Collyer (HM Inspector of Taxes) v Hoare and Company, Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 28 June 1937 |
| Date | 28 June 1937 |
| Court | King's Bench Division |
NO. 1049-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
Income Tax, Schedule D - Profits of trade - Deduction - Brewers - "Deficiency of rent" of tied houses - Method of computation.
In determining the amounts to be allowed as deductions to the Respondent Company, which carried on a brewing business, in respect of "deficiency of rent" under the decision in Usher's Wiltshire Brewery, Ltd. v. Bruce,6 T.C. 399, the House of Lords held that each tied house must be considered separately and that in computing the appropriate deduction for an individual tied house account must be taken of any premium paid by the tenant as well as of rent (Collyer v. Hoare and Co., Ltd., 17 T.C. 169).
On appeal against assessments under Schedule D in respect of its trading profits the Company contended that, in computing the deficiency of rent in respect of leasehold tied houses, the rent paid by it should be augmented by the annual equivalent of sums falling under the following categories (i) premiums paid by it on the grant of leases to it, (ii) the purchase price of existing leases, (iii) sums expended under covenant on alterations and improvements of licensed premises, and (iv) sums representing the amount of debt foregone on the assignment to it of a lease in satisfaction of a debt.
Held, that for the purpose of computing the deficiency of rent the figure to be compared with the rent paid by the tenant was the rent paid by the Company or the gross Schedule A assessment of the premises, whichever was the higher, and that it was not correct to take into account sums falling under any of the categories in question.
Stated under the Income Tax Act, 1918, Section 149, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the King's Bench Division of the High Court of Justice.
1. At meetings of the Commissioners for the Special Purposes of the Income Tax Acts held on the 15th and 16th May, 1935, and the 5th July, 1935, Hoare and Company, Limited, hereinafter called "the Company", appealed against assessments made upon it under Case I of Schedule D of the Income Tax Act, 1918, in respect of the profits of its trade for the years 1924-25 to 1933-34 inclusive.
2. The Company during the years in question carried on the business of brewers at the Red Lion Brewery, St. Katherine's Way, E. Following a common practice among brewers the Company had, in order to increase its trade, from time to time purchased or acquired leases of licensed houses, which it let on yearly tenancies or for periods varying from seven to twenty-one years and upwards to tenants who were tied to the Company for all the beer, wine and spirits sold in the premises let. The Company had about a thousand houses which were so let. The Company had also a few licensed houses which were let without a tie.
3. Under the decision in the case of Usher's Wiltshire Brewery, Limited v. Bruce, [1915] A.C. 433 and 6 T.C. 399, the Company was entitled in computing the profits of its trade for assessment under Case I of Schedule D to a deduction of the difference between the rents paid by it for its leasehold houses or the Schedule A assessments on its freeholds and the rents received by it from the tied tenants, this difference being hereinafter referred to as "the "deficiency of rent".
Under the later decision in the case of Collyer v. Hoare and Company, Limited, [1932] A.C. 407 and 17 T.C. 169, it was held that, in computing the deficiency of rent in respect of any tied house, account must be taken of any premium paid by the tenant for his lease as well as of the rent. It was agreed that the premium should be spread over the term of the lease, and the aggregate of the tenant's rent and the part of the annual equivalent of the premium apportioned to each year be set against the rent paid by the brewer or the Schedule A assessment of the house in order to ascertain the deficiency of rent (if any) on that house.
4. It is admitted on behalf of the Appellant that (apart from the question in issue in the present case) the sum to be taken for comparison with the rent received by the Company from a tied tenant for the purpose of computing the deficiency of rent of the house is the rent paid by the Company or the gross annual value of the house as assessed for the purpose of Income Tax under Schedule A, whichever is the greater sum.
5. It is now claimed by the Company that, in computing the deficiency of rent in respect of any leasehold licensed house acquired by the Company, any sum (falling within any of the four categories hereinafter mentioned) paid or foregone by the Company on its acquisition of the house should be similarly spread over the period of the lease and the annual equivalent of the sum in question (herein called "the extra sum") added to the sum which the Company paid in the name of rent. It was agreed that if the extra sum was to be taken into account at all its annual equivalent should be determined on the basis of the five per cent. annuity tables. There was a great number of houses held by the Company on which the point arose.
6. The sums which it is sought to treat in this way fall into one or other of four categories:-
(i) A premium paid by the Company on the grant of a lease at a yearly rent to the Company, which has let the premises to a tied tenant at a yearly rent with or without a premium. We have not thought it necessary to distinguish between cases where the Company has let the premises at a premium and where it has not because the annual equivalent of the premium received (where a premium has been charged) is added to the rent in accordance with the decision referred to in paragraph 3 hereof. The example given in paragraph 7 (a) hereof is an example of this class of case.
(ii) A sum paid on the purchase by the Company of an existing lease of premises which the Company has let to a tied tenant at a yearly rent with or without premium. The example in paragraph 7 (b) is an example of this class of case.
(iii) A sum expended by the Company on alterations and improvements in a licensed house under a covenant so to do contained in a lease of the premises to the Company, where the premises have been let by the Company to a tied tenant at a yearly rent with or without a premium. The example given in paragraph 7 (c) hereof is an example of this class of case.
(iv) The amount of debt foregone on the assignment to the Company of a lease of premises in satisfaction of a debt due to the Company, which has let the premises to a tied tenant at a yearly rent with or without premium. This arises where a lease has been granted by a third party to a person who has become indebted to the Company and has been assigned by that person to the Company in satisfaction of his debt. In such a case the cost to the Company of acquiring the lease is represented by its value at the time of its assignment. If the amount of the debt foregone exceeds such value the excess becomes the subject of a claim for allowance as a bad debt. The example in paragraph 7 (d) hereof is an example of the nature of this claim though the actual circumstances were somewhat special.
7. The following are the typical examples above mentioned:-
(a) The Red Lion, Ebury Street.
(b) By an indenture dated the 16th July, 1923, the Company was granted a lease of these premises for a term of nineteen years from Lady Day, 1923, at a premium of £1,850 and a yearly rent of £150. The annual equivalent of the premium on the 5 per cent. tables is £1,850 ÷ 12.08 or £153. The premises were let by the Company on a tenancy at a yearly rent without premium. The rent in the particular year selected was £252 14s.10d.
-
(c) The Company's claim in respect of these premises is as follows:-
£
s.
d.
Annual equivalent of premium paid by the
Company
153
0
0
Yearly rent paid by the Company
150
0
0
303
0
0
Less rent received from tied tenant
252
14
10
Company's claim
£50
5
2
(d) The Appellant contends that the Company has no claim, for the reason that it is not permissible to take into account the annual equivalent of the premium paid by the Company.
(e) The Blacksmiths Arms, Upper Caterham.
(f) On the 29th April, 1919, the Company purchased the undertaking and assets of A.C.S. & H. Crowley, brewers, of Croydon, the total purchase consideration for the brewery and licensed properties being £190,330. One of the properties so acquired was this house, which was then held for the residue of a term of ninety-nine years from the 25th March, 1877, at the yearly rent of £50. Of the total purchase consideration the sum of £2,500 was apportioned by the Company in its books as the price of this house and this figure is accepted by the Appellant.
(g) The annual equivalent of the apportioned purchase price on the tables (£2,500 ÷ 18.76) is £133.
(h) The premises were let to a tied tenant of the Company at a yearly rent of £60.
-
(i) The Company's claim in respect of these premises is as follows:-
£
s.
d.
Annual equivalent of purchase price paid
by the Company
133
0
0
Yearly rent paid by the Company
50
0
0
183
0
0
Yearly rent received from tied tenant
60
0
0
Company's claim
£123
0
0
(j)
(k) The Appellant contends that the Company has no claim, for the reason that it is not permissible to take into account the annual equivalent of the purchase price paid by the Company.
(l) Mercer's Arms and Stables, Stepney.
(m) Under and by virtue of an agreement for a lease dated 30th July, 1931, and a lease dated 29th March, 1932, these premises were demised to the Company for a term of thirty years from Midsummer, 1931, for a consideration which included an agreement by the Company to expend £1,200 at least on alterations and improvements of the premises and the payment of a premium of £1,650 and a rent of £80. Actually a sum of £1,250 was spent on alterations and improvements. The rents received from the tenant...
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