point being made in the passage quoted was that tax and commercial objects can co-exist, but that is not in issue. As Lightman J made clear, the question is one of fact and it is to be determined by examining the relative importance to the decision-maker of the various factors leading to the decision to enter into the particular transaction or transactions. 50. The much more difficult question, on which we heard a good deal of urging rather than argument from authority, is the identification of the dividing line between an object which, though not paramount, is a main object and an object which, even if it is rather more than the icing on the cake, is nevertheless a subsidiary rather than main object. Before addressing this question we need to identify the FTT’s relevant findings of fact. The material facts extracted from the FTT’s decision 51. Paragraphs [8] to [17] of the judgment of Rimer LJ, which we have set out above, deal with the relevant events but touch only incidentally and briefly on the reasons why the transactions were structured as they were. In this section of our decision therefore we examine the evidence relevant to that question and the FTT’s various findings of fact about it, at the same time identifying those particular points on which the parties rely. As we have already observed, much of the FTT’s decision relates to issues 1 and 2, and is of only incidental relevance to issue 4; and the greater part of what remains is now uncontroversial. For that reason we propose in the main to summarise the material findings and the evidence which led to them, while adding a reference to the relevant paragraph or paragraphs in the decision. We shall need, however, to quote some passages. 52. The material before the FTT consisted, as we have said, of the relevant documentation and the evidence of four witnesses: Mr Stennar Thomassen, until December 2007 the manager of the LNG shipping division of Statoil; Mr Hiromichi Aoki, a managing executive officer of K-Line; Mr Akira Misaki, general manager of K-Line’s LNG division; and Mr Richard Williams, of the Lloyds Banking Group. They had all made witness statements and the first three gave oral evidence in addition; Mr Williams did not as his witness statement was unchallenged. As Mr Peacock emphasised, not only had Mr Williams’ evidence not been challenged, the evidence of the three witnesses who were called by LEL at the hearing was said by the FTT to be “impressive and convincing”
“[233] At a board meeting of K-Euro on22 February 2002 there was discussion of the plan to expand K-Euro’s business by the establishment of bulk and LNG carrier divisions for operation in Europe, with the intention that K-Euro would operate and manage the vessels employed in those divisions. That meeting also reviewed the shipbuilding contracts and the time charters in respect of the Vessels entered into on19 December 2001 and the proposed finance leasing arrangements were also discussed, including K-Euro’s intended part in those proposals. It was noted that if the proposals were implemented with K-Euro’s participation, K-Euro would be disponent owner of the Vessels, having responsibility for the commercial and technical management of the Vessels but without the economic risks of ownership. It was also noted that if K-Euro operated the Vessels its aim would be to earn an operator’s profit, and that the question of K-Euro’s profit margin had not yet been agreed. It was agreed that one of the directors would continue to review the proposals on K-Euro’s behalf and to negotiate any documents involving K-Euro, with that director reporting back informally to the remaining directors. [234] Directors of K-Euro (including the chief executive officer) were subsequently involved in discussions as to the basis on which K-Euro would act as disponent owner, and in particular as to the rate of hire under the proposed bareboat charter (the terms of the time charter having been agreed in the December 2001 transaction, the amount of the bareboat hire was a critical factor in determining the likely profitability of the venture for K-Euro). [235] At a board meeting of K-Euro on12 September 2002 the directors were presented with the terms of the lease financing of the Vessels and with the documents to which it was proposed that K-Euro should become a party. It was noted that K-Euro would become responsible for operating and managing the Vessels as disponent owner, assuming obligations under the bareboat charter and having responsibility for the commercial and technical management of the Vessels. It was also noted that K-Euro could expect to make a profit from such operation. [236] At that board meeting there was also produced to the directors a copy of the business plan, dated July 2002, for the bulk and gas division of K-Euro. It was noted that that division had been established on1 July 2002 (following a board resolution to that effect on31 May 2002 ) in order for K-Euro actively to develop its bulk and LNG carrier business in Europe by establishing bulk and LNG fleets. It was also noted that the proposals whereby K-Euro became disponent owner of the Vessels were in furtherance of the business plan. Resolutions were passed approving the bulk and gas division business plan and authorising K-Euro to enter into the relevant documents by way of implementation of the lease financing arrangements.” 71. This passage in the FTT’s decision must be taken, we think, to represent the foundation of the finding at [427] that the primary object of the transactions was commercial. 72. The FTT dealt with the reorganisation of K-Euro’s business at [240] to [251]. We do not, we think, need to go into the detail; there is sufficient in what was said by Rimer LJ at [15] and [16], set out above. Mr Peacock argued, notwithstanding Judge Nowlan’s comments, that the reorganisation was irrelevant because, even if it occurred when the ships were yet to be delivered, it took place long after the relevant agreements had been entered into and it was an event not in contemplation at that time; for that reason alone it could shed very little light on the objects of the transactions when the parties entered into them. In addition, the reorganisation was driven by commercial considerations including, as Rimer LJ recorded, the likelihood that K-Euro would suffer a significant loss from its participation in the Snøhvit project. In fact, it had been apparent from an early stage, though after the September 2002 transactions, when crewing costs increased that a loss was probable. The FTT had accepted, at [412], that “subsequent events may shed light on motives at an earlier time” but dismissed the notion that the need for a reorganisation was, or could have been, foreseen in September 2002, and accepted, rightly said Mr Peacock, that it was driven by the need to react to adverse unexpected developments, in particular the exposure of K-Euro to a loss. 73. Mr Ewart’s argument was not that the re-structuring was foreseeable, still less planned, in 2002, but that what was revealing was the action taken: as Judge Nowlan observed, although K-Euro transferred its LNG business to K LNG, it did not novate the bareboat and time charters, a step which would have considerably simplified the contractual relationships between the relevant parties. Instead, K-Euro remained the disponent owner of the vessels because it was essential that it should do so if the availability of the allowances was to be preserved, but it was left with no other role at all. He added the argument that Judge Nowlan was entirely correct in what he said of this development, that it shed considerable light on the true reason why it was so important for the project that K-Euro should become involved as it did. The parties’ submissions 74. We have set out much of what Mr Peacock and Mr Ewart argued already, but there are some further points with which we have yet to deal. Some of their submissions amounted to arguments about why the FTT were right, or wrong, and that is understandable given the unusual manner in which the matter has reached us; but we repeat, in case it is forgotten, that the question before us is not whether the FTT’s conclusion was supported by the evidence, but whether the evidence and FTT’s findings about it lead us to conclude that s 123(4) is engaged. 75. Mr Peacock’s essential point was that the structure adopted was necessary if the parties’ objectives were to be met: the Snøhvit Sellers’ requirement that the vessels be operated by a European disponent owner, K-Line’s desire to establish a substantial European presence for the group, and K-Euro’s desire, once it had been persuaded to do so, to expand and develop its own business. Although it would have been possible for K-Euro to be no more than the manager of the ships there were accordingly sound commercial, rather than tax, reasons for it to take on the role of disponent owner. It is, moreover, necessary to set the Snøhvit project in its context, as merely one part of the substantial expansion of K-Euro’s business which took place between 2002 and 2006. 76. It was quite correct that tax advice had been sought, and that the incidence of tax was a factor in the pricing structure which was adopted. As the authorities with which we have already dealt show, the fact that tax advice has been taken is not an indication that a tax saving is the object, or one of the main objects, of the transaction entered into; it is no more than a prudent step which any sensible businessman would take as a matter of course. 77. It was significant, Mr Peacock added, that even though the involvement of K-Euro was in the contemplation of K-Line when the first agreements were signed in December 2001 K-Euro had yet to be persuaded that it should participate, and in consequence it was not a party to any of those agreements. The only way in which it could become the disponent owner of the ships, and meet the commercial requirements the Snøhvit Sellers had set and the commercial aims of the K-Line group (of European expansion), at a later date was by entering into the bareboat charter and granting the time charter; that the transactions carried a tax benefit with them was merely incidental. The same benefit would have been the consequence if K-Euro had been a participant from the outset; thus nothing of significance could be read into the fact that it was introduced to the arrangements later. 78. HMRC’s argument that the transactions could have been differently structured—for example by Northern NLG becoming the time charter owner and K-Euro the manager—was, he added, unrealistic. It did not satisfy the parties’ commercial requirements and it also did not address the statutory question, which was not whether the transactions could have been ordered in a different and (for the argument to make sense) less tax-advantageous manner but whether the transactions actually entered into had the securing of the allowances as one of their main objects. What was apparent from the FTT’s findings was that tax considerations, though not irrelevant to the structure as a whole, were not the main object, or one of the main objects, of the two transactions which had to be considered for the purposes of this appeal. The FTT were therefore right to conclude not only that the predominant purpose of the two transactions was commercial, but that the tax advantage was subservient to the extent that obtaining the allowances could not properly be regarded as one of their main objects. We should come to the same conclusion. 79. Mr Ewart argued that a recurrent theme throughout the negotiation of the arrangements was the need to ensure that K-Euro satisfied the requirements of s 123(1) because the benefit of the allowances was a factor influencing the decisions of all of the participants. In the Upper Tribunal Judge Nowlan had correctly identified several features: that the tax advice was sought for structural rather than due diligence reasons; that the parties spent a good deal of time identifying the best financial structure; that the availability of the allowances (worth about 10% of the capital cost of the vessels) was a material factor in the determination of the rental costs, which in turn had an impact on the financial exposure of all of the parties; and, as we have already mentioned, the fact that care was taken to ensure that K-Euro remained the disponent owner after the 2006 reorganisation. 80. He also placed considerable emphasis on the argument he had advanced before the FTT, and which they recorded at [383]: “Mr Ewart submitted that, in ascertaining the main objects of the relevant transactions it is necessary to look individually at the objects or purposes of the parties entering into those transactions. In the case of Northern LNG (looking to its shareholders, the Snøhvit Sponsors), their objective in entering into the bareboat charter could only have been to secure cheaper finance for the Vessels through a tax-based lease, that is, to ensure that the requirements of section 123(1) CAA 2001 were satisfied: they could show no commercial objective beyond that. In the case of K-Euro itself, it acted upon the direction of K-Line and therefore had little or no independent objective, but in so far as it had, it was aligned with the objectives of K-Line, and for the reasons given, those objectives were substantially to ensure that the requirements of section 123(1) CAA 2001 were satisfied. As for the Snøhvit Sellers, their only objective in accepting the novation of the time charter to K-Euro was to maintain the commercial terms of the time charter which they had negotiated in 2001.” 81. The only later allusion by the FTT to that argument appeared in the sentence, within [427], that “The capital allowances were a route to reduced cost of funds for the financing of transactions already decided upon.”
“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 dependant. In terms of priority or hierarchy, that was subservient to, or of lesser importance than, achieving the commercial purposes of the relevant transactions.” 87. The first sentence of that extract is consistent, at first sight, with what the FTT said at [233] (quoted at para 70 above) but is in our view plainly inconsistent with what they had said before. At [218] they mentioned K-Line’s preliminary enquiries, and at [220] that K-Line was advised “of the benefits of a UK finance lease where capital allowances are available to the lessor”