Scorer (Inspector of Taxes) v Olin Energy Systems Ltd [1985] UKHL 3

House of Lords
Between
Scorer (Inspector of Taxes)AppellantOlin Energy Systems LtdRespondent
Before
Lord Fraser of Tullybelton
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal of the 19th day of December 1983 complained of in the said Appeal be, and the same is hereby, Affirmed and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellant do pay or cause to be paid to the said Respondents the Costs incurred by them in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments if not agreed between the parties.Cler: Parliamentor:

HOUSE OF LORDS

SCORER (INSPECTOR OF TAXES) (APPELLANT)

v.

OLIN ENERGY SYSTEMS LTD. (RESPONDENTS)

Lord Fraser of Tullybelton Lord Keith of Kinkel Lord Bridge of Harwich Lord Brightman Lord Templeman

LORD FRASER OF TULLYBELTON

My Lords,I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Keith of Kinkel. I agree with it and, for the reasons given by him, I would dismiss the appeal.

LORD KEITH OF KINKEL

My Lords,The respondents, Olin Energy Systems Ltd., formerly named Olin Mathieson Ltd. ("Olin"), are a wholly owned subsidiary of a United States corporation incorporated in the State of Delaware. In 1956 Olin commenced business in a trade consisting in the supply of specialist equipment to the coal mining industry and in certain other engineering activities. In 1961 Olin started another trade in the shape of the long-term chartering of a ship, the m.v. Morven, to its parent corporation. The ship had been purchased and equipped with the aid of a loan of $8,582,000 from another subsidiary of the parent corporation, carrying interest at the rate of 5 5/8 per cent. per annum and repayable over a period of 20 years. In February 1967 the charter, which had also been for a term of 20 years, was terminated with the payment of compensation to Olin, the ship was sold, and the balance of the loan was repaid. During each of the seven years for which the ship-chartering business was carried on, Olin's accounts showed the profits of that business, described as "Shipping Division," separately from those of its engineering business, described as "Airbreaker Division." In the profit and loss accounts for each of these years various charges regarded as being directly attributable to either of the two divisions were so treated. The interest on the loan of $8,582,000, by contrast, was not attributed to either division, but was dealt with by charging it against the aggregate trading result of the two divisions.This treatment was accepted by Olin's very reputable auditors, but it was, as is now common ground, incorrect. By virtue of certain double taxation regulations which it is unnecessary to go into, the provisions of the Income Tax Acts relating to relief for losses were available to Olin in respect of

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the interest payments. Accordingly it was permissible for Olin, under section 345 of the Income Tax Act 1952, to treat the payments of loan interest, having been made wholly and exclusively for the purposes of the Shipping Division trade, as though they were losses incurred in that trade. Such losses were available, under section 342 of the Act of 1952, to be carried forward and set off against the profits of that trade in future years. Similar relief was made available, after the introduction of corporation tax by the Finance Act 1965, under certain provisions of that Act and associated Regulations. Further, under paragraph 21 of Schedule 15 to the Act of 1965 provision was made for the continued carry- forward of losses incurred before the introduction of corporation tax, including interest payments treated as losses under section 345 of the Act of 1952.These carry-forward provisions were applicable, however, only in relation to the trade in respect of which the deemed losses in the shape of interest payments were incurred. They did not have the effect of making it permissible to carry the losses forward and set them off against the profits of a separate trade carried on by the same taxpayer. But this did not have a material effect upon the taxation position until the m.v. Morven was sold and the trade of the Shipping Division discontinued. As a matter of general principle, where a taxpayer carries on two trades, losses in one of them in a particular year may be set off against profits of the other realised in that year. So as long as both the Shipping Division and the Airbreaker Division were carrying on trade, the losses of the former were capable of being set off against the profits of the latter. In each of the seven accounting periods prior to the discontinuance of the Shipping Division trade the current losses in that trade, including interest payments deemed to be losses, were so great as to swallow up the profits of the Airbreaker Division, leaving Olin with a nil tax liability. Thus the wrong treatment of the Shipping Division losses in the accounts did not have any practical effect on the taxation position.The picture changed after the discontinuance of the Shipping Division trade in February 1967. The accumulated losses of the division at that time amounted to £465,457. The profits of the Airbreaker Division for the year ended 30 November 1968 were substantial. There now being only one trade, that of the Airbreaker Division, the terminal losses of the defunct Shipping Division were not capable of being carried forward and set against the profits of that one trade, which were thus liable to corporation tax. On 14 November 1969 Olin's accountants sent to the inspector of taxes accounts for the year to 30 November 1968 together with tax computations. The profit and loss account for the Airbeaker Division in that year brought out a profit of £113,654. That for the Shipping Division showed a nil profit, and comparable figures for the preceding year (including a profit of £42,637) were given. The tax computation for the Airbreaker Division showed an adjusted profit of £115,515. The final page of the computations read as follows:

"OLIN MATHIESON LTD. SECTION 345 INCOME TAX ACT 1952

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Losses brought forward

£465,457

Deduct profits of Airbreaker Division

£115,515

Carried forward

£349,942"

On 17 November 1969 the inspector issued to Olin a corporation tax assessment for the year ended 30 November 1968 in the sum of £5,000, this being an estimated assessment. The accountants appealed against the assessment by letter dated 19 November 1969. The inspector raised a number of fairly minor queries on the accounts and computations, which the accountants answered to his satisfaction, and on 8 January 1970 he wrote to the accountants as follows:
"I thank you for your letter of 18 December 1969 and can agree your suggestions. Your computations are therefore agreed for the chargeable accounting period ended 30 November 1968 and the appeal is determined in accordance with section 510, Income Tax Act 1952."
On 14 January 1970 the Inspector issued an amendment to the corporation tax assessment showing:

"Schedule D Cases I and II

£123,403

(Less losses or charges treated as losses)

£123,403

the tax payable being

nil

"

Thereafter the inspector dealing with Olin's tax affairs changed. The accountants had correspondence with him about Olin's corporation tax liability for the year ended 30 November 1969, and he raised the point that the losses of the defunct Shipping Division should not have been carried forward and used to offset the profits of the Airbreaker Division. On 17 July 1972 this inspector (who is the appellant in this appeal) issued an additional assessment to corporation tax on Olin for the year ended 30 November 1968. This had the effect of disallowing relief for carried-forward Shipping Division losses, so that tax of £51,019.12 became payable. The issue in the appeal is whether he was entitled to issue this additional assessment under section 5(3) of the Income Tax Management Act 1964, or whether he was precluded from doing so by section 510 of the Act of 1952. The special commissioners answered this question in Olin's favour. On appeal by the Inland Revenue by way of case stated Walton J. reversed that determination and found in their favour. Olin appealed to the Court of Appeal, which by a majority (Lawton and Fox L.JJ., Kerr L.J. dissenting) allowed the appeal and restored the determination of the special commissioners, but granted the revenue leave to appeal to your Lordships' House.Section 5 of the Act of 1964, which was extended to corporation tax by paragraph 6(1) of Schedule 6 to the Finance Act 1966, provides by subsection (3):
"If an inspector or the Board discover - ( a ) that any income which ought to have been assessed to tax at the standard

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rate or to surtax has not been assessed, or ( b ) that an assessment to tax at the standard rate or to surtax is or has become insufficient, or ( c ) that any relief which has been given is or has become excessive, the inspector or, as the case may be, the Board may make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged."Section 12(4) of the Act of 1964 provides:
"Save as otherwise provided in the Income Tax Acts or the enactments relating to the profits tax the determination of the General Commissioners or the Special Commissioners in any proceedings under the Income Tax Acts or the enactments relating to the profits tax shall be final and conclusive."
By section 510(1) of the Act of 1952 it is enacted:
"Subject to the provisions of this section, where a person gives notice of appeal to the General Commissioners, the Special Commissioners or the Board of Referees against an assessment to, or a decision of any kind with respect to, income tax other than surtax or surtax, and, before the appeal is determined by the Commissioners or Board, the surveyor or other proper officer of the Crown and the appellant come to an agreement, whether in writing or otherwise, that the assessment or decision should be treated as upheld without variation, or as varied in a particular manner or as discharged or cancelled, the like consequences shall ensue for all purposes as would have ensued if, at the time when the agreement was come to, the Commissioners or Board had determined the appeal and had upheld the assessment or decision without variation, had varied it in that manner or had discharged or cancelled it, as the case may be."
The references to income tax in this subsection were extended to corporation tax by paragraph 12(2) and (4) of Schedule 6 to the Act of 1966.It was settled by Cenlon Finance Co. Ltd, v. Ellwood [1961] Ch. 50; [1961] Ch. 634 that where an agreement has been arrived at under section 510 of the Act of 1952 it is not open to the inspector to make an additional "discovery" assessment under section 5(3) of the Act of 1964 (the material provisions of which were at that time to be found in section 41(1) of the Act of 1952). Such an additional assessment is, however, not precluded if it is founded upon a point other than the particular matter which was the subject of the section 510 agreement. (See the Cenlon, case, p er Cross J., at p. 69, Upjohn L.J., at p. 651, and Holroyd Pearce L.J., at p. 655; Kidston v. Aspinall (1963) 41 T.C. 371, per Wilberforce J., at p. 386; Chancery Lane Safe Deposit and Offices Co. Ltd, v. Inland Revenue Commissioners (1965) 43 T.C. 83, Banning v. Wright (1972) 48 T.C. 421.) In the present case the additional assessment dated 17 July 1972 was based upon the proposition that in law the carried-forward losses of the defunct Shipping Division were not available to be set against the profits of the Airbeaker Division for the accounting year to 30 November

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1978. The question at issue is whether or not the availability of these losses for that purpose is the particular matter which was the subject of the section 510 agreement arrived at on S January 1970. By his letter of that date the inspector stated:
"Your computations are therefore agreed for the chargeable accounting period ended 30 November 1968 . . ."
These computations plainly included the calculations which I have quoted, showing the set-off of section 345 brought-forward losses against the profits of the Airbreaker Division. These losses were in fact losses of the defunct Shipping Division. Counsel for the appellant argued, however, that the accounts and computations did not make this plain, that the provenance of the brought-forward losses was not clearly indicated, and that the inspector then dealing with the matter might have thought or assumed that they arose in the Airbreaker Division itself. In the circumstances the point now at issue was not in contemplation at the time. Reference was made to a passage in the judgment of Harman L.J. in the Chancery Lane Safe Deposit case, [1965] 1 W.L.R. 239, 247, where he said:
"the point now in issue was not then raised nor was the question in the minds of either of the parties" and to another in the judgment of Wilberforce J. in Kidston v. Aspinall (1963) 41 T.C. 371, 388: "the question as to the right of the appellant's wife to take capital out of the settlement was not present to the minds of either the appellant or the special commissioners, and no possibility of an assessment following upon that right was ever discussed or ever raised."
In my opinion there can be no doubt that Olin's accountants were aware that they were putting forward a claim to have the carried-forward losses of the defunct Shipping Division set against the profits of the Airbreaker Division for the year in question. They clearly knew that the brought-forward losses of £465,457 shown on the final page of their computations had arisen wholly in the Shipping Division. I am further of opinion that the material which they put before the inspector was sufficient to bring home to the mind of an ordinarily competent Inspector in his position precisely what they were claiming. The accounts made it entirely clear that the Shipping Division had ceased to trade and had no profits in the year in question. The comparative figures for the year to 30 November 1977 included therein showed a substantial compensation payment received in respect of capital loss arising on the sale of m.v. Morven, and also an item, in the Shipping Division profit and loss account, in respect of disposal expenses. The nature of the losses claimed was made plain by the reference to section 345 of the Act of 1952, and they were claimed in a computation separate from that relating to the Airbreaker Division itself. I can see grounds for an assumption that the losses claimed related to the Airbreaker Division specifically. Reference to earlier accounts, which the inspector must have had in his possession, would have made it even clearer that they did not.So there are no grounds for the view that the accountants did not lay before the inspector material apt to cause him to appreciate the nature of their claim. The situation must be viewed objectively, from the point of view of whether the inspector's agreement to the relevant computation, having regard to the surrounding circumstances including ail the material known to be in his possession, was such as to lead a reasonable man to the conclusion that he had decided to admit the claim which had

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been made. In my opinion that question falls to be answered in the affirmative. I am fortified in that conclusion by the consideration that the argument for the Inland Revenue before the special commissioners, as recorded in the case stated, contains not the slightest hint that the inspector did not appreciate that the brought-forward losses the subject of the claim had been incurred wholly in the discontinued Shipping Division. The passage particularly relevant is this:
"If the inspector had carried out his duties correctly, he could not possibly have accepted the proposal that losses in a trade which had ceased should be set off against those of a continuing trade."
The fact of the matter is that he did agree to just that, and it is of no consequence why he did so, provided it was not due to misleading information. I find myself in respectful agreement with the following passage in the judgment of Fox L.J. in the Court of Appeal [1984] S.T.C. 141, 150:
"It is true that the actual point of law was never formulated. But I do not think that can be necessary. The section is dealing with agreements as to how an assessment shall be dealt with. It is not dealing with the formulation of points of law. We do not know why the inspector agreed the computation. He may have made an error of law or he may have misunderstood the facts or he may have failed to think about the matter at all. Subject to the question, which I mention later, as to whether the taxpayer has provided misleading information, I do not see why the circumstances that the inspector has made a mistake either of law or fact should take the case outside section 510. Essentially, the question is not why he agreed but whether he agreed. The purpose of the section must be to protect the taxpayer by producing finality, and Parliament, I would suppose, must have contemplated that the taxpayer would be protected, even though the inspector made some error in his assessment. That is a likely, if not the most likely, event in which the question of going back on the agreement would ever arise at all."
My Lords,for these reasons I would dismiss the appeal. The appellant must pay the respondents' costs in this House.

LORD BRIDGE OF HARWICH

My Lords,For the reasons given in the speech of my noble and learned friend Lord Keith of Kinkel, with which I agree, I too would dismiss this appeal.

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LORD BRIGHTMAN

My Lords,I also agree that this appeal should be dismissed for the reasons given in the speech of my noble and learned friend Lord Keith of Kinkel.

LORD TEMPLEMAN

My Lords,In 1957 an American subsidiary comprised in a group of companies controlled by a parent corporation also incorporated in the United States of America commissioned an Italian shipyard to construct a vessel to be used in the shipping activities of the group. In 1961 the vessel was completed at a cost of approximately £3m., named the Morven and registered in the name of the respondent, an English subsidiary of the group. The respondent raised money to pay for the vessel by a loan from another American subsidiary of the group repayable over 20 years with interest at 5 5/8 per cent. per annum. The Morven was chartered by the respondent to its American parent corporation for a period of 2O years on terms presumably agreeable to both.Prior to the acquisition of the Morven, the respondent was engaged in one composite trade which consisted of supplying specialist equipment used in the coal mining industry and manufacturing and supplying various other items of an industrial or engineering nature. After the acquisition of the Morven, the respondent carried on two separate trades, namely its former manufacturing and supply trade known as "the Airbreaker Division" and its new trade, so far as it could be called a trade, associated with its ownership of the Morven, known as "the Shipping Division" and involving the collection of paternal charter hire and the payment of fraternal loan interest.The acquisition by the respondent, an English subsidiary, with moneys provided by an American subsidiary, of a vessel constructed in Italy, for the purposes of a group owned by an American corporation, enabled the respondent's Shipping Division to claim for the purposes of United Kingdom tax an investment allowance of £1.1m. and an annual allowance of £270,000 per annum or thereabouts. The respondent also became entitled to pay the annual interest of about £160,000 on the loan of £3m. from its American fellow subsidiary without deduction of United Kingdom tax and to treat the whole of that interest as though it were a loss incurred by the Shipping Division.In these proceedings the respondent's accounts for the years 1962, 1964 and 1968 were disclosed. From those accounts it appears that from 1961 when the Morven was acquired until 1967 when the Morven was sold, the respondent made aggregate profits exceeding £500,000 after providing about £500,000 by way of depreciation and during that period the respondent did not become liable to pay any United Kingdom tax as a result of applying the

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tax allowances and interest losses attributable to the Shipping Division.In preparing the profit and loss accounts of the Shipping Division, the respondent did not deduct the gross or net cost of the interest of £160,000 payable on the loan raised to purchase the Morven. That was bad acountancy practice but did not distort the profit and loss account of the respondent company which showed the interest as a deduction from the combined profits of the Airbreaker Division and the Shipping Division.In its taxation computations the respondent company deducted Airbreaker Division profits from interest paid on the loan of £3m. in the current year and also from the balance of interest paid in previous years. This was bad accountancy and bad law because the Airbreaker Division profits could not be set off against accumulated interest losses of the Shipping Division for past years. Counsel for the respondent informed the House that this admitted error did not prejudice the revenue because in each year the current Airbreaker profits did not exceed the current Shipping Division interest loss.The error in the respondent's taxation computation was however repeated in the 1968 accounts after the respondent had ceased to carry on its Shipping Division trade. The 1968 accounts disclosed that the Morven had been sold, that the Shipping Division had ceased to trade and that the only trade carried on by the respondent was "the manufacture and sale of high pressure pneumatic and hydraulic equipment." In these circumstances the profits of the Airbreaker Division for 1968 could not be set off against the interest losses attributable to the Shipping Division in previous years. The relevant computation asserted, however, such set-off. In the result the 1968 computation incorrectly claimed that the respondent had not made any profits liable to tax when in fact the respondent had made a profit for tax purposes of £115,515. The inspector of taxes accepted this incorrect computation, possibly a little bemused by the earlier incorrect computations and by the high reputation of the respondent's auditors, Peat Marwick.When a subsequent inspector of taxes sought to recover the tax which ought to have been paid for 1968, these present proceedings were instituted. The respondent sought to justify the 1968 tax computation but its arguments were dismissed trenchantly by Walton J., were swept aside by the Court of Appeal and were not repeated to your Lordships.My Lords,it appears that tax allowances are generous to foreigners; that the revenue could not safely assume that the accounts forwarded by the respondent's auditors complied with elementary rules of accountancy and tax law; that the error of the respondent being plain on the face of the 1968 accounts, the respondent has escaped tax for which it ought to have been made liable; and that this appeal must be dismissed.

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Cited in 1 later judgment