Gaspet Ltd v Elliss (Inspector of Taxes)

[1985] 1 WLR 1214

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(Judgment by: Gibson J)

Gaspet Ltd
vElliss (Inspector of Taxes)

Court:

Judge:
Gibson J

Legislative References:
Income and Corporation Taxes Act 1970 - section 238
Finance Act 1972 - section 93
Capital Allowances Act 1968 - section 91; section 91(1)
Income Tax Act 1952 - section 47(1)

Hearing date: 13 June 1985
Judgment date: 14 June 1985

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Judgment by:
Gibson J

This is an appeal by the taxpayer company, Gaspet Ltd., formerly Saga Petroleum (U.K.) Ltd. The taxpayer company had appealed to the special commissioners against an assessment to corporation tax for the accounting period 22 September 1977 to 14 September 1978. The commissioners held that that appeal failed in principle; hence the appeal to this court. The appeal turns on a short point of construction of section 91(1) of the Capital Allowances Act 1968. Before I summarise the relevant facts as agreed between the parties and found by the commissioners, I shall state briefly the effect of the statutory provisions against which to view those facts.

Chargeable gains accruing to a company are treated as profits liable to corporation tax (section 238 of the Income and Corporation Taxes Act 1970), but those gains are scaled down in such a way that, in effect, they bear tax at the rate of 30 per cent. instead of the full corporation tax rate: section 93 of the Finance Act 1972. A company carrying on a trade which incurs a loss can set it off against its trading profits in the accounting period in which the loss was incurred or in, amongst others, the immediately preceding period: section 177(2) of the Act of 1970. A capital allowance authorised under the Capital Allowances Act 1968 is treated as a trading expense deductible from profits for corporation tax purposes: section 73 of the Act of 1968. Section 91(1) of that Act governs the right to a capital allowance in respect of expenditure on scientific research and the material part of that subsection is as follows:

"where a person -(a) while carrying on a trade, incurs expenditure of a capital nature on scientific research related to that trade and directly undertaken by him or on his behalf ..."

It is common ground between the parties that exploration for oil under the sea is to be regarded as scientific research for the purposes of section 91 and accordingly I shall not take up time in considering whether such a meaning can be contrived out of the statutory language.

The taxpayer company is a wholly owned English subsidiary of a Norwegian limited partnership, Saga Petroleum A.S. & Co. ("Saga A.S."). In 1977 Saga UK owned interests in a North Sea oil field. It decided to sell part of those interests but it was apparent to it that a substantial chargeable gain would result from that disposal. On 22 September 1977 it acquired an interest in three American oil and gas leases under which oil and gas were being produced and thereby it commenced to trade from that day. The next day it made its disposal of part of its North Sea interests, thereby incurring the expected chargeable gain which, appropriately scaled down, fell to be treated as part of its profits liable to corporation tax. Saga A.S. also had a wholly-owned Irish subsidiary, Saga Ireland Ltd. ("Saga Ireland") formed for the purpose of making applications as a member of two syndicates for exploration licences from the Irish government in respect of certain blocks of offshore areas of the Irish Continental Shelf. One syndicate ("the B.P. syndicate"), consisting of Saga Ireland, B.P. Petroleum Development Ltd. ("B.P.") and two other companies, was granted a licence in respect of certain blocks. The other syndicate ("the Amoco syndicate"), consisting of Saga Ireland, Amoco Ireland Exploration Co. ("Amoco") and five other companies, was granted a licence in respect of other blocks. Each licence was subject to standard licensing terms set out in a notice published by the Irish Department of Industry and Commerce. Those terms included the following: (1) licences would be granted only to licensees chargeable to Irish tax and any obligations to be observed and performed by more than one licensee under a licence were to be joint and several obligations (section 7); (2) licensees were required to pay certain periodic fees to the minister (section 9); (3) the licensees were required to perform minimum exploration programmes to be approved by the minister (section 11) with penalties if this was not carried out (section 14); (4) the prior written consent of the minister was required for the assignment of, or the transfer of, the interest of any rights under the licence (section 54(1)); (5) application for the minister's consent would be favourably considered for the assignment of, or transfer of, an interest to an affiliated company of a licensee (section 54(4)(b)). Each licence required the licensee to carry out certain works including a specified programme of exploration operations in respect of each block owned by the licensee.

On 29 March 1976 the participants in the Amoco syndicate entered into an operating agreement under which Amoco, which had the major interest, was to be the operator. On 10 November 1977 the participants in the B.P. syndicate entered into an operating agreement in similar form under which B.P. was to be the operator. Each operating agreement contained provisions governing the rights and obligations of the participants in the particular syndicate inter se. The size of each participant's interest was specified and it was agreed that costs and expenses were to be borne in proportion to the participants' respective interests. Each participant was entitled to a proportion of the oil or gas discovered corresponding to that participant's interest. The operator was charged with taking all steps necessary for the exploration programme. There was a specific provision allowing a participant to assign its interest, in whole or in part, to an affiliate.

On 17 April 1978 Saga Ireland and the taxpayer company entered into an agreement which, in the jargon of the petroleum industry, is of a kind known as an illustrative agreement. Under that agreement it was stated that Saga Ireland intended to conduct petroleum exploration operations in, and in connection with, the licensed areas covered by the two licences and if petroleum were discovered it was intended to develop the areas and produce the petroleum therefrom. It was stated that Saga Ireland should be, and at all times remain, responsible to the minister for the full and proper discharge of all obligations under the licences and the conduct of the operations in accordance with the law and the licensing terms, provided that Saga Ireland might enter into contracts with others to perform on its behalf and under its responsibility such operations as it might desire to be so performed, and it required Saga Ireland to pay to the minister during the term of the licence the consideration for the grant of the licence. The rights and obligations of the taxpayer company were also set out in that agreement. The taxpayer company was to provide all funds and equipment required for the exploration, development and operations under the licences and for all investment therefor and all expenses thereof. In short, it was to bear the ultimate burden of the licences, and in return the taxpayer company was to own all the petroleum won and saved to which Saga Ireland might become entitled under the licences. The taxpayer company agreed to conduct all of its activities under that agreement through a branch in Ireland and the agreement was made subject to the consent of the minister, which was given on 5 May 1978. It is common ground between the parties that the illustrative agreement did not constitute an assignment to an affiliate pursuant to the express provisions in the operating agreements. There is no evidence that any other member of either syndicate of which Saga Ireland was a participant was aware of the illustrative agreement.

After 17 April 1978 and during the accounting period ended 14 September 1978 and in the subsequent accounting period ended 14 September 1979, expenditure was incurred by B.P. and Amoco under their respective operating agreements on exploration. Saga Ireland's proportionate share of that expenditure under the respective operating agreements was borne by the taxpayer company in accordance with the illustrative agreement.

In these circumstances the taxpayer company claims that section 91 of the Capital Allowances Act 1968 entitles it to an allowance in respect of that share of the expenditure. Before the special commissioners it was common ground that the taxpayer company was carrying on a trade when the expenditure was incurred, that the expenditure was of a capital nature, that the expenditure was on scientific research and that the taxpayer company did not itself directly undertake that research. There were three points in issue. One was whether the taxpayer company incurred the expenditure. The Crown argued that it had not but the commissioners held that it had; that finding has not been disputed by the Crown before me. A second point was whether the research related to the taxpayer company's trade. This point was not conceded by the Crown before the commissioners, but was not pursued either, and it is not pursued before me. The third was whether the research in the form of exploration was directly undertaken on behalf of the taxpayer company. The commissioners held that it was not directly undertaken on behalf of the taxpayer company. The sole question for me to determine is whether they were right in that conclusion. On this short point of construction I have had the benefit of admirably presented argument from Mr. Park for the taxpayer company and Mr. Carnwath for the Crown.

Mr. Park contended that the words "on his behalf" meant in their statutory context "in the interests of" or "for the benefit of" the claimant. Mr. Carnwath contended that the phrase "by him or on his behalf" meant "by the claimant or the claimant's agent or representative"; in other words, he contended that there was a legal relationship between the claimant and the person by whom the scientific research was directly undertaken.

At one stage each counsel addressed arguments to me on the footing that the word "directly" qualified the words "on his behalf"; but there was eventually common ground between the parties that that was not the right approach to the construction of the relevant words. The adverb "directly" qualifies the participle "undertaken" and both those words must be construed as governing both "by him" and "on his behalf." It is not disputed on the facts of this case that scientific research was directly undertaken by B.P. and Amoco, though there is some dispute as to the meaning of "directly undertaken." The question in issue is whether it was directly undertaken on behalf of the taxpayer company. That was the question to which the commissioners addressed themselves and answered thus:

"it seems to us that work is 'directly undertaken on behalf of' the person who has commissioned it. The work that was undertaken by B.P. was commissioned by itself and the other three members of the B.P. syndicate. We do not think that the illustrative agreement altered that position. B.P. did not directly undertake anything on behalf of anybody other than the other members of its own syndicate and the relevant member of the syndicate remained Saga Ireland. We agree of course that on the facts the scientific research enured (as to the appropriate proportion) to the benefit of [the taxpayer company] rather than Saga Ireland but we have come to the conclusion that Mr. Park's reliance on the destination of the fruits involves an unacceptable departure from the words of the statute. 'Directly undertaken on behalf of ...' involves, in our view, a stricter test than 'for the benefit of'."

Mr. Park criticised that reasoning and conclusion which he described as formalistic in the extreme. Mr. Park submitted that Saga Ireland was very close to being the agent of an undisclosed principal, the taxpayer company, and that its role in the two syndicates once the illustrative agreement had been made was for and on behalf of the taxpayer company. I think that is not correct. There is no finding of agency, nor, I think, could there be. Saga Ireland continued to have obligations and duties which it owed the other participants in the respective syndicates and the minister, and the illustrative agreement makes it clear that Saga Ireland's functions in relation to the licence were preserved and its obligations were to continue. Exploration operations by B.P. and Amoco discharged Saga Ireland's obligations to the minister. However, it is of course correct that the taxpayer company took the benefit and the ultimate burden of Saga Ireland's agreements with the minister and with the other members of the syndicates. Mr. Park accepted that the words "on his behalf" can have the meaning found by the commissioners. But he submitted that the meaning for which he contends is one well recognised in ordinary speech and by the law, and that faced with a choice of meanings the commissioners should have chosen, and this court should choose, the meaning which promotes the evident statutory purpose of encouraging scientific research.

Mr. Carnwath supported the commissioners' reasoning subject only to this qualification: that if and in so far as they were suggesting that only the person who initially commissions the research by another is the person on whose behalf the research is undertaken for the purposes of the section, that would be too restrictive. He accepted that where, for example, a person initially commissions scientific research but then is replaced by another person who, by novation, assumes the benefits and burdens of the original contract of commissioning, that latter person qualifies as the person on whose behalf the scientific research is thereafter undertaken.

I approach the question of construction seeking to give the statutory words their ordinary meaning, consistent, so far as possible, with the purpose of Parliament underlying the statutory provision; but if I am left in doubt because the words are equally capable of two meanings, one favourable to the taxpayer company and one not, then the taxpayer company will fail, as the burden is on the taxpayer company to come within the words granting the allowance claimed. I accept that the statutory purpose can be said to be broadly to encourage scientific research, but, as Mr. Carnwath rightly said, it is clear that Parliament was limiting the expenditure on scientific research that qualified for the allowance; not all expenditure on that research comes within the statutory wording. The specific terms of section 91(1) must be satisfied. An example of that restrictive intention is in the use of When I look at the requirements of the section I observe that they can be broadly divided into two parts, one relating to what might be said to be the economic qualification, that is to say the incurring by the claimant of expenditure, and the other being the nature of the work on which the expenditure is incurred. I make two comments. As Mr. Carnwath pointed out, it would be a little surprising to find a test of economic benefit in the second part. Second, if the test be one of benefit, that, to my mind, introduces an element of uncertainty, making it a somewhat unsatisfactory test: how direct must that benefit be?

The phrase "by him or on his behalf" is to my mind one very familiar in ordinary language. One is required to see by whom the relevant act is done. It is accepted on both sides that one reads in "by another person" in front of "on his behalf." I would venture to say that its ordinary and natural connotation is that the act must be done by the claimant or his agent. Mr. Park drew attention to the definition in the Shorter Oxford English Dictionary of the wording "behalf" and to is "in the interest of," to which the editors have added in parenthesis "(with the notion of interposition)." That to my mind connotes representation rather than indicating a meaning equal to "for the benefit of."

Mr. Park referred to one other statutory usage of the phrase "on behalf of" and to the consideration of Cross J. of that phrase inClixby v. Pountney [1968] Ch. 719. The question there was whether wilful default had been committed "by or on behalf of" the taxpayer within the meaning of section 47(1) of the Income Tax Act 1952. The general commissioners had made findings of fact, which Cross J. plainly thought unsatisfactory, that the taxpayer personally had not been guilty of wilful default but that his accountant was so guilty on behalf of the taxpayer. The taxpayer on appeal argued that the section required the taxpayer expressly or impliedly to have authorised or ratified the act of wilful default by his agent. The Crown argued that the section covered the act of an agent acting on behalf of the taxpayer as principal even when the principal did not know about the act. Cross J. thought the words "on behalf of" perfectly clear and should not be restricted in the way contended for by the taxpayer. It was never suggested that it was sufficient that the act should have been done by someone merely acting for the benefit of the taxpayer. For my part I do not see that this case advances Mr. Park's contentions. It provides an illustration of the ordinary meaning of the phrase "by or on behalf of" as applying to an act done by a person or his agent. Next, Mr. Park referred me to the use of the words "on behalf of" in respect of representative actions as appearing from the notes in The Supreme Court Practice 1985 [note 15/12/4, p. 205] and in various cases. One, Markt & Co. Ltd. v. Knight Steamship Co. Ltd. [1910] 2 K.B. 1021, related to the predecessor, prior to 1962, of R.S.C., Ord. 15, r. 12, that is to say the former Ord. XVI, r. 9, which, it is to be noted, all persons having the same interest in a cause or matter.

It is clear that a representative plaintiff or defendant is authorised to sue or to be sued on behalf of himself and others in the like interest and that is how such a person is frequently described, notwithstanding that the others in the like interest may not know, or approve, the actions taken by the representative. There, as it seems to me, the context is one of representation, the court supplying the procedure whereby those in the like interest are treated as being before the court and bound by the decision of the court although they are not, in fact, personally present. The concept of benefit is not the primary connotation. The shareholder suing in a derivative action on behalf of himself and other shareholders sues as the representative of all the corporators of the company. In any event the use of the words "on behalf of" in what has been called the time-honoured phrase "on behalf of himself and other shareholders," or when otherwise used to denote a representative capacity, is a somewhat different use of language from that contained in the statutory context with which I am concerned where one is looking to see if what has been done was done by or on behalf of a person.

Mr. Park also pointed to various uses of the words "on behalf of" in ordinary parlance, for example, when a person says that he is acting on his own behalf. As he rightly said, there is a sense there in which the person means he is acting for his own benefit, although even there I would say that the notion of representation is commonly present in that the person suggests that he acts in his own capacity and does not represent others and is not represented. But again it seems to me to be a long way from the context which I must consider.

Mr. Park advanced an argument based on the no doubt common case of research being sub-contracted. He submitted that in circumstances where A undertakes research on behalf of C and A sub-contracts part of the work to B, it would be absurd if C were not entitled to an allowance in respect of work performed by B, in circumstances where C was the ultimate paymaster. That result, he submitted, could only be on the footing that the research was, within the meaning of section 91, undertaken by B. on behalf of C in the sense of for the benefit of C. I am not persuaded that that necessarily follows. Mr. Park's example assumes that "research undertaken" means no more than research done or performed. As at present advised, I think that "undertaken" carries a significance greater than mere performance and is wide enough to cover research for the performance of which the claimant or his agent has the direct responsibility. Mr. Park made a powerful appeal to the common sense of the matter: why, he asked, should a United Kingdom company which has incurred substantial expenditure on exploration for oil which, if found, will belong to it directly and absolutely not be entitled to obtain an allowance for that expenditure? If it were for me to lay down the policy I would find it hard to resist that argument; but I can only be guided by the restrictive language of the section as enacted by Parliament. As I have said, the point is a short one and it seems to me, as it did to the commissioners, that the statutory language requires more than a consideration of where the benefit goes. I am satisfied that Mr. Carnwath is correct in his submission that there must be a contractual link between the claimant and the person by whom the research is directly undertaken and the contractual link is one of agency or something akin thereto. I do not quite see how a representative of the claimant can figure in reality in the matter, but I am clear that the person by whom the work is undertaken must be responsible to the claimant and in its ordinary significance the relationship is one of agency. Under these circumstances I must dismiss this appeal.Appeal dismissed with costs.