Beauchamp v F. W. Woolworth Plc

JurisdictionUK Non-devolved
JudgeLord Keith of Kinkel,Lord Brandon Of Oakbrook,Lord Templeman,Lord Oliver of Aylmerton,Lord Goff of Chieveley
Judgment Date08 June 1989
Judgment citation (vLex)[1989] UKHL J0608-1
Date08 June 1989
CourtHouse of Lords

[1989] UKHL J0608-1

House of Lords

Lord Keith of Kinkel

Lord Brandon of Oakbrook

Lord Templeman

Lord Oliver of Aylmerton

Lord Goff of Chieveley

Beauchamp (H. M. Inspector of Taxes)
(Appellant)
and
F. W. Woolworth plc
(Respondents)
Lord Keith of Kinkel

My Lords,

1

I have had the opportunity of considering in draft the speech to be delivered by my noble and learned friend, Lord Templeman. I agree with it, and for the reasons he gives would allow the appeal.

Lord Brandon Of Oakbrook

My Lords,

2

For the reasons set out in the speech to be delivered by my noble and learned friend, Lord Templeman, I would allow the appeal and restore the order of Hoffmann J.

Lord Templeman

My Lords,

3

Section 1 of the Income and Corporation Taxes Act 1970, now section 1 of the Act of 1988 of the same name and reproducing earlier enactments, directs, inter alia, that income tax shall be charged in respect of profits described in Schedule D set out in section 108 of the Act of 1970. That section directs, inter alia, that tax shall be charged in respect of the annual profits arising or accruing to any person residing in the United Kingdom from any trade. The expression "profits" is not defined, and there is no express provision for the deduction of the expenses incurred in earning profits, but it is only possible to arrive at the computation of the profits of a trade after setting against the receipts the expenditure necessary to earn them according to the ordinary principles of commercial accounting: see Lord Herschell in Gresham Life Assurance Society v. Styles [1892] A.C. 309, 323. The expression "annual profits" confirms that income tax is to be charged on profits of an income nature as opposed to capital profits: see Scottish Provident Institution v. Farmer (1912) 6 T.C. 34, 38. Moreoever, by section 130( f) of the Act of 1970, in computing the amount of the profits of a trade, no sum shall be deducted in respect of any sum employed or intended to be employed as capital "but so that this paragraph shall not be treated as disallowing the deduction of any interest." It follows that while expenses incurred in earning profits may be deducted for the purposes of assessing income tax on the profits of a trade, such expenses as may be incurred in respect of capital transactions are not so deductible. A fortiori, capital losses are not deductible from income profits. The question which arises in the present case is whether an expense or loss was incurred by a trader in earning profits, or was incurred in the course of a capital transaction.

4

The trader in question is the respondent taxpayer company F. W. Woolworth Plc. By section 238 of the Act of 1970, a company is not chargeable to income tax, but its profits are chargeable to corporation tax, "profits" include income and by section 250 the amount of any income shall for the purposes of corporation tax be computed in accordance with income tax principles. The taxpayer is resident in the United Kingdom and carries on the trade of providing and selling by retail a wide range of articles from its numerous well known chains of shops. In 1971 the taxpayer borrowed 50 million Swiss francs repayable in five years' time or earlier at the option of the taxpayer, subject to a premium for early repayment. The taxpayer converted the Swiss francs into sterling. In 1976 the taxpayer purchased 50 million Swiss francs and repaid the loan to the lender, a Swiss bank. In 1972 the taxpayer borrowed a further 50 million Swiss francs and converted them into sterling. In 1977 the taxpayer purchased and repaid 50 million Swiss francs. As a result of a fall in the value of sterling in relation to Swiss currency, the proceeds of converting 100 million Swiss francs into sterling in 1971 and 1972 were £11.4m. less than the cost to the taxpayer of purchasing and repaying 100 million Swiss francs in 1976 and 1977. The taxpayer undoubtedly incurred a currency exchange loss of £11.4m. The taxpayer claims that this loss is deductible from the profits of the retail trade carried on by the taxpayer during the period of the loan. If the loans of 100 million Swiss francs were revenue transactions, then the currency exchange loss is deductible in computing the profits of the taxpayer's trade. If the loans were capital transactions the currency exchange loss is a capital loss and is not deductible from profits. The taxpayer submits that the loans were revenue transactions; the Inland Revenue submit that the loans were capital transactions. The special commissioners found in favour of the taxpayer. Hoffmann J. held [1987] S.T.C. 279 that the commissioners had misdirected themselves in law. The Court of Appeal (Sir Nicolas Browne-Wilkinson V.C. and Nourse and Stuart-Smith L.JJ.) [1989] 1 W.L.R. 50 restored the order made by the special commissioners on the grounds that the question was one of fact and that the facts found by the commissioners were not such that no person acting judicially and properly instructed as to the relevant law could come to the conclusion that the loans were revenue transactions. The Inland Revenue appeal.

5

My Lords, the weight of authority supports the view that the question whether the transactions in the present case were of a revenue or capital nature is a question of law to be determined in the light of the facts found by the commissioners, and that a trader who borrows 100 million Swiss francs for a fixed period of five years thereby enlarges the capital employed in the trade.

6

Mr. Park who appeared for the taxpayer relied on the statement by Viscount Cave L.C. in British Insulated and Helsby Cables Ltd. v. Atherton [1926] A.C. 205, 213 that the question whether a contribution to form the nucleus of a pension fund was revenue or capital expenditure was "a question of fact which is proper to be decided by the commissioners upon the evidence brought before them in each case." And Lord Hanworth M.R. said much the same thing in European Investment Trust Co. Ltd. v. Jackson (1932) 18 T.C. 1, 13. These dicta are inconsistent with the fact that in a multitude of cases there have been disputes before the courts involving the consideration and determination of the question whether expenditure is capital or income, and that in some cases the commissioners were upheld and in other cases the commissioners were reversed, and the courts do not appear to have been inhibited from reaching their own conclusion. In Davies v. Shell Co. of China Ltd. (1951) 32 T.C. 133, 151, Jenkins L.J. said:

"I think it is recognised that these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend no doubt to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts …"

7

In Jeffrey v. Rolls-Royce Ltd. (1962) 40 T.C. 443 this House, overruling the special commissioners, held that a sum received on the sale of "know-how" was capital. Viscount Simonds said, at p. 490:

"It is common ground between the parties that the court, while paying proper regard (as to which, see Edwards v. Bairstow [1956] A.C. 14) to the facts found by the commissioners and to the inferences drawn by them from those facts, must ultimately determine as a question of law alike whether receipts by the taxpayer are capital or income for the purposes of income tax and whether expenses incurred by him are for the same purposes to be treated as incurred on income or capital account."

8

In Strick v. Regent Oil Co. Ltd. [1966] A.C. 295 the question was whether lump sums paid by an oil company to a garage owner on a lease and lease-back arrangement which tied the garage to the oil company's products were revenue or capital expenditure. Lord Reid said, at p. 313:

"The question is ultimately a question of law for the court, but it is a question which must be answered in the light of all the circumstances which it is reasonable to take into account, and the weight which must be given to a particular circumstance in a particular case must depend rather on common sense than on strict application of any single legal principle."

9

In Inland Revenue Commissioners v. Carron Co. (1968) 45 T.C. 18 the question was whether expenditure incurred in removing restrictions in the company's charter which obstructed profitable trading was expenditure on income account or was capital expenditure. Lord Wilberforce said, at p. 73:

"The second question, whether the expenditure had the character of capital or of revenue expenditure, is difficult, as this type of question invariably is. It is a question of law, so that the special commissioners' decision is open to review."

10

In Tucker v. Granada Motorway Services Ltd. [1979] 1 W.L.R. 683 the question was whether a sum paid to secure a reduction in rent was an income or a capital expenditure. Lord Wilberforce said, at p. 688:

"I add one word as to the decision of the special commissioners, who took the opposite view. It seems to me clear that to reverse their decision involves no interference with any finding of fact within their exclusive competence. The finding submitted by them to the court — clearly one of fact — has been accepted throughout. It is only on the consequence of that finding that the courts are taking a different view. That involves a pure question of law on the decided cases."

11

In the same case Lord Edmund-Davies, discussing the findings of the commissioners put forward in the form of propositions, said, at p. 692:

"In respect of each of these propositions the special commissioners cited authorities in support. In so far as the propositions embody statements of fact they must be treated as unassailable unless they do not measure up to the well-known test propounded by Viscount Simonds in Edwards v. Bairstow [1956] A.C. 14, 29. But the relevance of any facts found, the means adopted in evaluating...

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