Donald Fisher (Ealing) Ltd v Spencer (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 11 June 1987 |
| Date | 11 June 1987 |
| Court | Chancery Division |
Chancery Division.
Mr. Andrew Cosedge (instructed by Messrs. Somers & Co.) for the company.
Mr. P.I.F. Vallance (instructed by the Solicitor of Inland Revenue) for the Crown.
Before: Walton J.
The following cases were referred to in the judgment:
Gray (H.M.I.T.) v. Lord Penrhyn TAX(1937) 21 T.C. 252
London & Thames Haven Oil Wharves Ltd. v. Attwooll (H.M.I.T.)ELRTAX[1967] Ch. 772; (1966) 43 T.C. 491
Rolfe (H.M.I.T.) v. Nagel TAX(1981) 55 T.C. 585
Tucker (H.M.I.T.) v. Granada Motorway Services Ltd. WLRTAX[1979] 1 W.L.R. 683; (1979) 53 T.C. 92
This was an appeal by the taxpayer company against the decision of a Special Commissioner that a payment received by the company in settlement of a claim against its agent in negligence was a trading 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 per annum subject to review after five and ten years of the term. 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 in the sum of £12,500. The company instructed an estate agent, who had advised that a proper market rent for the property would be £7,500, to serve the appropriate counter-notice on the landlord and to try to negotiate a proper market rent. The agent negligently failed to serve the counter-notice on the company's behalf in time, and the landlord claimed that the rent payable from 6 July 1978 was £12,500 per annum. The landlord commenced an action against the company; the company disputed the validity of the rent review notice and joined the agent as a third party claiming damages for negligence. In October 1981 the action was settled on terms that the landlord agreed to accept a rent of £11,500 in lieu of the £12,500 claimed, and the agent agreed to pay the company £14,000 damages.
The company appealed against an assessment to corporation tax for its accounting period ending 5 April 1982 made on the footing that the £14,000 was a trading receipt. A Special Commissioner dismissed the appeal. The company appealed to the High Court contending that the payment was a capital receipt, being compensation for the reduction in value of a capital asset, namely the lease, which because of the agent's negligence was worth less than it would otherwise have been.
Held, dismissing the company's appeal:
1. The compensation was in respect of the increase in rent which reduced the company's trading profits. Compensation for an increase in expenditure which reduced the company's profits was the same in principle as compensation for diminution of profits and was thus a trading receipt. (London & Thames Haven Oil Wharves Ltd. v. Attwooll (H.M.I.T.) ELR[1967] Ch. 772, followed.)
2. Although it could be said that the £14,000 was paid as compensation for the diminution in the value of the lease, the only reason for the reduction in value was the increased rent. The payment did not alter or improve the lease itself.
1. On 4 March 1986 a Commissioner for the special purposes of the Income Tax Acts heard the appeal of Donald Fisher (Ealing) Ltd. ("the company") against an assessment to corporation tax for the accounting period ended 5 April 1982 in the sum of £1,000.
2. The question for determination, findings of fact on the evidence adduced, summaries of the respective contentions of Mr. W.A. Somers on behalf of the company and, of the respondent inspector in person together with the Commissioner's conclusions in principle are set out in the decision which was issued on 24 March 1986.
3. Mr. Donald Rowland Slack, a director of the company, gave evidence.
4. An agreed statement of facts was admitted in evidence.
5. The authorities cited in argument are referred to in the decision.
6. Following the decision in principle figures were agreed between the parties on 22 July 1986 and on 25 July 1986 the Commissioner adjusted the assessment accordingly.
7. The company immediately after the determination of the appeal declared its dissatisfaction therewith as being erroneous in point of law and on 28 July 1986 required the Commissioner to state a case for the opinion of the High Court pursuant to the Taxes Management Act 1970, Taxes Management Act 1970 section 56sec. 56.
8. The question of law for the opinion of the court was whether on the facts as found the Commissioner erred in holding that a sum of £14,000 received by the company during the relevant accounting period under the terms of a negotiated settlement of an action concerning the rent payable by the company for 191 High Street, Acton formed part of the profits of the company assessable to corporation tax under Sch. D, Case I.
Donald Fisher (Ealing) Ltd. ("the company") appeals against an estimated assessment to corporation tax for the accounting period ended 5 April 1982 in the sum of £1,000. The question for my decision is whether a sum of £14,000 received by the company during the relevant accounting period under the terms of a negotiated settlement of an action concerning the rent payable by the company for 191 High Street, Acton ("the property"), formed part of the profits of the company chargeable to corporation tax.
1. On 6 July 1973 the company took a lease of the property from Millmar Properties Ltd. ("the landlord") for a term of 15 years from the date of the grant of the lease.
1.1 The rent reserved by the lease was £5,000 per annum subject to reviews by the landlord at the end of the fifth and tenth years of the term.
1.2 The rent review clause in the lease provided that the landlord should serve written notice on the company specifying the amount of rent required by the landlord and unless the company served a written counter-notice upon the landlord within a specified period objecting to the amount of the proposed rent, that rent would become payable under the terms of the lease.
2. The company entered into possession of the property, which was used in connection with the company's trade of running amusement businesses. The ground floor of the property was used as a bingo club and the first floor as a snooker centre.
3. On 7 December 1977 a representative of the landlord received a letter from its agents, Messrs. Athawes, Son & Co., advising the landlord that the market rent for the property at that time was approximately £8,750 per annum but suggesting that when operating the rent review clause the landlord should specify a rental figure of £12,500 per annum payable from 6 July 1978.
4. On 16 December 1977 the landlord served a notice in writing on the company reviewing the rent for the property with effect from 6 July 1978 in the sum of £12,500.
5. The company was advised by a local estate agent, valuer and surveyor that in his opinion a proper market rent for the property would be approximately £7,500 per annum. On receiving that advice the company instructed that estate agent to serve the appropriate counter-notice upon the landlord and to try to negotiate a proper market rent. The agent negligently failed to serve the counter-notice on the company's behalf within the time specified in the lease and the landlord claimed that the rent payable thereunder with effect from 6 July 1978 was £12,500 per annum.
6. A dispute having arisen as to the rent properly payable under the terms of the lease with effect from 6 July 1978 as between the landlord and the company, the landlord commenced an action in the High Court against the company and two of its directors as guarantors under the terms of the lease. Subsequently the company's agent was joined in the action as a third party.
7. The company and its directors disputed the validity of the rent review notice served by the landlord and also claimed damages for negligence against its own agent.
8. On 21 October 1981 the action was settled before trial, the terms of the settlement being as follows:
-
(a) The landlord agreed to accept a rent of £11,500 per annum in lieu of the claimed rent of £12,500 per annum.
-
(b) The company's agent agreed to pay to the company the sum of £14,000 as damages.
-
(c) The company's agent agreed to pay the costs.
9. The company accepted a sum of £14,000 as damages from its agent on the basis of advice given by counsel to one of its directors, Mr. Donald Rowland Slack, who gave evidence before me, that such sum would be free of tax.
10. Subsequently the company tried without success to sell the lease.
11. At a later date Mr. Slack attended a public auction and successfully bid £110,000 for the freehold reversion of the property.
Mr. W.A. Somers made the following submissions on behalf of the company:
-
(A) The compensation received by the company did not constitute income of the company:
-
(2) Not all payments received are necessarily income in the hands of the recipient.
-
(3) Whether or not a payment in the hands of the recipient is income is a question of fact: London & Thames Haven Oil Wharves Ltd. v. Attwooll (H.M.I.T.) ELR[1967] Ch. 772 at pp. 803, 813 and 815.
-
(4) In order for a payment to constitute part of a company's trading income, a trade must be carried on and the receipts have to be in the course of that trade. It is not part of the company's trade to deal in leases.
-
(5) The compensation is not compensation...
-
To continue reading
Request your trial
-
Deeny v Gooda Walker Ltd (No. 2)
...equally to compensation for his liability to pay a sum of money which was a revenue expense: see Donald Fisher (Ealing) Ltd. v. Spencer [1989] S.T.C. 256. So Mr. Vos says that we need not concern ourselves with whether the employment of the managing agent was a contract made in the course o......
-
Michael Eunan Deeny and Others v Gooda Walker Ltd and Others
...two decisions of this court, London & Thames Haven Oil Wharves Ltd. v Attwooll [1967] Ch.772 and Donald Fisher (Ealing) Ltd. v Spencer [1989] S.T.C. 256. It is Mr. Eder's submission that each case was concerned with the question whether compensation received by a taxpayer was capital or inc......
-
Deeny et al. v. Gooda Walker Ltd. et al., (1996) 195 N.R. 63 (HL)
...Fir and Cedar Lumber Co., [1932] A.C. 441 (P.C.), refd to. [para. 25]. Donald Fisher (Ealing) Ltd. v. Spencer (Inspector of Taxes), [1989] S.T.C. 256 (C.A.), refd to. [para. Lewis v. Daily Telegraph Ltd., [1964] A.C. 234 (H.L.), dist. [para. 32]. Statutes Noticed: Finance Act, 1993 (U.K.), ......
-
Deeny and Others v Gooda Walker Ltd and Others
...of the Court of Appeal:London & Thames Haven Oil Wharves Ltd v AttwoollELR ((1967 Ch 772) and Donald Fisher (Ealing) Ltd v SpencerUNK ((1989) STC 256). In Attwooll's case Lord Justice Diplock had said (at p815): "Where, pursuant to a legal right, a trader receives from another person compen......