Emmerson (HM Inspector of Taxes) v Computer Time International Ltd ((in Liquidation))
| Jurisdiction | England & Wales |
| Judgment Date | 11 February 1977 |
| Date | 11 February 1977 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
Corporation tax-Whether sum representing apportioned part of rent and services paid by liquidator of taxpayer company an allowable deduction in computing chargeable gains arising on disposal of company's tenancies-Finance Act 1965 (c. 25), Sch. 6, paras. 4(1)(b) and 5(1) and (2).
The Company's business premises were leasehold, rents being payable quarterly in advance. There was a covenant not to assign without the landlord's consent. The quarter's rent due on 25th March 1970 had not been paid when on 24th April the Company went into liquidation. The liquidator decided to retain the leasehold premises with a view to assigning them. The landlord agreed to their assignment subject to payment in full of rent arrears. The assignments gave rise to chargeable gains, and out of the proceeds the liquidator paid to the landlord £6,131 for arrears of rent and other tenant's outgoings in respect of the period from the commencement of the liquidation to the date of the assignments.
The Special Commissioners held (1) that the liquidator's purpose, in agreeing with the landlord to pay the arrears, was to obtain the right to assign the lease free from the threat of re-entry, and that this benefit enhanced the value of the lease and, accordingly, the deduction was allowable under para. 4(1)(b); and (2) that the exclusion provisions of para. 5(2) did not apply because the payment was a capital payment.
The Chancery Division held that the payment was properly made by the liquidator as rent; that such rent did not qualify as expenditure incurred for the purpose of enhancing the value of the asset within the meaning of para. 4(1)(b), despite the fact that the rent arrears had to be paid before realising the full value of the lease; and that even if the payment was incurred "in… preserving…title…to the asset" (within para. 4(1)(b)) it was not deductible because it was excluded by para. 5(2), being deductible in computing trading profits.
Commissioners of Inland Revenue v. Land Securities Investment Trust Ltd.45 T.C. 495; [1969] 1 W.L.R. 604 and Littlewoods Mail Order Stores Ltd. v. McGregor 45 T.C. 519; [1969] 1 W.L.R. 1241 distinguished.
In the Court of Appeal the Crown further contended that since the rent for the premises was payable when the Company was still trading, although not actually paid until the date of disposal, it fell to be deducted in computing the Company's profits, and hence was disqualified as a deduction under para. 5(1).
Held, that the decision of the Court below should be affirmed; that the payment of the arrears of rent was not a payment incurred "in…preserving …title to the asset" under para. 4(1)(b) as it was in performance of the Company's obligations under the lease and that, in the absence of any findings by the Commissioners, the Crown could not establish that the rent should be disqualified under para. 5(1).
Stated under the Taxes Management Act 1970, s. 56, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 16th February 1973 the liquidator of Computer Time International Ltd. (hereinafter called "the Company") appealed against an assessment to profits chargeable to corporation tax in the sum of £22,352 for the accounting period from 24th April 1970 to 23rd April 1971.
2. Shortly stated the question for our decision was whether a sum of £6,131 representing an apportioned part of rent and services paid by the liquidator in connection with the disposal of the Company's tenancies could be deducted in computing the chargeable gains arising on the disposal.
3. The liquidator, Mr. Bernard Phillips F.C.A., gave evidence before us and the following documents were admitted or proved in evidence:
(a) A statement of affairs of the Company at 31st March 1970 annexed to a letter dated 5th May 1970 from Bernard Phillips & Co., chartered accountants, to the Company's creditors (exhibit A).
(b) Correspondence between the liquidator, his solicitors, and Montague Burton Ltd. (exhibit B).
(c) An underlease dated 23rd June 1969 between Montague Burton Ltd. and Peter Robinson Ltd. as landlord and the Company as tenant (exhibit C).
(d) A licence dated 1st July 1970 between Burton Group Ltd. and Peter Robinson Ltd. of the first part, the Company of the second part, the liquidator of the third part and the British Oxygen Co. Ltd. of the fourth part (exhibit D).
(e) A bill of costs and completion statements by the liquidator's solicitors, Messrs. Kingsley Napley & Co. (exhibit E).
(f) A statement showing amounts due to Montague Burton Ltd. in respect of the first floor premises (exhibit F).
Copies of the above are annexed hereto as exhibits(1).
4. As a result of the evidence both oral and documentary adduced before us we find the following facts proved or admitted:
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(a) The Company was incorporated on 28th February 1969 with a nominal capital of £10,000 in 1s. shares of which £9,475 was issued. The Company carried on the business of hiring computer time. Its business was not successful and a meeting of its creditors was called in April 1970. On 24th April 1970 it was resolved that it be wound up voluntarily and Mr. Bernard Phillips F.C.A. was appointed liquidator; trading ceased on that date.
(b) The Company was the tenant of premises at 214 Oxford Street, London, from which it carried on its business. It adapted those premises to make them suitable for its business and installed electrical equipment at its own cost.
(c) The Oxford Street premises consisted of suites of rooms on the first and second floors. The Company entered into occupation of the first floor suites and agreed to pay rent therefor at the annual rate of £16,000 from 8th March 1970. The Company agreed to take a formal lease thereof for 21 years. No formal lease of the first floor suites had been granted to the Company before it went into liquidation, but the Company with the consent of the landlord spent considerable sums thereon in adapting the premises for its business purposes.
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(d) The Company became tenant of suites G1, G2 and E of the second floor of 214 Oxford Street by virtue of an underlease dated 23rd June 1969 (exhibit C). By the underlease the landlord demised the suites for 21 years from 25th March 1969 at the yearly rent of £19,000 payable quarterly in advance on the usual quarter days with an additional rent representing a proportion of the insurance of the premises. The Company also agreed to pay to the landlord £454 11s. per annum for a heating supply. By clause 2(13) of the underlease the Company convenanted not to assign, charge, transfer, or sublet, or part with, or share the possession of the demised premises or any part or parts thereof without the consent in writing of the Landlord. By clause 4 of the underlease the Landlord reserved a power of re-entry in the event of the liquidation of the Company. The terms of the clause are as follows:
(1) If and whenever any part of the said rent shall be in arrear for twenty-one days whether legally demanded or not or if and whenever there shall be a breach non-observance or non-performance of any of the covenants on the part of the Tenant or the conditions herein contained or if the Tenant (being a company) shall enter into liquidation whether voluntary or compulsory save for the purpose of amalgamation or reconstruction or (not being a company) shall become bankrupt or make any composition with creditors of the Tenant then and in any such case it shall be lawful for the Landlord to re-enter upon the demised premises or any part thereof in the name of the whole and the same to have again repossess and enjoy as in the Landlord's first and former estate anything herein contained to the contrary notwithstanding and thereupon the said term shall cease without prejudice to any right of action or remedy of the Landlord in respect of any antecedent breach by the Tenant of any of the covenants or conditions herein contained and such right of re-entry shall not be waived or prejudiced by the receipt by the Landlord (even after the service of notice on any ground or cause for the exercise of such right) of any rent accruing due after such right shall have arisen.
(e) A statement of affairs of the Company prepared by Messrs. Bernard Phillips & Co. as at 31st March 1970 (exhibit A) showed that: the Company had spent £37,213 on building improvements and electrical equipment on the premises at 214 Oxford Street; its assets had an estimated realisable value of £77,424; its preferential creditors would account for £24,085 of this sum leaving an estimated surplus for unsecured creditors of £53,339 and an estimated deficiency of £185,527 as regards unsecured creditors; the rents due to the landlord on 25th March 1970 had not been paid by the Company at the date of liquidation.
(f) On 30th April 1970 the liquidator wrote to the landlord of 214 Oxford Street requesting a licence to assign the Company's premises on the first and second floors. Having regard to the sums spent on adapting the premises and the current rise in property values, the liquidator expected to be able to obtain approximately £90,000 for the disposal of the premises.
(g) On 4th May 1970 the landlord wrote the following reply to the liquidator's letter:
Thank you for your letter dated the 30th ultimo and I must first point out that all negotiations for Computer Times proposed tenancy of the first floor suites were subject to completion of a formal lease. They were allowed to enter the premises to carry out works entirely at their own risk, and subject to reinstatement of the premises, should the lease not be completed. Thus we contend that Computer Time International Limited, have no interest whatsoever, in...
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