Willingale and International Commercial Bank LTD
[1978] AC 834(Judgment by: Lord Salmon)
Willingale (Inspector of Taxes)
and International Commercial Bank LTD
Judges:
Lord Diplock
Lord SalmonLord Fraser of Tullybelton
Lord Russell of Killowen
Lord Keith of Kinkel
Subject References:
Revenue
Corporation tax
Computation of profits
Anticipated profits from bills and promissory notes discounted or purchased by bank
Whether tax payable on fractional part of anticipated profits from bills
Legislative References:
Income and Corporation Taxes Act 1970 - Section 108
Case References:
BSC Footwear Ltd v Ridgway - [1972] AC 544; [1971] 2 WLR 1313; [1971] 2 All ER 534
Duple Motor Bodies Ltd v Inland Revenue Commissioners - [1961] 1 WLR 739; [1961] 2 All ER 167
Gardner, Mountain and D'Ambrumenil Ltd v Inland Revenue Commissioners - (1947) 177 LT 16; [1947] 1 All ER 650; 29TC69
Harrison v John Cronk and Sons Ltd - [1937] AC 185; [1936] 3 All ER 747
Newcastle Breweries Ltd v Inland Revenue Commissioners - (1927) 96 LJKB 735; 12 TC 927
Southern Railway of Peru Ltd v Owen - [1957] AC 334; [1956] 3 WLR 389; [1956] 2 All ER 728
Sun Insurance Office v Clark - [1912] AC 443
Bennett v Ogston - (1930) 15 TC 374
Dailuaine-Talisker Distilleries Ltd v Inland Revenue Commissioners - [1930] SC 878; 15 TC 613
Dimbula Valley (Ceylon) Tea Co Ltd v Laurie - [1961] Ch 353; [1961] 2 WLR 253; [1961] 1 All ER 769
Odeon Associated Theatres Ltd v Jones - [1971] 1 WLR 442; [1971] 2 All ER 407; [1973] Ch 288; [1972] 2 WLR 331; [1972] 1 All ER 681
Pearce v Woodall Duckham Ltd - [1977] 1 WLR 224; [1977] 1 All ER 753
Seaham Harbour Dock Co v Crook - (1930) 16 TC 333
Whitworth Park Coal Co Ltd v Inland Revenue Commissioners - [1961] AC 31; [1959] 3 WLR 842; [1959] 3 All ER 703
Judgment date: 2 February 1978
Judgment by:
Lord Salmon
My Lords, I have had the advantage of reading the speeches which are about to be delivered by my noble and learned friends, Lords Fraser of Tullybelton and Keith of Kinkel. I agree that for the reasons which they give and also for the reasons stated in the judgments of Walton J. and the majority of the Court of Appeal that this appeal should be dismissed.
I wish to add only a very few observations of my own. Take the case of a bank which buys for the equivalent of £10,000 a foreign bill of exchange with a face value equivalent to £15,000, maturing five years after the date of its purchase. The bank in calculating the price which it was prepared to pay for the bill, on which it expected to make a profit, may well have taken into consideration the interest it would be losing on the purchase price. This, however, would be only one factor in arriving at the price which the bank was prepared to pay. Some of the other factors taken into account would no doubt be the estimated strength of the currency in which the bill was made out and the standing of the commercial house which issued it. None of these factors can alter the nature of the transaction which is the purchase of a bill at a price considered by the bank to be its market value at the date of purchase. The bank would have the option of holding the bill until it matures or selling it at any time before it reaches maturity. In the instant case, the bank usually held the bills until they matured but it sold many of the bills before maturity, often at a profit but sometimes at a loss. The bill being bought in foreign currency whose rate of exchange fluctuates considerably, the profit the bills might yield would be unpredictable. If the rate went against sterling at the date of maturity or at the date when the bill was sold, the profit made by the bank would be diminished and indeed the transaction might, as it sometimes did, result in the bank making a loss. If the rate went in favour of sterling at the material date, the bank would make a larger profit than it had expected.
It is well settled by the authorities cited by my noble and learned friends that a profit may not be taxed until it is realised. This does not mean until it has been received in cash but it does mean until it has been ascertained and earned. It follows in my view that corporation tax cannot be levied in respect of the bank's transactions until the fiscal year in which the bank sells the bill or if the bank holds it until maturity, until the fiscal year in which it matures. The tax is leviable even if the bank does not receive the cash in that fiscal year. If the bank's customer defaults, an adjustment would be made for the bad debt in the following year.
The difference between the price at which the bank buys the bill, and the bill's face value is something referred to as "a discount." A discount however is different from interest it is not earned nor does it accrue from day to day. Even, if contrary to my view, the profit on a bill could be taxed before it is sold or matures, the profit could not, for tax purposes, be spread over the years elapsing between the date of purchase and the date of maturity or of the sale of the bill. I agree, however, that it is arguable although the Crown does not rely on the argument, that the bank on entering into the transaction which I have postulated acquires the right to be paid the £5,000 in five years' time and that accordingly the bank earns that sum in the fiscal year in which the transaction is made. It follows, so the argument runs, that the bank can be taxed on the £5,000 in that fiscal year subject to a suitable adjustment for the deferment of the payment. The rate of corporation tax does not vary according to the amount of profit upon which it is assessed, but the rate of income tax does. If an individual was carrying on the same kind of business as does the bank, I cannot imagine that the Inland Revenue would contend that a substantial profit accruing in year 1 or in year 5 should be spread over the intervening years for tax purposes.
If I understand him correctly, my noble and learned friend, Lord Russell of Killowen, considers that the bank's transactions are no different from loans of money at compound interest made in this country. My noble and learned friend equates compound interest on a loan with discount on a bill because he considers that compound interest is the content of the discount. I am afraid I cannot agree. As I have already pointed out, in my view, particularly so far as foreign bills are concerned, the interest on the purchase price is only one of the factors taken into account by the bank in deciding the price which it is prepared to pay for the bill.
Although there may be some superficial similarity between (a) lending £10,000 for 5 years at a rate of interest of X per cent. per annum on the terms that none of the interest amounting in all to £5,000 shall be payable until the principal becomes repayable and (b) buying a foreign bill of exchange with a face value equivalent to £15,000 for a price equivalent to £10,000, the two transactions are, in my view, essentially different from each other in character.
The lender is entitled to be paid £15,000 at the end of five years; no more and no less. The purchaser of the bill is entitled to sell the bill when he likes, or keep it until maturity. The amount he receives for it, translated into sterling, will depend upon the currency rate of exchange at the material time. I would also point out that to imagine a bank or any other commercial institution lending money at interest none of which is payable until the principal is repayable is a very bizarre conception. I doubt whether any such a loan has ever been made or ever will be. If it were, corporation tax would, I think, be exigible on the £5,000 for the fiscal year in which the loan agreement was made with an allowance for the deferment of the payment of interest. That would be the year in which the bank earned the right to be paid the £5,000 in five years' time. The other alternative may be that the bank might be taxable on the £5,000 in the year in which it fell due for payment. I do not think that the bank could have been taxed in respect of interest in any of the intervening years, for the bank would not have earned nor have been entitled to be paid any interest in any of them.
Accordingly, if, contrary to my opinion, it is possible in the circumstances of the instant case, to equate the profit made on a bill with compound interest due and payable on a loan but only payable when the loan itself becomes repayable, still no tax would be exigible in respect of any fiscal years other than the years in which the bill was issued to the bank or in which it matured or was sold by the bank.
My Lords, I would dismiss the appeal.