Chapter BIM35625
| Published date | 22 November 2013 |
| Record Number | BIM35625 |
| Court | HM Revenue & Customs |
| Issuer | HM Revenue & Customs |
Where the taxpayer’s trade does not comprise or include buying and selling leases, a lease is a fixed capital asset. The costs of acquiring or disposing of the lease are therefore on capital account. This will remain the case even when the disposal is for sound business reasons including cases where it is uneconomic to retain the lease.
In the case of Mallett v The Staveley Coal and Iron Company Ltd [1928] 13TC772 a colliery company made two payments to be released from the remaining term of two mining leases. Whilst the leases endured the company was required to get coal despite that being uneconomic. The company claimed that the payments to be released from the onerous leases should be allowed because:
- they secured no asset or advantage, and
- they represented the commutation of an annual charge which otherwise would have had to be met.
The courts denied relief on the following grounds:
- the company’s business was not and did not include dealing in mining leases,
- the leases were fixed capital assets of the company’s business, and
- the expense of acquiring or disposing of a capital asset was itself capital.
Rowlatt J explained why, notwithstanding that the company did not acquire any assets, the payments were on capital account; saying at page 778:
‘They have got nothing, says Mr Latter [counsel for the company], for this expenditure. Well, perhaps they have not, but there is this, that they have now got a list of leases or a field of mineral which has the advantage of being minus an undesirable part of it, instead of having one that is encumbered with an undesirable part of it…It seems to me that the whole transaction, on the clearest possible principles, is a capital transaction. But now it is put another way. The cases were referred to where payments have been made, principally to servants or members of the staff,…redeeming an annual business expenditure by a payment in one particular year instead of over a number of years, and where that is done the payments can be deducted…Here that entirely breaks down. It is not the case at all. The company do not make these payments to get rid of any annual charge against revenue in the future. They make these payments to get rid of the loss in the business or apprehended loss in the business…They are paying this money in other words in order pro tanto to go out of business. They are not meeting in advance an annual demand in the business.’
In the case of Cowcher v Richard Mills and Company Ltd [1927]...
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