Commissioners of Inland Revenue v Watson and Philip Ltd
| Jurisdiction | Scotland |
| Judgment Date | 17 January 1984 |
| Date | 17 January 1984 |
| Court | Court of Session |
Inner House, Court of Session.
Mr. A.C. Hamilton Q.C. and Mrs. A. Paton (instructed by the Solicitor of Inland Revenue for Scotland) for the Crown.
Mr. G.W. Penrose Q.C. and Mr. J.W. McNeill (instructed by Messrs. Shepherd and Wedderburn) for the company.
Corporation tax - Stock relief - Valuation of stock following change of person carrying on trade - Acquisition by taxpayer of two businesses - Taxpayer's assertion that only one trade carried on after acquisition not challenged by inspector - Whether Commissioners entitled to rely on assertion without supporting evidence - Finance Act 1976 schedule 5 subsec-or-para 9 schedule 5 subsec-or-para 21 schedule 5 subsec-or-para 23Finance Act 1976, Sch. 5, para. 9, 21, 23.
This was an appeal by the Crown against a decision of the Special Commissioners that in computing the amount of stock relief to which the taxpayer company was entitled, no adjustment of the opening stock value required to be made.
The company carried on the business of distributing foodstuffs and ancillary products. During the year in question the company had purchased two other businesses as going concerns. The Commissioners had had to decide whether the acquisition of these business brought into operation the special rules for valuation of stock contained inFinance Act 1976 schedule 5 subsec-or-para 21 schedule 5 subsec-or-para 23para. 21 and 23 of Sch. 5 to the Finance Act 1976. They had held first that these rules could apply to a situation where a company acquired the trade of another person, but secondly that the company's entitlement to stock relief fell to be calculated as if in fact they had not carried on, after the acquisition, the trades of the two businesses. On this second point they relied on an assertion by the company, not challenged by the inspector of taxes, that the company had only one trade after the acquisition. They concluded that the special rules did not therefore apply, and no adjustment to the opening stock value was necessary.
For the Crown it was contended that the Commissioners should not have relied upon the company's assertion, without supporting evidence. Further, it was argued that the inspector's silence in the face of the assertion should not have been treated as acceptance of it, and that the Commissioners must have misunderstood the inspector's attitude to this point. The case should be remitted to the Commissioners to hear the company's appeal afresh.
Held, dismissing the Crown's appeal:
It could not be said that the Commissioners had erred in disposing of the appeal on the basis that it was agreed between the parties that after the acquisition, the trades carried on by the sellers had ceased to exist. If the inspector had conducted the appeal on this basis there was no need for the company to lead evidence to establish the truth of their assertion. It was clear that the Commissioners had been under no misapprehension as to the position maintained by the inspector.
Before: The Lord President (Lord Emslie), Lord Cameron, Lord Stott.
I. On 6 October 1981 in Edinburgh the Commissioners for the Special Purposes of the Income Tax Acts heard the appeal of Watson & Philip Limited (hereinafter called "the Company") against an assessment to corporation tax in the sum of £20,000 for the accounting period to 28 October 1977.
II. The only point in issue before the Special Commissioners was how the stock relief due to the Company for the above mentioned period was to be calculated.
III. The circumstances in which the issue arose and the contentions advanced on behalf of the parties are summarised in the written Decision of the Special Commissioners of which a copy is appended to this case.
IV. The following documents were proved or admitted before us:
a Statement of Agreed Facts adjusted between the Company's auditors, Messrs. Arthur Young McClelland Moores & Co., Chartered Accountants, and H.M. Inspector of Taxes, Dundee 3rd District (Exhibit A);
Vending Agreement dated 14 February 1977 between the Company of the first part, Progress Cash & Carry Limited of the second part and Bisset Investments Limited of the third part (Exhibit B);
Vending Agreement dated 18 August 1977 between the Company and J.B. Thompson (Exhibit C);
the Company's Report and Accounts for the year to 28 October 1977 (Exhibit D);
the Corporation Tax Computation for the Company's accounting year ended 28 October 1977 (Exhibit E). (We have no record of this being referred to in the course of argument.)
The documents referred to above are at the request of the Appellants annexed hereto as exhibits and form part of this Case.
V. In addition to the cases mentioned in para. 5.4 of the Decision two other cases were referred to in the course of argument, Laycock v. Freeman, Hardy and Willis Ltd. TAX(1938) 22 T.C. 288, and R. v. General Commissioners of Income Tax for the City of London (Ex parte Gibb) TAX(1940) 24 T.C. 221.
VI. At the conclusion of the argument the Special Commissioners reserved their decision and subsequently gave it in writing on 5 November 1981 whereupon the Appellants by letter dated 9 November 1981 declared their dissatisfaction therewith and by letter dated 23 November 1981 requested that the Special Commissioners state a case for the opinion of the court which case we have stated and signed accordingly.
VII. The question of law for the opinion of the court is whether we were entitled to apply Finance Act 1976 schedule 5 subsec-or-para 9para. 9, Sch. 5, Finance Act 1976 by comparing the Company's opening and closing stock at the beginning and end of the relevant period of account without making any adjustment underFinance Act 1976 schedule 5 subsec-or-para 21 schedule 5 subsec-or-para 23para. 21 and 23 of the Schedule in respect of the two trades to which the Company allegedly succeeded during the period.
1. Watson & Philip Ltd. ("the Company") appeals against an assessment to corporation tax for the period of twelve months ended 28 October 1977 in an estimated amount of £20,000. The only point in issue in the appeal as presented to us is how the stock relief due to the Company for that period is to be calculated. During the period the Company, which carries on a business of distributing foodstuffs and ancillary products, acquired two businesses which became merged with the Company's existing business. The point in issue turns on the treatment of stock acquired when these businesses were acquired and of stock held at the end of the period in warehouses taken over with the businesses.
2. Mr. Wilks of the Company's auditors, presenting the case for the Company, asserted that after taking over the two businesses the Company carried on one trade, and only one trade, which comprised both the activities of the trade previously carried on by the Company and the activities of the two trades or businesses taken over. Mr. Wilks called no evidence to support this assertion. The extent to which the matter had been discussed or agreed with the inspector in accordance with our published request to parties in cases such as this to identify in advance matters which are agreed or in dispute as the case may be, was not disclosed to us. However, Mr. Robertson, the inspector, who presented the difficult and complex case advanced on behalf of the Revenue, did not challenge the assertion and in presenting the Revenue's case appeared to accept that as a matter of fact the trades or businesses taken over ceased to exist as separate identifiable entities and became one with, and part of, the trade of the Company. Although a more thorough examination of what occurred when the Company expanded its activities might, conceivably, have thrown light on the problem presented, we have approached that problem on the basis that in this appeal it is a matter of agreed fact between the parties that when the Company acquired the two businesses, each of the vendor companies (to borrow the language of Income and Corporation Taxes Act 1970 section 252 subsec-or-para (7)sec. 252(7)Income & Corporation Taxes Act 1970), ceased to carry on a trade and the Company began to carry on the activities of that trade as part of its trade.
3.1. Nothing in such evidence as was made available to us contradicts the conclusion that the businesses acquired became merged with the Company's business. The Director's Report for the relevant period referred to the acquisitions in these terms:
Acquisitions/expansion
During the year the group expanded its sphere of operations throughout the country by the acquisition of the following businesses -
Location(s) |
Nature of Business |
Date of Acquisition |
Rutherglen and Renton |
Cash & Carry |
February 7 1977 |
Clydebank |
Cash & Carry |
February 14 1977 |
Turriff |
Delivered Grocery |
May 9 1977 |
Glasgow |
Catering-Frozen Foods |
September 12 1977 |
The above businesses were acquired by the purchase of assets except in the case of Rutherglen and Renton which involved the purchase of the share capital of Harvie & Watson Limited.
The report went on to state that the transactions mentioned involved significant changes in the group's fixed assets, including heritable properties amounting to £364,000 and plant and machinery at £142,000.
3.2. The Clydebank Cash & Carry business was a cash and carry and ice-cream manufacturers' business ("the Progress business") purchased on terms contained in an Agreement dated 14 February 1977. The Company was to acquire the Progress business as a going concern, was to pay certain agreed sums for Fixed Assets and Goodwill and a sum to be calculated on an agreed basis for stock. The total purchase price amounted to £435,464 of which £373,530 represented the price of the stock acquired. The Glasgow Catering - Frozen Foods business was a Wholesale Fish and Frozen Foods business ("the Thompson business") which was purchased on 12 September 1977 on similar terms. The price to be paid for assets other...
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