HM Revenue and Customs v William Grant and Sons Distillers Ltd; Small (Inspector of Taxes) v Mars UK Ltd
| Jurisdiction | England & Wales |
| Judge | THE HONOURABLE MR JUSTICE LIGHTMAN,Mr Justice Lightman |
| Judgment Date | 12 April 2005 |
| Neutral Citation | [2005] EWHC 553 (Ch) |
| Docket Number | Case No: CH 2004 APP 0261 |
| Court | Chancery Division |
| Date | 12 April 2005 |
[2005] EWHC 553 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Lightman
Case No: CH 2004 APP 0261
Mr David Milne QC & Mr Rupert Baldry (instructed by Solicitor of Inland Revenue, Solicitor's Office, Somerset House, London WC2R 1LB) for the Appellant
Mr Graham Aaronson QC (instructed by Dorsey & Whitney, 21 Wilson Street, London EC2M 2TD) for the Respondent
Hearing dates: 14 th—16 th February 2005
APPROVED JUDGMENT
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Mr Justice Lightman
INTRODUCTION
This is an appeal by the appellant Mr Trevor Small, HM Inspector of Taxes, ("the Revenue") from a decision ("the Decision") of the Special Commissioners ("the Commissioners") released on the 8 th March 2004. By the Decision the Commissioners allowed an appeal by the Respondent Mars UK Limited ("Mars") against the assessment of the sum of £1,969,335.76 in respect of cumulative depreciation in stock of £3,039,000 in the period up to the 31 st December 1996. The important question raised in this test case is on the construction of section 74(1) of the Income and Corporation Taxes Act 1988 ("the 1988 Act"). The effect of section 74(1)(f) provides that in computing the amount of the profits to be charged under Case I or Case II of Schedule D no sum shall be deducted in respect of depreciation of capital assets. The issue of general application raised is whether this extends to a part of that depreciation which is not charged as an expense but is included as a cost in the carrying figure for stock.
Together with the appeal by Mars the Commissioners also considered a question referred to them by William Grant & Sons Distillers Limited ("Grant") under paragraph 31A of Schedule 18 of the Finance Act 1998. That referral raised the same issue as the appeal in Mars. The Decision determined the issue in both cases in favour of the taxpayer. The Revenue are appealing both decisions. Whilst the appeal by Mars lies to the High Court in London, the appeal by Grant lies to the Court of Session in Scotland and that appeal is due to be heard in May 2005. Because of the great importance of the issue of construction the Commissioners granted a Court of Appeal certificate under section 56A(2) of the Taxes Management Act 1970. The parties who have afforded me every assistance reasonably intend and anticipate that appeal from my decision will leapfrog to the House of Lords and that there will be a direct appeal from the decision of the Court of Session to the House of Lords.
STATUTORY PROVISIONS
In this judgment references to sections and schedules (unless otherwise indicated) are to sections and schedules to the 1988 Act.
Section 70 provides that for the purposes of corporation tax income shall be computed under Schedule D:
"…on the full amount of the profits or gains or income arising in the period…without any other deduction than is authorised by the Corporation Tax Acts."
Section 18(1)(a) provides that tax under Schedule D shall be charged in respect of:
"the annual profits or gains arising or accruing to any person…from any trade…"
Section 18(2) provides that tax under Schedule D is charged under the Cases set out in section 18(3) "subject to and in accordance with the provisions of the Tax Acts applicable to those Cases"; and that Case I is tax in respect of any trade carried on. Section 60(1) provides:
"…tax shall be charged under Cases I and II of Schedule D on the full amount of the profits or gains of the year …."
The critical section in this case is section 74 which provides that certain amounts are not allowable in computing taxable profits. Section 74(1) (so far as material) reads as follows:
"General rules as to deductions not allowable.
Subject to the provisions of the Tax Acts, in computing the amount of the profits or gains to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of—
(f) any capital withdrawn from, or any sum employed or intended to be employed as capital in, the trade, profession, or vocation…"
The effect of section 74(1)(f) is that no allowance for depreciation can be made in ascertaining the taxable profits of that year: Addie & Sons v. CIR (1875) 1 TC 1. Alternative provision for depreciation may however be available under the separate statutory provision under which fixed assets may qualify for capital allowances on plant and machinery.
I should also set out section 42 of the Finance Act 1998 ("the 1998 Act"):
"42 Computation of profits of trade, profession or vocation.
(1) For the purposes of Case I or Case II of Schedule D the profits of a trade … must be computed in accordance with generally accepted accountancy practice, subject to any adjustment required or authorised by law in computing profits for those purposes….
(3) This section applies to periods of account beginning after 6 th April 1999."
The 1998 Act only came into force as from the 6 th April 1999, but this provision is declaratory of the previous (and accordingly applicable) law: see Gallagher v. Jones [1993] STC 537 ("Gallagher").
HISTORY
Mars is a subsidiary of Mars Incorporated, a United States company. Mars manufactures food for human consumption and pet food.
In Mars's annual report for the financial year ended the 28 th December 1996, the profit and loss account stated the company's profit on ordinary activities before taxation of £50,097,000 after charging £41,823,939 in respect of depreciation on tangible fixed assets (see Note 5 to the accounts on page 13). Mars's balance sheet recorded that as at the 28 th December 1996 Mars held stock valued at £131,398,000. Note 10 to the accounts (on page 16) recorded that "At 28 December 1996, depreciation of £3,039,000 had been included in the stock valuation". The basis for this treatment was set out in the accounts' "Statement of accounting policies" at (c) on page 6:
"In the case of manufactured products, cost includes all direct expenditure and production overheads, including a share of manufacturing depreciation, based on the normal level of activity."
The auditors certified that the accounts showed a true and fair view. In its tax computation for the accounting period ended 31 st December 1996 Mars added back to the figure of profit before tax of £50,096,843 depreciation of £41,823,939 in respect of tangible fixed assets but subtracted the amount of £3,039,000 in respect of depreciation in unsold trading stock. The Revenue took the view that the subtraction of the sum of £3,039,000 ought not to be allowed and made the assessment. The Special Commissioners by the Decision allowed the appeal by Mars.
THE DECISION
The Decision began by setting out the issue to be determined and how it arose:
"7. We have adopted three definitions agreed by the expert witnesses. 'Gross depreciation' is the gross amount of the charge for depreciation calculated for the year on fixed assets. "Depreciation in stock" is that element of depreciation on fixed assets that is included in the carrying amount (or value) of unsold trading stock in a company's balance sheet at the end of the year. 'Net depreciation' is the gross depreciation charge after adjustment for depreciation in stock.
8. In preparing their financial statements both Appellants included in the cost of unsold trading stock the overhead costs incurred in producing the trading stock. At the end of the year depreciation on manufacturing fixed assets was treated as an overhead cost, capitalised and included in the carrying value (i.e. the balance sheet value) of closing stock and carried forward to the next year. The gross depreciation was debited in the profit and loss account followed by a simultaneous credit to the profit and loss account to adjust for the capitalisation of the depreciation in stock. The other side of the double entry dealing with this adjustment was a debit to the carrying value of closing stock (thereby increasing that carrying value by the amount of depreciation in stock). The amount of the final accounting profits was calculated by deducting net depreciation and not gross depreciation.
9. Because section 74(1)(f) of the 1988 Act prohibits, for tax purposes, the deduction of sums employed as capital in the trade, and because depreciation in respect of fixed assets is a deduction in respect of capital, the accounting profits shown in any trader's profit and loss account (although they are computed in accordance with generally accepted accounting practice) have to be adjusted for tax purposes by cancelling the deduction for depreciation. This cancelling is known as 'adding back'. In preparing their tax computations the Appellants added back the amount of net depreciation but did not add back the amount of depreciation in stock; depreciation in stock was carried forward and effectively added back in the year when the stock was sold.
10. The Inland Revenue accepted that both Mars and William Grant had computed their accounting profits in accordance with generally accepted accounting practice. However, they argued that gross depreciation, including depreciation in stock, had been deducted in the accounting period and so should be added back in the accounting period. The Appellants argued that the depreciation in stock had not been deducted from the accounting profits and so it was wrong to require it to be added back to the accounting profits for tax purposes.
11. Thus the issue for determination in the appeals was whether the amount representing depreciation in stock should be...
To continue reading
Request your trial
-
HM Revenue and Customs v William Grant and Sons Distillers Ltd; Small (Inspector of Taxes) v Mars UK Ltd
...(1888) 15 R (HL) 51; 25 SLR 451; 13 App Cas 418 Ryan v Asia Mill LtdTAX [1951] 32 TC 275[CHECK] Small v Mars (UK) LtdTAX [2005] EWHC 553; [2005] BTC 236 Sun Insurance Office v ClarkELR [1912] AC 443 Whimster & Co v Inland Revenue CommissionersENRTAX 1926 SC 20; 1925 SLT 623; 12 TC 813 Textb......
-
HM Revenue and Customs v William Grant & Sons Distillers Ltd Small (HM Inspector of Taxes v Mars UK Ltd
...Court of Session (Lord Penrose and Lord Osborne, Lord Reed dissenting) (2005 SLT 888) and Mr Justice Lightman (The Times May 11, 2005; (2005) STC 958), each allowing appeals by the Commissioners of Revenue and Customs against decisions of special commissioners in favour of the companies. Mr......
-
Abbey National Plc v Commissioners of Customs and Excise
...v GermanyTAX (Case C-427/98) [2003] BTC 5,149; [2002] ECR I-8315 Gallagher v Jones (HMIT)TAX [1993] BTC 310 Small (HMIT) v Mars UK LtdTAX [2005] BTC 236 Value added tax - Supply of goods and services - Consideration - Bad debt relief - Provision of finance for purchase of vehicles - Conditi......
-
Macquarie Internationale Investments Ltd v Glencore UK Ltd
... ... R & C Commrs v William Grant & Sons Distillers LtdUNK [2007] UKHL 15 ; ... liabilities, whether large or small. Similarly the phrase not misleading did not mean ... ...