Lloyds capital allowances case goes back to First Tier Tribunal

The Court of Appeal has set aside the decision of the Upper Tribunal and the First Tier Tribunal (FTT), and has remitted the case to be heard again by the FTT.

The case concerns whether capital allowances were available on two ships where the ships were ultimately leased to non-UK resident lessees in R & C Commrs v Lloyds TSB Equipment Leasing (No 1) Ltd [2014] EWCA Civ 1062.

Lloyds TSB Equipment Leasing (No 1) Ltd (LEL) bought two ships designed to transport liquefied natural gas (LNG). LEL entered into a 30-year finance lease with separate joint venture companies (Northern LNG I and Northern LNG II) in respect of the ships.

The two Northern LNG companies then granted bareboat charters to K-Euro (a UK resident company) and an existing time charter was novated to K-Euro. K-Euro then contracted out the manning and maintenance of the ships to an associated company. LEL claimed 25% writing-down capital allowances on the cost of the ships.

HMRC disallowed the claim for capital allowances on the basis that the ships were not being used for a qualifying purpose and, if they were, the main object, or one of the main objects, of the setup was to obtain capital allowances.

The FTT in Lloyds TSB Equipment Leasing (No 1) Ltd [2012] UKFTT 47 (TC) looked at four issues:

  • whether the lessee (K-Euro) was responsible for paying all, or substantially all, expenses in connection with the ships under the time charter throughout the charter period;
  • whether the lessee let the ships on charter in the course of a trade which consisted of or included operating ships;
  • whether the main object test in Capital Allowances Act 2001 (CAA 2001), s123(4) could apply in this case; and
  • whether (under CAA 2001, s123(4)) the main object, or one of the main objects, of any transaction or series of transactions which included the letting of the ships or charter was to obtain the 25% writing down allowance claimed by LEL.

The FTT found in favour of LEL in respect of the first and second issues, and in favour of HMRC on the third issue. On the fourth issue, the FTT found in favour of LEL, concluding that obtaining capital allowances was not the main object of the transactions.

In the Court of Appeal’s view 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 had was to obtain the capital allowances

On appeal, the UT dismissed the appeals on all four of the issues. HMRC and LEL both appealed to the Court of Appeal.

On the third issue, the Court of Appeal upheld the earlier decisions that if the main object, or one of the main objects, was to obtain a writing-down allowance the legislation did not intend the allowance to be determined by reference to or with regard to CAA 2001, s109.

On the fourth issue, the Court concluded that the FTT was wrong to consider the ‘main object’ test in Finance Act 1971, Sch 8, para 3(1) as similar to the ‘main object’ test in CAA 2001, s123(4). It found the earlier decisions that the main object, or one of the main objects, of the arrangements was not to obtain capital allowances to be ‘virtually unreasoned’.

In the Court of Appeal’s view 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 had was to obtain the capital allowances.

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