BSC Footwear Ltd v Ridgway

JurisdictionEngland & Wales
JudgeLord Reid,Lord Morris of Borth-y-Gest,Lord Guest,Viscount Dilhorne,Lord Pearson
Judgment Date05 May 1971
Judgment citation (vLex)[1971] UKHL J0505-2
Date05 May 1971
CourtHouse of Lords

[1971] UKHL J0505-2

House of Lords

Lord Reid

Lord Morris of Borth-y-Gest

Lord Guest

Viscount Dilhorne

Lord Pearson

B.S.C. Footwear Limited (Formerly Freeman, Hardy & Willis Limited)
and
Ridgway (Inspector of Taxes)

Upon Report from the Appellate Committee, to whom was referred the Cause B.S.C. Footwear Limited (formerly Freeman, Hardy & Willis Limited) against Ridgway (Inspector of Taxes), that the Committee had heard Counsel, as well on Monday the 15th, as on Tuesday the 16th, Wednesday the 17th and Thursday the 18th, days of February last, upon the Petition and Appeal of B.S.C. Footwear Limited (formerly Freeman, Hardy & Willis Limited), whose registered office is situate at Sunningdale Road, Leicester, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 23d of January 1970, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioners might have such other relief in the premises as to Her Majesty the Queen in Her Court of Parliament, might seem meet: as also upon the Case of David George Ridgway (Her Majesty's Inspector of Taxes), lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:

It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal, of the 23d day of January 1970, complained of in the said Appeal, be, and the same is hereby, Affirmed, and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellants do pay, or cause to be paid, to the said Respondent the Costs incurred by him in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments.

Lord Reid

My Lords,

1

The Appellants carry on a very large business selling shoes by retail: they have about 790 shops. They buy their shoes wholesale. Normally they fix their selling prices by adding a "mark up" of about 37 per cent. to the prices which they have paid. But for various reasons such as change of fashion or severity or mildness of the weather they often find that a particular line is not selling as well as they had hoped it would. Then they have to reduce the selling price, generally in their annual sale in January.

2

They make up their accounts on 31st December, so their stock in trade at the end of each financial year includes large quantities of shoes for which they will not receive the retail prices which they expected. The question in this case is how this part of their stock is to be valued for the purpose of determining their profit for income tax purposes.

3

It is a commonplace that a trader's profit for tax purposes must be determined by framing a profit and loss account in which there is set against his gross receipts all relevant expenditure. It has often been said that you set against the receipts all expenditure incurred in earning those receipts. But that is not quite accurate. If you manure the field in year one in order to reap the harvest in year two, no one now doubts that the cost of the manure is a proper charge against the receipts in year one although that cost produces no return until the next year. There are no statutory rules about this, and it is well settled that the ordinary principles of commercial accounting must be used except in so far as any specific statutory provision requires otherwise. The question is what is fair to the taxpayer and fair to the Revenue.

4

It has long been recognised that a fair result cannot be achieved without taking into account the trader's stock in hand at the beginning and at the end of the year. In the long run it might not much matter how this stock is valued because, if the wrong figure for the stock at the end of year one causes the profit for that year to be too low, the same figure on the other side of the account at the beginning of year two will cause the profit for year two to be to the same extent too high. But for obvious reasons it is desirable that in each separate year the profit should be determined as accurately as possible.

5

The application of the principles of commercial accounting is, however, subject to one well established though non-statutory principle. Neither profit nor loss may be anticipated. A trader may have made such a good contract in year one that it is virtually certain to produce a large profit in year two. But he cannot be required to pay tax on that profit until it actually accrues. And conversely he may have made such an improvident contract in year one that he will certainly incur a loss in year two but he cannot use that loss to diminish his liability for tax in year one.

6

This principle is subject to an exception as regards stock in trade. If it were applied logically, stock in trade must always be valued at the end of the year at cost, even if it could have been bought at the end of the year much more cheaply. But for half a century at least traders have been allowed to value such stock at the end of the year at its market price or market value at that date if that is lower than the original cost price:

7

on the other hand, the trader is not required to value his stock at market value if that is higher than the original cost. So to this extent he can diminish his profit in year one by setting against it an anticipated loss in year two. It is only an anticipated loss because the market price may move upwards before he sells the stock so that when he does sell it he gets a price equal to or greater than the original cost and so never in fact suffers any loss. If that happens the matter is put right in year two. The effect of carrying forward the stock at a valuation below cost is that in the account for year two that valuation and not the actual original cost is deemed to be the cost, and so the profit in year two is increased.

8

That exception has been expressed by the phrase "cost or market value, whichever is the lower". But that is only a shorthand convenient form of expression. It is not contended by the Crown that it is a rule of law to be interpreted as if the words occurred in a statute. It is I think accurate and adequate where there is a market in the ordinary sense.

9

A market is a place where there is sufficient trade to enable a market price at a particular time to be recognisable and where a trader can buy or sell almost immediately at that price, so that a seller can put in his pocket the full price less expenses, which can be neglected as we are not seeking mathematical accuracy. Then market price can fairly be taken to be the value of marketable goods which a trader holds in stock either for sale or consumption in his business. There is no question of such goods having a special value to the trader: otherwise he would not sell or consume them.

10

But what if there is no market in that sense? It appears to me that in principle what we must be looking for in every case is the value of the goods in stock on the day when the trader closes his annual accounts. If there is truly a market price on that day then that is the best indication of their value. If there is not then we must look for the next best way of estimating their value. It is here that we should have regard to commercial accounting practice. The last word must always be with the court. If there is a uniform accounting practice it should not be rejected without good reason. If there is not the court must choose which version appears to give the fairest and most reasonable result in the particular case.

11

Here there was no market in the ordinary sense. The shoes to be valued were largely obsolescent lines and there is no indication that any other trader wanted to buy or sell them or indeed had them available. And certainly there was no current price agreed by willing buyers and willing sellers.

12

The Crown's case, as I understood it, was that the Appellants' shops were the market and that the reduced prices at which the goods were to be offered for sale were the market prices. That appears to me to be wrong. The Appellants had to wait until customers appeared who wanted these goods at the marked prices. The goods might be unsaleable at these prices and even if they did ultimately fetch those prices the shops had to be kept running at great expense until the goods were sold. I cannot see how in such circumstances the marked reduced prices can be regarded as market prices on the date when the account was closed.

13

But we are not looking for theoretical perfection. We are looking for a solution which is not too cumbrous in operation and which produces a reasonably fair result. I have no doubt that in many, perhaps in most, cases the Crown's method fulfils these requirements. But I am not satisfied that it does so in this case where large sums are involved in rather unusual circumstances. What we are looking for is a method of ascertaining value at a particular date when there is no market and no market price. Then one method at least would be to ask what the taxpayer will ultimately get for his stock after performing all necessary operations before it can be sold and to deduct a fair estimate of the total cost of these operations. The Crown are willing to go some distance in this direction by deducting direct expenses connected with the sale, but it seems to me that in some cases that must be insufficient. Suppose a trader had such large stocks that during the next year the chief function of his shops was to sell off this stock. Surely in that case general running expenses of the shops must be brought in. To estimate the total cost of selling the stock would require elaborate costing and there would be differences...

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