Revenue

Corporation tax payment of accrued interest creditor lending debtor capital to enable debtor to pay interest to creditor transaction creating tax advantage genuine payment of...Corporation tax payment of accrued interest creditor lending debtor capital to enable debtor to pay interest to creditor transaction creating tax advantage genuine payment of interestMacniven v Westmoreland Investments Ltd: HL (Lord Nicholls of Birkenhead, Lord Hoffmann, Lord Hope of Craighead, Lord Hutton and Lord Hobhouse of Woodborough): 8 February 2001The taxpayer company borrowed a capital sum from its parent company, a tax exempt pension fund.

The sole purpose of the loan was to enable the taxpayer to pay off accrued interest owed to the pension fund and create an allowable deduction for corporation tax pursuant to section 338 of the Income and Corporation Taxes Act 1988.

The pension fund, being tax exempt, was then able to reclaim the tax on the interest accounted for by the taxpayer to the Revenue.

The Crown refused to allow the taxpayer to deduct the interest payments against profits on the grounds that they had not been payments within the meaning of section 338 as they had been made purely for the purposes of avoiding tax and had to be disregarded within the principle of interpretation laid down in WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300.

The special commissioners decided in favour of the taxpayer but were reversed by the judge.

The Court of Appeal allowed the taxpayers appeal.

On appeal by the Crown.Christopher McCall QC and Michael Furness QC (Solicitor of Inland Revenue) for the Crown; David Milne QC and Adrian Shipwright (Ashurst Morris Crisp) for the taxpayer.Held, dismissing the appeal, that ultimately statutory construction involved ascertaining what Parliament had meant by using the language of the statute; that under the Ramsay principle if the statutory language was construed as referring to a commercial concept and steps which had no commercial purpose had been artificially inserted for tax purposes into a composite transaction they would be disregarded for the purposes of applying the relevant concept; that, however, there were many terms in tax legislation which could not be construed in that way as they referred to purely legal concepts which had no broader commercial meaning; that in such cases, the Ramsay principle could have no application because, if a transaction fell within the legal description, it made no difference that it had no business purpose; that payment of interest within section 338 was a legal concept which meant the simple discharge of a debt and the statutory words could not be given a different meaning in the case of payment to a tax exempt lender which had been able to reclaim the tax; and that accordingly the payments of interest were deductible under section 338.

(WLR)