BSC Footwear Ltd v Ridgway
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE RUSSELL,LORD JUSTICE SALMON,LORD JUSTICE MEGAW |
| Judgment Date | 23 January 1970 |
| Judgment citation (vLex) | [1970] EWCA Civ J0123-4 |
| Court | Court of Appeal (Civil Division) |
| Date | 23 January 1970 |
| Docket Number | 1965 No. 14. |
[1970] EWCA Civ J0123-4
In The Supreme Court of Judicature
Court of Appeal
(Civil Division)
(On Appeal from Mr. Justice Cross)
Lord Justice Russell
Lord Justice Salmon
and
Lord Justice Megaw
Mr. C. N. BEATTIE, Q. C., Mr. MICHAEL NOLAN. Q. C. and Mr. DENIS CAREY (instructed by Messrs. Titmuss, Sainer & Webb) appeared on behalf of the Appellant.
Mr. H. H. MONROE, Q. C., and Mr. P. W. MEDD (instructed by the Solicitor of Inland Revenue) appeared on behalf of the Respondent.
The Appellant taxpayers' trade is that of selling footwear as retailers from their many retail shops up and down the country. For the most part they acquire the footwear for their trade from the manufacturers. The question for decision concerns the correct method of ascertaining the full amount of the profits or gains of the trade of a year. Stated more narrowly the question for determination is the correct method of ascertaining the value of stocks of footwear held by the taxpayer at 1st January, 1959 and 31st December, 1959, the opening and closing dates of the accounting period forming the basis of assessment. Stated yet more narrowly the question for determination is what is the market value to be considered in the present case in applying the time honoured formula under which for income tax purposes in valuing stock in hand at the close of an accounting period (and consequently at the opening of the next accounting period) such stock is to be brought in at cost or if the market value be lower than cost, then at that lower value.
For many years the taxpayers have kept their accounts upon a basis that has been accepted by the Crown as demonstrating the full amount of their profits or gains for the relevant periods for the purposes of income tax. But a challenge to this was made for the first time by the Crown in respect of the period of 1959. Of course in the long run, since any basis of valuation must be followed consistently, it would seem that in a broad sense it makes little difference which approach to "market value" is adopted. But questions of tax are seldom viewed in the long run. The dispute before us demonstrates that the Crown considers it preferable to challenge the previously accepted system, while the taxpayer considers it preferable to adhere to it. Ours not to reason why: certainly not ours to explain why.
The full facts are set out in the findings of the Commissioners in the Stated Case. I believe that for present purposes only the barest outline will suffice.
The taxpayers operate a system, to some extent flexible, by which management fix from time to time an average "mark up" in terms of a percentage of retail selling price: say as an example 35% This produces the gross profit which is a larger percentage of cost: footwear costing £3.5.0. is aimed to sell at £5 and vice versa.
Very large stocks are carried and it is an essential part or aspect of this trade that there are sales in January and also in the summer of stock in hand at the end of the previous year. These sales are at reduced retail prices that will not of course produce the gross profit at which the percentage mark up had been, so to speak, aimed. In valuing the stock in hand at the 31st December (and consequently at the 1st January) in their accounts the taxpayers in effect Job backwards from the expected (reduced) retail prices in the sales so as to produce a figure as the value of stock on which the expected (reduced) price in the sales will reflect a mark up as previously stated: for example 35%. The calculations are meticulous and detailed. The resultant values are described as replacement values, the sums that the taxpayers say that they would be prepared to pay for the stock having regard to their estimates of future retail prices and their desired mark up percentage. This seems to me a perfectly legitimate way of presenting such a company's financial situation over the years: much evidence was given before the Commissioners by those of great experience in such matters to that effect, and I would not presume to criticise it. As a system of presenting accounts it was described as "sophisticated"a word that has in this use travelled far from its true sense. But the question for tax purposes is whether the value attributed to stock in hand by this method of calculation is properly to be described as market value, bearing in mind that for calculation for tax we start with the assumption, that stock is to be brought in at cost unless market value is shown to be lower. The Grown contends that market value in this context requires that the stock should be taken at the figures expected to be realised in due course on sale in the retail market. It is of course obvious that the taxpayers system of ascertaining replacement values will produce values lower than cost in many cases in which according to the Crown's contention market value is not lower than cost and the stock must accordingly be valued at cost. Broadly speaking the taxpayers contend that any diminution in hope of not profit on cost should be reflected in the terminal valuation, whereas the Crown contends that for Income Tax purposes a valuation below cost is permissible only when sale at a figure below cost is expected.
I must say, as I did at an early stage in argument, that I have always thought that in this context market value meant the price at which the stock could be expected in due course to be sold in the market in which the trade of selling by the taxpayer was conducted. And after extensive argument I am not persuaded that my original assumption was wrong. It seems to me to be wholly artificial to speak of the values calculated in the manner stated as the market values of the stock: the taxpayers would not dream of selling in any market at those values when they aim, in due course of selling retail, at prices showing a gross profit of over 35% of those values. Nor was it suggested that there would be then available from manufacturers the equivalent of stocks in hand at the relevant marked down values.
In my Judgment income tax law in this regard does not march step by step in the divergent footprints of the accountancy profession. Maybe it would be appropriate that for tax purposes any of several methods in this connection showing a year's profits or gains of a trade should be acceptable, as maybe the case when ascertaining the proper cost and therefore value of work in progress. But it seems to me that for tax purposes the valuation of stock in hand at market value if lower than cost has crystallised in a retail trade as the price fairly to be expected as the retail sale price of the goods in due course, assuming that (as here) a retail sale is still to be expected. The trader's market is the retail market, and while that market exists for the goods I see no Justification for turning to any other market, or for thinking that in the accustomed Judicial phrase reference is made to any other market. It is said that the Crown's contention cannot be acceptable because the formula assumes a sale on a market of the whole of all stock in hand on the very terminal date; no such sale is conceivable in the present case of all this stock in the retail market all on one day: and indeed the figures of expected sale values put forward by the taxpayers upon which the Crown relies as showing market values are avowedly on sales spread over several months. For myself I do not see that this gives rise to a problem. It seems to me that in this context market value, though it falls to be estimated at a particular date, can quite readily refer to the price that the goods will fetch when sold in due course in the relevant market.
In my view the accepted practice of entering stock in hand at cost at the terminal date of the first period and the opening date of the second period arises from the fact that theexpenditure has not contributed anything directly to the figures of gross profit in the first period. It is unused expenditure to "be carried forward into the second period in which it is estimated that it will contribute on sale to the gross profit of that period. But if it is estimated that on sale it will not contribute to the gross profit of the second period - that is if it is estimated that it will sell below cost - the shortfall is to be regarded in the course of stock valuation as irrecoverable and may properly be treated as a loss incurred in the first period. This I believe to be the basis of the principle that for tax purposes market value if below cost may be taken as the value of stock in hand. The principle relates to loss of all gross profit and more, and not to diminution.
The Crown's figures of valuation are based upon the taxpayers' estimate of retail selling prices in due courses but they allow a deduction for salesmen's commission. This it is suggested by the taxpayers reveals a fallacy in the Crown's approach, for, they say, all kinds of overheads will be involved in producing these sales, overheads that will be absorbed in the mark up involved in the taxpayers' method of valuation. I do not myself think that this shows a fallacy. Granted that market value means that which the stock is expected to produce on retail sale it seems to me logical and reasonable to look for the money expected to reach the till as a result of sales: in effect the salesman's commission does not reach the till, though in practice he does not abstract it from money handed over the counter and pocket it before paying the balance into the till.
I have not rehearsed in detail the contentions of the taxpayers which I am sure justify their method of presenting their accounts from year to year to shareholders and creditors, a method which no doubt they...
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