Jenners Princes Street Edinburgh Ltd v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 29 June 1998 |
| Date | 1998 |
| Court | Special Commissioners (UK) |
special commissioners decision
Mr T Gordon Coutts QC and Mr J Gordon Reid QC.
Professor JS McLeod of Ernst & Young, chartered accountants, for the appellant.
Steven Woolman, advocate, instructd by the Solicitor of Inland Revenue.
Corporation tax - Deduction in computing profits - Retail business - Provision in accounts for repairs to business premises - Meaning of "actually expended" - Whether "actually expended" meant money paid to third party - Accrual method of accounting accepted - "Actually" meant "precisely" ascertained amount of liability - Physical payment not necessary - Appeal allowed - Income and Corporation Taxes Act 1988 section 74 subsec-or-para (1)Income and Corporation Taxes Act 1988, s. 74(1)(d).
1. This appeal concerns the interpretation of the words actually expended which are to be found in section 74(1)(d) of the Income and Corporation Taxes Act 1988 ("TA 1988"). The question for our determination is whether that statutory provision prohibits Jenners Princes Street Edinburgh Ltd (the "taxpayer company") from making a certain deduction in calculating its profits chargeable to corporation tax for the accounting period ended on 31 January 1995. That deduction was the specific provision of £2.06m in respect of repairs to the premises which the taxpayer company occupies for the purposes of its trade. As at 31/1/95, the contracts for the necessary works had not been concluded; the repairs had not been carried out and no part of the sum of £2.06m had been spent i.e. paid out. These premises are the well known department store at 48 Princes Street, Edinburgh. The disputed assessment made by the Inspector under Case 1 of Schedule D is dated 21/3/97. The amount of the assessment is £3,820,003.
2. The material background facts are not in dispute. Neither Party led evidence. A Statement of Agreed Facts was provided. It included the following paragraphs-
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(i) Jenners, Princes Street, Edinburgh Limited carries on the trade of retailer from premises at 48 Princes Street Edinburgh. The building at 48 Princes Street is a category A listed building of considerable architectural and historical interest. Its exterior, which is of an ornate design, is constructed in red sandstone which, over the years, has been susceptible to decay due to atmospheric conditions and as a result, from time to time, the company has had to make repairs to parts of the building. Hitherto, repairs have been done on a piecemeal basis, as and when required.
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(ii) In 1994 the escalating costs of these repairs prompted the company to carry out a feasibility study on the possibility of a refurbishment of the exterior of the building, to restore it to its original condition, and to obviate the need for constant piecemeal repairs. This feasibility study, which cost £190,000, was completed during the accounting period ended on 31 January 1995. In the same period the Board of the company resolved to proceed with the refurbishment of the building, at an estimated cost of £2.25 million, including the £190,000 already spent and issued invitations to tender to contractors.
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(iii) In the accounting period to 31 January 1996 the company entered into a contract for the repair work to be carried out. The work was carried out between May 1995 and November 1996 - and therefore in the accounting periods to 31 January 1996 and 31 January 1997 -payments being made to contractors by the company of £796,000 during the former accounting period and £1.628 million during the latter period. The work carried out by the company was a repair of premises occupied by it for the purposes of its trade within Section 74(1)(d) of the Taxes Act 1988.
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(iv) The published accounts of the company for the year to 31 January 1995 described the work which the company proposed to carry out and its estimated cost. A specific provision of £2.06 million was made in these accounts for the repairs, being the total estimated cost of £2.25 million less the £190,000 already spent. The profit and loss account for the year shows a deduction of £2.17 million being the sum of £2.25 million less a general provision for building repairs of £80,000 which had appeared in the previous year's accounts and which was now released.
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(v) In making a specific provision for repairs of £2.06 million in their accounts for the year to 31 January 1995 the company was acting on the advice of its accountants. The directors sought, and were given, confirmation by the company's auditors that they concurred with this accounting treatment. In making the provision the company was acting in accordance with the normal principles of commercial accountancy.
3. We also record that the taxpayer company's published accounts for the periods ended 31/1/96 and 31/1/97 were also produced. There was no dispute as to their authenticity. It was also not disputed that they were prepared in accordance with sound principles of commercial accountancy.
4. The Inland Revenue made three significant concessions. In the first place, they accepted that, as noted above, in making the provision in question in their 1995 Accounts, the taxpayer company was acting in accordance with sound principles of commercial accountancy. It was not suggested that such accountancy principles should be declared to be erroneous or that the treatment of the deduction in the 1995 Accounts was imprudent. In the second place, the Inland Revenue accepted that the provision for repairs was money wholly and exclusivelyexpended for the purposes of the taxpayer company's trade within the meaning of section 74(1)(a) of the TA 1988. In the third place, they conceded that if their argument were sound, the sums subsequently spent or paid out on the repairs in question, would be deductible in subsequent years i.e. the years in which the money was spent or paid out, for the purposes of calculating the taxpayer's profits chargeable to corporation tax in such subsequent years. The issue was therefore one of timing. The latter point as to deductibility in later years was challenged for reasons which are later considered.
5. The starting point is section 74(1). It provides inter aliaas follows-
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74(1) 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-
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(a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation (e);
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(a) …
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(a) …
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(d) any sum expended for repairs of premises occupied, or for the supply, repairs or alterations of any implements, utensils or articles employed, for the purposes of the trade, profession or vocation, beyond the sum actually expended for those purposes;
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(d) …
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(d) …
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(g) any capital employed in improvements of premises occupied for the purposes of the trade, profession or vocation.
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6. It is important to rehearse the statutory background in relation to the taxation of profits of companies. Section 6 of TA 1988 provides that Corporation tax is to be charged on the profits of companies; and that profits means income and chargeable gains. By section 9 of that Act, income for the purposes of corporation tax is to be computed in accordance with income tax principles, including questions as to amounts that are or are not to be taken into account as income, the computation of income and the time when any such amounts are to be treated as arising. The income tax Schedules and Cases apply. Thus Schedule D, Case 1 applies in this appeal (Section 18 of the TA 1988). Accordingly, for the purposes of corporation tax, income is computed on the full amount of the profits or gains arising, without any other deduction than is authorised by the Corporation Tax Acts (see section 70(1) & (2)). Accordingly, in computing a company's profits for tax purposes, the only deductions that are allowed are those that are allowed for the purposes of assessing Case D Schedule 1 profits, and any other express statutory deductions. In the present appeal no specific express statutory deduction, other than section 74(1)(d) is founded upon as allowing the deduction of the sum of £2.06m.
7. It is well established that profit arising or accruing from the trade in question, for the purposes of assessing Case D Schedule 1 profits, means profits computed in accordance with sound, normal or ordinary principles of commercial accounting or accountancy. This principle has been variously expressed in many cases over the years. A selection were cited to us including BSC Footwear Ltd v Ridgeway 1970 47 TC 495 per Lord Reid at 524F-G; Lord Morris of Borth-y-Gest at 530B-C; Odeon Associated Theatres Ltd v Jones 1970 48 TC 257 per Salmon LJ at 281, and 283A; Buckley LJ at 286A-C where he quotes the opinion of Lord President Clyde in Lothian Chemicals Ltd v Rogers 1926 TC 508 at 520-521; Orr LJ at 290G; Gallagher v Jones 1993 66 TC 77 per Sir Thomas Bingham MR at 121 I-123D As noted above it is conceded that the inclusion of the provision for repairs of £2.06m in the 1995 Accounts accorded with sound principles of commercial accountancy. There was no agreement and no suggestion that it would accord with sound principles of commercial accountancy to make such a provision in the taxpayer company's accounts for any other accounting period.
8. Accordingly, unless the deduction in question is excluded by a statutory provision, it must be allowed. It was not disputed that sound principles of commercial accountancy must yield to a contrary statutory provision (see Usher's Wiltshire Brewery Ltd v Bruce 1912 6 TC 393 per Lord Parker of Waddington at 429; Lord Sumner at 436 Lord Guest in BSC above at 533A; Odeon above at 281G). This can work both ways. For example, there are some statutory deductions allowable which the ordinary...
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