For the first time in over 10 years, the Court of Appeal has ruled on a "main object" test in UK tax legislation and whether it applied to deny a company the benefit of capital allowances.
A Japanese company wanted to buy two ships and use its UK subsidiary to operate them. The Japanese company was advised that by using a UK finance lease, the lessor would be able to claim capital allowances on expenditure on the ships. The purchasing contract was novated to a company in the Lloyds banking group which entered into a finance lease with a joint venture entity involving the Japanese company, which then granted a charter to the UK operating subsidiary. Lloyds claimed capital allowances on the basis that it was using a ship for a qualifying purpose.
The UK tax authorities (HMRC) contended that the UK tax legislation, which denied allowances where "the main object, or one of the main objects, of… a series of transactions" was to obtain those allowances, applied.
The Court of Appeal's view was that although the transactions may have served a genuine commercial purpose, it did not mean that the obtaining of capital allowances could not also be a main object of the transaction, even if it was not the main object. The Court was concerned that the lower court (which had found that profit-making and business development had been the main objects of the transaction) had failed to evaluate the significance of the tax advice received in relation to capital allowances. The case has therefore been remitted to the lower court for reconsideration.
The case highlights the complexity of considering the anti-avoidance provisions in tax legislation, and applying the appropriate tests. The Court of Appeal criticised what it described as unsatisfactory legislation: "a recipe for dispute and litigation in that it made the availability of capital allowances contingent on the subjective intention of a party to the transaction".
The Court of Appeal's view that there is a "main object" in this context if a business would not have made an investment without the benefit of the allowances has created uncertainty for structuring. The decision suggests that the main object test might apply if a business intended to make the investment anyway, but structured it in such a way as to obtain the allowances.