Johnston (Inspector of Taxes) v Britannia Airways Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 07 July 1994 |
| Date | 07 July 1994 |
| Court | Chancery Division |
Chancery Division.
Knox J.
Ian Glick QC and Alan Griffiths (instructed by the Solicitor of Inland Revenue) for the Crown.
Andrew Park QC and Felicity Cullen (instructed by Norton Rose) for the taxpayer.
The following cases were referred to in the judgment:
Edwards (HMIT) v Bairstow & Anor ELR[1956] AC 14
Gallagher v Jones (HMIT) WLRTAX[1994] 2 WLR 160; [1993] BTC 310
Minister of National Revenue v Anaconda American Brass LtdELR[1956] AC 85
Odeon Associated Theatres Ltd v Jones (HMIT) WLR[1971] 1 WLR 442
Southern Pacific Insurance Co (Fiji) Ltd v Commr of Inland Revenue (Fiji) TAX[1986] BTC 181
Southern Railway of Peru Ltd v Owen (HMIT) ELR[1957] AC 334
Willingale (HMIT) v International Commercial Bank Ltd ELR[1978] AC 834
This was an appeal by the Revenue against a decision of the special commissioners that an airline could deduct the anticipated cost of major jet engine overhauls on an accruals basis over the three or four-year period before the next overhaul.
The taxpayer operated a fleet of 29 Boeing 737 aircraft together with 71 engines. Under the Air Navigation Order 1985, an aircraft was not allowed to fly unless there was in force a certificate of airworthiness which, in the case of the Boeing 737, would only be issued if each engine had received a major overhaul every 17,000 flying hours. On average the taxpayer's aircraft completed 17,000 hours over a period of three or four years.
For its accounting periods ending 31 December 1978 to 1987 the taxpayer included in its profit and loss account expenditure in respect of major overhauls of engines accrued on the basis of the number of hours flown.
The taxpayer appealed against the Revenue's refusal to accept the accruals method of dealing with the engine overhauls.
The evidence for the taxpayer was that the accruals method of dealing with major engine overhauls was in accord with the ordinary principles of commercial accounting. It conformed with the four fundamental accounting principles set out in para. 14 of Statement of Standard Accounting Practice 2: the going concern concept; the accruals concept; the consistency concept; and the concept of prudence. The second and fourth were of particular relevance.
Two other possible methods of dealing with engine overhauls were used by some airlines. One was the "capital and amortise" method involving making provision for the expenditure after the event as the hours which the aircraft was permitted to fly before the next overhaul were used up. The other, used by British Airways, which had its own workshops and a continuous flow of engines to overhaul, was to include the expenditure in the accounts in the period in which the overhaul was carried out.
The evidence given by the accounting adviser to the Revenue was that, although the accruals method gave a true and fair view of the taxpayer's position, nevertheless the capital and amortise method should be used.
The special commissioners accepted the evidence for the taxpayer. Not only did the accruals method accord with the ordinary principles of commercial accountancy but it was best suited to give a true and fair view of the company's trading position. In matching the costs of a period of account with the revenue earned in the same period it accorded with the principle of prudence.
The commissioners examined two questions. First whether it was legitimate for the taxpayer to compute its profit for tax purposes in accordance with the ordinary principles of commercial accounting and whether there was anything in statute or case law which precluded the accruals method from being adopted. The commissioners found as a fact that, although the figure inserted in the accounts for the future cost of engine overhauls would never be precisely accurate, the figure was accurate enough to achieve the purpose of reflecting the company's profits.
The Revenue contended that the commissioners should not have accepted the taxpayer's evidence that the accruals method had the effect of matching the costs in a period of account with the revenue earned in the same period. The commissioners' finding that major overhauls were necessary to enable the engines to be used after 17,000 hours' flying showed that the expenditure was a cost of carrying on business in subsequent periods and not a cost attributable to earlier periods. Moreover, some event might have occurred, such as the taxpayer going out of business before the next overhaul was due, so that it would be unnecessary.
Held, dismissing the Revenue's appeal:
The court was slow to accept that accounts prepared in accordance with accepted principles of commercial accountancy were not adequate for tax purposes as a true statement of a taxpayer's profits for the relevant accounting period. In particular it was slow to find a judge-made rule of law which prevented such accounts from complying with tax legislation. Equally, the court was reluctant to interfere in accountancy matters with determinations of fact by tribunals to whom issues of fact were entrusted by legislation. There was no legal basis for excluding any of the three ways of attributing the cost of engine overhauls to a period or periods of accounting. Which of the three was to be adopted was essentially a matter for accountancy judgment and the special commissioners were entitled to accept the taxpayer's accountancy evidence: Southern Railway of Peru Ltd v Owen (HMIT) ELR[1957] AC 334 at p. 360 and Gallagher v Jones (HMIT) TAX[1993] BTC 310 followed.
1. On 8, 9, 10, 11, 15, 16 and 17 July 1991, two of the commissioners for the special purposes of the Income Tax Acts (His Honour Judge Medd OBE, QC and Mr DA Shirley) heard the appeal of Britannia Airways Ltd ("the company") against assessments to corporation tax for the accounting periods and in the sums set out below-
Accounting Period Ending |
Amount of Assessment |
£ |
|
31 Dec 1978 |
2000 |
31 Dec 1979 |
1000 |
31 Dec 1980 |
18,000,000 |
31 Dec 1981 |
22,000,000 |
31 Dec 1982 |
25,000,000 |
31 Dec 1983 |
30,000,000 |
31 Dec 1984 |
30,000,000 |
31 Dec 1985 |
13,500,000 |
31 Dec 1986 |
20,100,000 |
31 Dec 1987 |
14,000,000 |
against the refusal of a claim by the company for relief underTaxes Management Act 1970 section 33s. 33 of theTaxes Management Act 1970.
2. The question for our determination, our findings of fact on the evidence adduced and the contentions of the parties together with our conclusions in principle are set out in our decision which was issued on 6 September 1991, and a copy of which is annexed as part of this case.
[Paragraphs 3 and 4 listed the witnesses who gave evidence and the documents before the commissioners.]
5. The following cases were cited to us:
Bernhard v Gahan (HMIT) TAX(1928) 13 TC 723
Duple Motor Bodies Ltd v Ostime (HMIT) TAX(1961) 39 TC 537
Edward Collins & Sons Ltd v IR Commrs TAX(1924) 12 TC 773
Gillatt and Watts v Colquhoun (Surveyor of Taxes) TAX(1884) 2 TC 76
IR Commrs v Titaghur Jute Factory Co Ltd TAX(1977) 53 TC 675
James Spencer & Co v IR Commrs TAX(1950) 32 TC 111
Lloyd Cheyham & Co Ltd v Littlejohn & Co [1986] Palmers Company Cases 389
Lothian Chemical Co Ltd v Rogers (HMIT) TAX(1926) 11 TC 508
Monthly Salaries Loan Co Ltd v Furlong (HMIT) TAX(1962) 40 TC 313
Naval Colliery Co Ltd v IR Commrs TAX(1928) 12 TC 1017
Odeon Associated Theatres Ltd v Jones (HMIT) WLRTAX[1971] WLR 442; (1971) 48 TC 257
Southern Railway of Peru Ltd v Owen (HMIT) ELRTAX[1957] AC 334; (1956) 36 TC 602
Roebank Printing Co Ltd v IR Commrs TAX(1928) 13 TC 864
Smith's Potato Estates Ltd v Bolland (HMIT) TAX(1948) 30 TC 267
Sun Insurance Office v Clark TAX(1912) 6 TC 59
Sun Life Assurance Society v Davidson (HMIT) TAX(1957) 37 TC 330
Symons (HMIT) v Weeks & Ors TAXTAX(1982) 56 TC 630; [1983] BTC 18
Whimster & Co v IR Commrs TAX(1925) 12 TC 813
Willingale (HMIT) v International Commercial Bank Ltd ELR[1977] AC 834
6. Following our decision in principle figures were agreed between the parties and we issued our determination on 5 December 1991, accordingly.
7. Immediately after the determination of the appeal the Revenue declared their dissatisfaction therewith as being erroneous in point of law and on 20 December 1991, required us to state a case for the opinion of the High Court pursuant to Taxes Management Act 1970 section 56s. 56 of the Taxes Management Act 1970, which case we have stated and do sign accordingly.
8. At the request of the company, made in response to a draft of this case which we circulated to the parties for comments, we supplement the findings in our decision in the following respects.
(2) In our decision we summarise the opinions of Messrs Brendon, Munson and Frith on a number of accounting matters. We find that all the opinions so summarised are in accordance with correct principles of commercial accountancy.
(3) The sources which Britannia uses in calculating the provisions are reliable and complete.
(4) Britannia does not discount the provision to allow for the fact that the cash expenditure will be incurred in future; equally, however it does not inflate the provisions to future values.
9. In response to the draft of this case, the Revenue's comments and additional material extended to a letter dated 27 May 1992 which mentioned the decision of Scott J in Consolidated Goldfields plc v IR Commrs TAX[1990] BTC 263, contentions of the Revenue, suggested amendments to the draft case in addition to manuscript amendments made in the draft case, additional findings of fact and correspondence (17 May to 2 July 1991) concerning (1) the exchange of expert's reports (2) Revenue bundles (3) notes of meetings.
We have carefully considered the letter of 27 May 1992 and the additional material sent therewith in the light of Scott J's judgment. We have adopted some very minor alterations to the draft case but no more having regard to the documents put before us at the hearing and the transcripts of the proceedings all of which are available to the...
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