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Capital Allowances |
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24A.1.5.3 A Special Case—Non-Recourse Finance |
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Under a non-recourse finance arrangement the lender does not seek repayment from the borrower personally but is content with some other source, eg the stream of income from the asset. Such loans are common in extraction industries, where the bank is content to be repaid from the stream of money flowing from the ore extracted. However, such arrangements have also been used in tax avoidance schemes. The present status of expenditure financed by non-recourse loans is unclear following the opaque speech of Lord Templeman in Ensign Tankers (Leasing) Ltd v Stokes.27 In principle, as Millett J had held at first instance, the fact that a borrower who obtains a non-recourse loan incurs no personal liability to repay the lender ought to be irrelevant; the capital allowance legislation is concerned with the taxpayer’s ability to spend it in acquiring the asset, not with the taxpayer’s liability to repay the lender.28 In the House of Lords, Lord Goff explained that the non-recourse nature of the loan was only one of the elements which enabled him to conclude that this expenditure had not been incurred by the taxpayer; other factors included the fact that the lender (L) was also the (US) company producing the film, that the money was paid into a special bank account opened at a bank nominated by L, and that when the money was paid in by L an identical sum was repaid by the taxpayer to L out of the same account on the same day. On such facts Lord Goff found it impossible to conclude that the money paid into the account by L was in any meaningful sense a loan; the payment was simply money paid in as the first step in a tax avoidance scheme.29 Lord Templeman, however, with whom all the other judges agreed, stated that: 30 |
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‘‘By reason of the non-recourse provision of the loan agreement the loan was not repayable by [the taxpayer] or anyone else. A creditor who receives a participation in profits in addition to the repayment of his loan is of course a creditor. But a creditor who receives a participation in profits instead of the repayment of his loan is not a creditor. The language of the document in the latter case does not accurately describe the true legal effect of the transaction which is a capital investment by the ‘creditor’ in return for a participation in profits.’’ |
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After mentioning the views of Millett J, Lord Templeman went on to set out the type of facts which Lord Goff had stressed. The result is that it is unclear whether non-recourse finance never works, or whether it fails only in circumstances such as those in Ensign Tankers.31 |
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24A.1.6 Giving Effect to Allowances |
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The rules as to giving effect to capital allowances are set out in relation to each allowance. They are normally given effect in taxing the trade or other activity32 and so are claimed in the return of income from that source. Sometimes, where there is no relevant source, the allowance must be claimed in another way.33 |
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