E.C.C. Quarries Ltd v Watkis (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 26 June 1975 |
| Date | 26 June 1975 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Corporation tax, Schedule D-Trade-Computation of profits-Deductions -Expenses-Sand and gravel business-Whether cost of unsuccessful applications for planning permission capital or revenue expenditure.
The Appellant Company incurred expenditure in connection with unsuccessful applications for planning permission to extract sand and gravel from three sites. The planning applications, if granted in respect of all three sites- though not asked in respect of all three sites-would have enabled the Company's activities to be pursued at each site until well after the year 2000. The expenditure was treated as revenue expenditure in the Company's accounts.
On appeal against assessments to corporation tax for the accounting periods to 30 September 1968 and 1969 the Company contended that the expenditure did not create any asset; permission to develop merely removed an impediment affecting the use of the land; and accordingly the expenditure was of a revenue nature deductible in computing the Appellant's profits for corporation tax. The accountants for the Company and an independent accountant gave evidence which was not contradicted that this treatment of the expenditure in the accounts was in accordance with the general principles of commercial accounting.
For the Crown it was contended that the expenditure was incurred to obtain raw materials over a long period and was therefore incurred not in earning profits but in order to make profits possible; that the acquisition of planning permission to work minerals was in the nature of the acquisition of a right or creation of a new asset; alternatively that it was an improvement of existing assets; thus the expenditure was capital and not revenue expenditure. The Special Commissioners held that the expenditure was capital. They considered that the correctness for tax purposes of the accountancy practice of debiting the costs of planning applications to revenue account depended on the correctness of their decision on the question of law.
Held, that the expenditure in connection with the planning applications was incurred for the purpose of securing a permanent alteration to the nature of the land which the Company owned or occupied; it was a lump sum and was intended to procure an enduring advantage static in nature in the sense that it was not the planning permission which would produce the profits but the subsequent operations of working and winning the minerals. The accountancy evidence was not sufficient to persuade the Court that the expenditure was of a revenue nature.
Stated under the Taxes Management Act 1970, s. 56, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 29 and 30 January 1974 E.C.C. Quarries Ltd. (hereinafter called "the Company") appealed against the following assessments to corporation tax:
£ |
|
Accounting period to 30.9.68 |
500,000 |
Accounting period to 30.9.69 |
875,000. |
2. The agreed questions reported to us for our decision were:
(a) Whether expenditure incurred by the Company in connection with applications for planning permission to extract sand and gravel from land owned or leased by the Company was to be disallowed in computing the Company's income for corporation tax purposes on the ground that the expenditure was capital expenditure; and
(b) Whether expenditure incurred by the Company in connection with the variation of the lease hereinafter mentioned was to be disallowed in computing the Company's income for corporation tax purposes on the ground that the expenditure was capital expenditure.
(c) The Company, while not conceding any point of law, accepts our decision under para. (b) above.
3. The following witnesses gave evidence before us:
(a) Richard Francis Silverlock (hereinafter called "Mr. Silverlock"), Fellow of the Royal Institution of Chartered Surveyors,
(b) George Duncan (hereinafter called "Mr. Duncan"), chartered accountant and partner in the firm of Messrs. Allan, Charlesworth & Co., auditors to the Company,
(c) Joseph Barron Sewell (hereinafter called "Mr. Sewell"), chartered accountant and partner in the firm of Messrs. Price, Waterhouse & Co.
4. The following documents were proved or admitted before us:
(a) Agreed statement of facts.
(b) Audited balance sheet and accounts of the Company for the years ended 30 September 1968 and 30 September 1969, together with schedule of legal and professional charges for those years.
(c) Copy Inspector's report dated 8 October 1968 to the Minister of Housing and Local Government.
(d) Copy decision dated 18 July 1969 of the said Minister.
(e) Copy lease dated 8 August 1933.
(f) Copy lease dated 10 July 1947 (hereinafter called "the 1947 lease").
(g) Copy deed of variation dated 21 October 1968 (hereinafter called "the deed of variation"), varying the 1947 lease.
(h) Copy statements of standard accounting practice (No. 2; Disclosure of Accounting Policies (issued November 1971) by the Institute of Chartered Accountants in England and Wales).
(i) To save expense, copies of such of the above as are not incorporated herein or not annexed hereto as exhibits are available for inspection by the Court if required.
5. The following facts were agreed between the parties prior to the hearing:
(2) The Company is a wholly owned subsidiary company of English China Clays Ltd. The Company's registered office was at all material times at St. Stephens House, Exeter, in the County of Devon, and its principal activities are the extraction and preparation for sale, and selling of stone and gravel and the manufacture of products based on these materials for the building and construction industry. The Company received its present name in 1958, having been previously called the South Hams Quarry and Concrete Co. Ltd. The South Hams Quarry and Concrete Co. Ltd. and other companies associated with it were acquired by English China Clays Ltd. in December 1957.
(3) The Company operates from quarries, pits and works at some 30 locations principally in the south-western counties and in Leicestershire, the Channel Isles and elsewhere. These mineral deposits are mainly on freehold land owned by the Company, but there are certain leasehold deposits, the most important of which is located at Blackhill, situate at Woodbury Common in East Devon.
(4) One of the companies acquired by English China Clays Ltd. in 1957 was the Blackhill Stone Co. Ltd. which then had the benefit of the 1947 lease granted by Lord Clinton and others to work sand and gravel from the Clinton Estate for a term of 21 years from 24 June 1954 on the terms and conditions referred to in the lease. The 1947 lease also contained an option to renew the term for a further 21 years from 24 June 1975. The 1947 lease and option contained therein were subsequently assigned to the Company. The 1947 lease covered extensive areas including the area generally known as "Blackhill" and a further area of common known as "Colaton Raleigh".
(5) At the date of its acquisition by English China Clays Ltd. Blackhill Stone Co. Ltd. had the benefit of planning permission for the winning and working of sand and gravel from approximately 32 acres at Blackhill Quarry.
(6) Another company acquired by English China Clays Ltd. in 1957 was J. & C. Bent Ltd. which then owned the freehold of a large sand and gravel deposit at Rockbeare, some seven miles from Blackhill. At Rockbeare there is a large manufacturing complex producing many types of concrete products and mainly utilising sand and gravel won from the adjacent quarry. The freehold of Rockbeare Quarry was subsequently transferred to the Company.
(7) At the time of its acquisition by English China Clays Ltd. J. & C. Bent Ltd. had the benefit of a planning permission for the winning and working of sand and gravel from 56 acres at Rockbeare Quarry, of which part had already been worked.
(8) In 1964 the Company, with a view to acquiring a reserve as a medium term replacement for Rockbeare Quarry, commenced negotiations with Sir John Kennaway for the acquisition of mineral bearing land at Straitgate Farm and Lowlands Farm, Ottery St. Mary, Devon. The freehold of this land, comprising 150.125 acres, was acquired early in 1965.
(9) At the time of its acquisition by the Company Straitgate Farm and Lowlands Farm did not have planning permission for the winning and working of minerals.
(10) Shortly after the acquisition of the mineral bearing land at Straitgate Farm and Lowlands Farm in 1965 the Company commenced the preparation of a planning application for permission under the Town & Country Planning Acts to win and work sand and gravel from Straitgate Farm and part of Lowlands Farm (as a subsequent replacement for Rockbeare) and also from an area at Blackhill, being a continuation of the Company's existing workings. In addition, the Company decided, in consultation with its landscape architect and other advisers, to prepare a plan for the winning and working of sand and gravel from Colaton Raleigh, such plan being an alternative to the proposed extension at Blackhill. This decision was arrived at on the basis that the Colaton Raleigh site could offer greater potential for use for other purposes after extraction had finished than the Blackhill extension.
(11) It was at all times, and still is, the Company's view that as much detailed work as possible should be completed before the submission of a planning application for mineral working so that the Local Planning Authority (in this case Devon County Council) and the public at large have all possible opportunity of assessing and investigating the Company's plans. In addition it is often of advantage to carry out certain landscaping and planting prior to the commencement of working. Before...
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Market South West (Holdings) Ltd v HMRC
...in the process.’” 23. An example of capital expenditure relating to a planning permission is found in ECC Quarries Ltd v Watkis (1975) 51 TC 153. There expenditure was expended on unsuccessful application for planning permission to extract sand and gravel from three sites that it owned but ......
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Markets South West (Holdings) Limited v The Commissioners for HM Revenue and Customs
...in the process.’” 23. An example of capital expenditure relating to a planning permission is found in ECC Quarries Ltd v Watkis (1975) 51 TC 153. There expenditure was expended on unsuccessful application for planning permission to extract sand and gravel from three sites that it owned but ......