Vodafone Cellular Ltd & Others v Shaw [1997] 69TC376
Citation:Vodafone Cellular Ltd & Others v Shaw [1997] 69TC376
Rule of thumb: If an organisation buys out a contract, what is this considered to be for tax purposes? It is not an ‘expense’ but rather it is an ‘investment’.
Judgment:
The facts of this were that Voafone operated a holding company system where they had one holding company and other subsidiaries. They had one subsidiary where people paid to operate the telecommunications network, and another subsidiary where people actually bought the phones. There was cutting edge new mobile phone technology out and Vodafone paid a company called Millibank money (i) to explain how to use the system, and (ii) for the actual handheld devices. Vodafone paid Millibank a significant amount of money for the use of this system and it was a long term deal. The know-how was paid for by the holding company and the use of the devices was paid for by a subsidiary. After some time, it became clear that the technology had become outdated and Vodafone had struck a bad deal with Millicom. Vodafone paid Millibank a one-off fee to get out of the deal and cut it short. The Court held that this payment by the holding company constituted an investment rather than an operating expense, meaning that this sum was considered to be plant investment rather than day-to-day expenses. The Court held that this was not for the exclusive purpose of the trade of holding company services – human resources etc, but benefited all of the subsidiaries meaning that there was an investment aspect to it as well.
‘But the principle that a payment made in order to commute or discharge a liability to make recurring revenue payments is itself a revenue payment is subject to an important qualification. If the liability to make recurring revenue payments is reduced or brought to an end by the modification or disposal of an identifiable capital asset, then any payment made for the modification or disposal is itself a capital payment...The principles derived from the foregoing survey of the authorities are sufficient to satisfy me that the fee agreement was not a capital asset, that it was a liability but only because it was likely to entail a heavy drain on the annual income of the taxpayer, and that by cancelling it the taxpayer did not obtain “an enduring benefit” for its trade in the sense of which that expression is used in this context. It obtained a reduction of its annual revenue expenditure but nothing more. It follows in my opinion that the payment of $30m by which it obtained that reduction was a revenue payment’. (Millett J)
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