Donald Fisher (Ealing) Ltd v Spencer (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 30 January 1989 |
| Date | 30 January 1989 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal.
Kerr, Balcombe and Woolf L.JJ.
Mr. Alexander Hill-Smith (instructed by Somers & Co., Ealing) for the company.
Mr. Alan Moses (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgments:
County Personnel (Employment Agency) Ltd. v. Alan R. Pulver & Co. WLR[1987] 1 W.L.R. 916
Gray (H.M.I.T.) v. Lord Penrhyn TAX(1937) 21 T.C. 252
London and Thames Haven Oil Wharves Ltd. v. Attwooll (H.M.I.T.)ELR[1967] Ch. 772
Rolfe (H.M.I.T.) v. Nagel TAX(1981) 55 T.C. 585
Tucker (H.M.I.T.) v. Granada Motorway Services Ltd. TAX(1979) 53 T.C. 92
This was an appeal by the taxpayer company from the decision of Walton J. ([1987] BTC 328) dismissing the company's appeal from the determination of a Special Commissioner that a sum paid to the company in settlement of a claim against an estate agent whose negligence had resulted in increased rent becoming payable by the company was an income receipt.
In 1973 the company took a lease of premises for a term of 15 years. The rent reserved by the lease was £5,000 p.a. subject to review after five and ten years. The rent review clause in the lease provided for the landlord to serve written notice on the company specifying the amount of rent required by the landlord and, unless the company served a counter-notice within a specified time objecting to the proposed rent, that rent would become payable under the lease. In December 1977 the landlord served a notice on the company reviewing the rent with effect from 6 July 1978. The company instructed an estate agent to object to the new rent proposed by the landlord and to negotiate a proper market rent. The estate agent negligently failed to serve a counter-notice in time and as a result the company became liable to pay a rent higher than the market rent for at least five years. A claim against the estate agent by the company was settled on payment of £14,000.
The question as to the nature of the payment was to be determined by asking whether the loss compensated for was of a capital or revenue nature.
The company contended that the lease was a capital asset which was fundamentally altered, and its value reduced, as a result of the estate agent's negligence. The loss was therefore a capital loss, compensated for by a capital payment.
The Revenue contended that the loss was an increased liability to pay rent which was a revenue liability deductible in the company's profit and loss account. The compensation was therefore paid for a loss of revenue and received on revenue account.
Held, dismissing the company's appeal:
There was no fundamental alteration to the lease: its terms remained the same after the agent's negligence as before although the rent was increased. The compensation was paid for the increase in rent over and above the true market value which was a revenue loss compensated for by a revenue payment. (Dicta of Willmer and Diplock L.JJ. in London and Thames Haven Oil Wharves Ltd. v. Attwooll (H.M.I.T.) ELR[1967] Ch. 772 at pp. 803- 804 and pp. 815-816; Tucker (H.M.I.T.) v. Granada Motorway Services Ltd. TAX(1979) 53 T.C. 92, distinguished.)
The taxpayer company appealed against the decision of Walton J. given on 11 June 1987 on the grounds that the judge had erred in law in supporting the findings of the Special Commissioners that the sum of £14,000 paid as damages for the negligence of the company's agent resulting in a rent higher than the true market rent for the premises becoming payable was income for the purpose of corporation tax.
Kerr L.J. This is an appeal from a judgment of WaltonJ. [1987] BTC 328 delivered on 11 June 1987. He dismissed an appeal from a decision of a Special Commissioner, who had upheld an assessment to corporation tax against the appellant taxpayer company in respect of a sum received by way of compensation on account of negligence in the operation of a rent review clause by an estate agent which had resulted in the company's having to pay a higher amount of rent for its trading premises than it would otherwise have had to pay. The issue is whether the sum received by way of compensation was of an income or capital nature. As so often in these cases, it is possible to put arguments in favour of both aspects and the court must decide between them.
The ground and first floors of 191 High Street, Acton, were used by the taxpayer company as a Bingo Club and a Snooker Centre. They held the premises under a 15-year lease dated 6 July 1973. The rent for the first five years was to be at the rate of £5,000 a year and then to be reviewed. It was either to remain the same or to be the open market value, whichever was the higher. There was a common form of rent review mechanism, whereby in the first instance the landlord would serve a notice specifying the rent required, and unless a counter-notice was served by the tenant within a specified time, objecting to the landlord's notice, then the rent specified by the landlord would be the new rent. If a counter-notice was served, the rent was to be determined by negotiation, and if that was unsuccessful by the president for the time being of the Royal Institute of Chartered Surveyors or whoever he might appoint.
The provisions governing the rent for the second review period after the lapse of ten years were similar, save that it was provided that on any view it was not to be less than the rent for the second period of five years.
On 16 December 1977 the landlord served a notice which required a rent for the second period of £12,500. That was done although he had received advice that the true open market rent was somewhere in the region of £8,750 per year.
The taxpayer/tenants then took advice from a local estate agent and valuer, a Mr. Roland Clay, who expressed the view that the proper market rent would be about £7,500. He was therefore instructed by the taxpayer to serve an appropriate counter notice and endeavour to negotiate a market rent. Unfortunately, he failed to serve the counter-notice. In the result, therefore, the landlords claimed that the rent payable from 6 July 1978 for the second period of five years was the rent specified in their notice, of £12,500.
That resulted in litigation in the Queen's Bench Division. The landlords claimed rent on the basis of their notice and, although we have not seen the proceedings, no doubt...
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