Lion Company
| Jurisdiction | UK Non-devolved |
| Judgment Date | 09 December 2009 |
| Neutral Citation | [2009] UKFTT 357 (TC) |
| Date | 09 December 2009 |
| Court | First Tier Tribunal (Tax Chamber) |
[2009] UKFTT 357 (TC)
Judge Roger Berner (Chairman), John Whiting (Member)
Alun James and Anne Redston, instructed by BTG Tax LLP, for the Appellant
Ian Hutton, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
Corporation tax - deductibility of loss on written down expenditure on residential property transferred to director as bonus - treated as current asset in accounts - whether on capital or revenue account - ICTA 1988, Income and Corporation Taxes Act 1988 section 74 subsec-or-para 1s. 74(1)(e)
The tribunal decided that amounts written down in the taxpayer's accounts in respect of a property acquired by the taxpayer and on which it incurred expenditure on repairs and improvements with the intention of transferring the property in specie by way of bonus to a director were not a deductible expense in computing its profits for corporation tax purposes since the expenditure, and the loss or write-down in value, was on capital account.
The taxpayer handled the exploitation of image rights, the provision of appearances and so on for L. It was not and never had been engaged in property development. The two directors and shareholders of the taxpayer were L and his wife. A residential property was purchased by the taxpayer in 1998, with the intention of making a payment in kind to L by way of a discretionary bonus of the property, once repairs and improvements had been carried out. The taxpayer understood that that would be a NIC-efficient means of remunerating L. The purchase price was £800,000 and the overall acquisition cost of the property including associated costs and stamp duty was £850,000. During the taxpayer's period of ownership further moneys were spent by the taxpayer on repairs and improvements in the aggregate sum of around £750,000. Overall expenditure on the property therefore totalled approximately £1.6m over the accounting periods to 31 October 1998 and 31 October 1999. L and his wife were allowed into occupation of the property in February 1999 whilst it was still owned by the taxpayer, a certificate of practical completion having been issued on 12 February 1999. The occupation of the property by the directors and the use of furniture was disclosed as a benefit P11D item for 1998-99 and 1999-00 (until 30 July 1999). Subsequently the taxpayer transferred the property to them to hold as joint tenants by way of discretionary bonus for L on 31 July 1999. At the date of transfer, the property was valued at £1.2m, an independent valuation agreed with HMRC, which was approximately £400,000 less than the total cost of the property to the taxpayer including repairs and improvements.
The accounts were correctly prepared in accordance with GAAP and the property was treated in the accounts as a current asset. Over the two periods to 31 October 1998 and 31 October 1999 the taxpayer's profits were reduced by the aggregate cost of around £1.6m: £1.2m of that was represented in the accounts as the cost of the bonus (appropriately accrued for in the accounts to 31 October 1998), being the value of the property at the date of transfer, with the balance being represented as the written off costs of additions to the property in excess of that figure (accrued as to £309,041 in the accounts to 31 October 1998 and £115,498 in the accounts to 31 October 1999). The taxpayer accounted for and paid corporation tax for the relevant periods in line with the figures for profit disclosed by its accounts with only minor adjustments. In particular, no substantive adjustment was made to the amounts charged to profit and loss account in respect of the property, being for tax purposes in total £1,591,823. The taxpayer appealed against assessments in respect of accounting periods to 31 October 1998 and 1999.
There was no dispute that the amount of the bonus to L (£1.2m) was a deductible expense. The dispute was as to the treatment of the costs of the additions to the property that were written off in the taxpayer's accounts in the accounting periods to 31 October 1998 and 31 October 1999.
HMRC's case was that the loss did not arise from the trade as the taxpayer did not deal in property. The loss was a capital loss on disposal of a capital asset. It therefore fell within Income and Corporation Taxes Act 1988 section 74 subsec-or-para 1s. 74(1)(e) of ICTA 1988.
Whether the amounts written down in the accounts for the relevant periods in respect of the property was a deductible expense in computing the taxpayer's profits for corporation tax purposes.
The First-tier Tribunal (Roger Berner and John Whiting) (dismissing the appeal) said that the accounts were not determinative of matters that were questions of law and not of accountancy. The issue of whether an item was of a capital or revenue nature was one such question. That had been recognised as a matter of statute law by the enactment in Corporation Tax Act 2009 section 53 subsec-or-para 1s. 53(1) of the Corporation Tax Act 2009 of a specific provision disallowing any deduction for items of a capital nature. Therefore the taxpayer's accounting treatment, whilst in general the starting point for its corporation tax assessment, was not determinative of the capital/revenue question. The tribunal had to determine the capital/revenue question as a matter of law, and only then consider if the accounting treatment in this case persuaded it to alter that view (Associated Portland Cement Manufacturers Ltd v KerrTAX(1945) 27 TC 103, Odeon Associated Theatres Ltd v JonesTAX(1970) 48 TC 257, Heather v P-E Consulting Group Ltd (1972) 48 TC 293, ECC Quarries Ltd v Watkiss (HMIT)TAX(1975) 51 TC 153 and Small (HMIT) v Mars (UK) LtdTAX[2007] BTC 315; 78 TC 442 considered).
On the facts of the present case and in the light of the authorities the write-downs of the value of the property were on capital and not revenue account, and accordingly were non-deductible. In so concluding, the tribunal had adopted judicial common sense in all the circumstances of the case and had borne in mind that indicia might point in different ways and that what might be required was to determine where the balance lay. Applying those tests, the first step was to consider the nature of the deduction that was sought by the taxpayer. It related not to an expense as such but to the writing down of the value of an asset, which was not trading stock of the taxpayer. The asset itself was a freehold property and so had an inherent enduring quality which led to the starting assumption that, in a case where the taxpayer's trade did not include dealing in land, expenditure on the acquisition and improvement of the property was capital expenditure (Tucker (HMIT) v Granada Motorway Services LtdTAX(1977) 53 TC 92, Strick (HMIT) v Regent Oil Co LtdTAX(1965) 43 TC 1 and Pitt v Castle Hill Warehousing Co LtdWLR[1974] 1 WLR 1624 considered).
The fact that the purpose of the whole operation was, within a short period, to remunerate L by making a discretionary bonus of the property in kind could not alter the capital character of the loss or write-down in this case on the asset in question. The fact that the asset was owned for a short period only, and was intended from the outset to be held temporarily, could not change the character of an asset held on capital account to one on revenue account. Nor, on the authorities, could the purpose of the transaction be determinative, although purpose was one element, though not the sole or principal element, that had to be taken into account. To the extent that a balancing exercise was required, in essence the loss or write-down on the property was on capital account and that was not outweighed either by the short time the property was held by the taxpayer or the purpose for which the taxpayer incurred expenditure on acquiring and improving the property (Owen and Gadsdon v Brock (HMIT)TAX(1951) 32 TC 206 distinguished).
It was no answer to a prima facie assumption that the acquisition and improvement of an identified asset was on capital account to say that the asset was not for the enduring benefit of the trade. It was the quality of the asset that was relevant here. If an asset was neither trading stock nor for the enduring benefit of the trade it did not for that reason fall into revenue account. Its status had to be determined by its own particular characteristics. Nor was the loss or write-down incurred itself in the nature of a gift or bonus. The bonus here, for which a deduction had been obtained, was of the value of the property. It was not of the loss or write-down itself. That was related to the holding of the property as a capital asset. The conclusion that the loss or write-down in the value of the property was on capital account was not affected by the accounting treatment of the property as a current asset. The criteria that applied for accounting purposes and which would result in an asset being treated as a current asset were not the same as, and did not reflect, the distinction as a matter of law between capital and revenue. The relevant accounting criteria in this case concerned the early realisation of the property. As a matter of law, such criteria could not change the nature of the asset or be determinative of the capital/revenue question.
1. The hearing of this appeal was directed, pursuant to Rule 32 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, to be heard in private. Accordingly, under Rule 32(6) this decision is published in anonymised form.
2. The Appellant appeals against assessments in respect of accounting periods to 31 October 1998 and 1999. The issue for determination is whether amounts written down in the accounts for the relevant periods in respect of a property acquired by the Appellant and on which it incurred expenditure on repairs and improvements with the intention of transferring the property in specie by way of bonus to a director, is...
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