FC Shipping Ltd & Anor v The Commissioners for HMRC

Facts

FB Shipping Ltd and FC Shipping Ltd, UK-resident subsidiaries of Alliance & Leicester Commercial Finance plc (later Santander Asset Finance plc) carrying on a business of leasing and financing assets, acquired five ships through the novation of shipbuilding contracts originally entered into by companies in the Vroon group, incurring capital expenditure of approximately US$84m (the FB Ships) and US$79.7m (the FC Ships). Each company granted a 25-year head lease of a ship to Fortis Finance (UK) Limited, a special purpose vehicle whose obligations were guaranteed by its parent, Fortis Bank S.A./N.V.; Fortis Finance simultaneously sub-leased each ship for 25 years to Vroon operating companies which were taxed under the tonnage tax regime and which prepaid substantial portions of the sub-lease rent, the prepayment for the FC Ships being 79.85%. The appellants claimed capital allowances on the expenditure for accounting periods ended 30 June 2005, 30 June 2006, 30 June 2007 and 16 November 2011, generating losses surrendered by way of group relief. HMRC disallowed the claims on the footing that the defeased leasing rules denied allowances. The First-tier Tribunal (Tax Chamber) dismissed the appellants' appeal, holding that the interposition of a bank lessee and the guarantee removed the greater part of the non-compliance risk. The appellants appealed to the Upper Tribunal with the First-tier Tribunal's permission on four grounds.