Odeon Associated Theatres Ltd v Jones
| Jurisdiction | England & Wales |
| Judgment Date | 03 November 1971 |
| Judgment citation (vLex) | [1971] EWCA Civ J1103-3 |
| Court | Court of Appeal (Civil Division) |
| Date | 03 November 1971 |
[1971] EWCA Civ J1103-3
Lord Justice Salmon
Lord Justice Buckley and
Lord Justice Orr
In The Supreme Court of Judicature
The Court of Appeal
Civil Division
THE SOLICITOR-GENERAL (Sir Geoffrey Howe, Q.C.), Mr RODERICK WATSON, Q.C. and Mr P.W. MEDD (instructed by The Solicitor of Inland Revenue) appeared on behalf of the Crown (Appellant).
Mr F. HEYWORTH TALBOT, Q.C., Mr MICHAEL NOLAN, Q.C. and Mr DENIS CAREY (instructed by Messrs Richards Butler & Co.) appeared on behalf of the Odeon Associated Theatres Ltd. (Respondents).
The relevant extracts from the Case Stated are all set out in the learned Vice-Chancellor's lucid Judgment and I need not repeat them. I wish, however, to draw attention to certain salient facts affecting this appeal.
Odeon Associated Theatres Limited, which I will call "Odeon", carry on business as exhibitors of films. They are, and have been since the 1930s, one of the largest exhibitors of films in England and own very many cinemas throughout the country. They are now members of one of the biggest groups of companies engaged in the cinema industry in England. In the immediate post-war years, Odeon bought a large number of cinemas and cinema owning companies. The object of these purchases was (a) to prevent this branch of the industry from falling under American domination, (b) to strengthen Odeon's negotiating power in booking films, and, of course, (c) to enlarge their profits.
On 8th January, 1945, Odeon bought what had formerly been called the Regal Cinema at Marble Arch for £240,000. During the war years, owing to the then current restrictions, it had been impossible to spend more than comparatively small sums on keeping cinemas in repair. Accordingly in 1945 the cinema at Marble Arch, like all cinemas in this country, was somewhat run down. During the previous 5 years many repairs and replacements which would normally have been effected had necessarily been deferred, because it had been impossible to obtain licences to carry them out.
Nevertheless, the Marble Arch cinema at the date of its acquisition was a fully effective profit-earning asset, and the price which Odeon paid for it had not been diminished nor in any way affected by reason of its lack of repair.
During the period 1945-54 Odeon spent considerable sums of noney in making additions to building plant and equipment at this cinema. All these items were charged as capital expenditure by Odeon in their accounts. In each year from 1945 to 1954 Odeon also spent substantial sums of money on repairs and renewals at this cinema. Some of this money was charged in their accounts as revenue expenditure spent on current repairs and renewals; it was allowed without question by the Inland Revenue as a charge against Odeon's profits. On the other hand, some of the money spent during this period on repairs and renewals was charged in Odeon's accounts as revenue expenditure spent on deferred repairs and renewals.
The reason for Odeon distinguishing in their accounts between current and deferred repairs and renewals was to avail themselves of the concessions relating to their liability for Excess Profits Tax made by Section 37 of the Finance Act, 1946. This tax had been in existence from about the middle of 1940 until the end of 1946. Section 37 (ibid) provided in effect that any money spent after 1946 relating to repairs and renewals which had been necessarily deferred during the period when Excess Profits Tax was exigable should be credited against liability for that tax. Between 1947 and 1954 Odeon charged £17,708 as their expenditure on deferred repairs and renewals. The amount spent during this period on deferred repairs andrenewals obviously could not be precisely measured. The Inland Revenue challenged the figure of £17,708. Negotiations took place and the amount attributable to deferred repairs and renewals was eventually agreed with the Inland Revenue at £11,510. It was also agreed that £7,969 of that sum related to the period prior to the acquisition of the cinema by Odeon on the 8th January, 1945, and the balance of £3,541 to the pericd from 8th January, 1945, until 1st January, 1947.
The Crown contends that the several sums amounting in all to £7,969 are not revenue expenditure but capital expenditure and therefore cannot be taken into account in assessing Odeon's liability for income tax in respect of any of the fiscal years in question.
It is, I think, worth noting from Annexe 2 to the Case Stated how the expenditure of £7,969 was allocated over the years.
| 1947 | £151 |
| 1948 | £752 |
| 1949 | £352 |
| 1950 | £1602 |
| 1951 | £1118 |
| 1952 | £2701 |
| 1953 | £317 |
| 1954 | £976 |
| Total | £7969 |
It is also perhaps worth noting that the work comprised in these items includes, for example, renewing carpets, decorating, re-wiring, etc. It does not seem to me that any of this expenditure can, prima facie, properly be regarded as being in the nature of capital expenditure. It appears to me to be obviously revenue expenditure. Moreover, the first item of this expenditure was not incurred until 2 years after the acquisition of the cinema and the last not less than 9 years after the acquisition.
£7,969 may be a comparatively small sum of money, but the group of which Odeon is a member owns 564 cinemas. In many of these, the same questions arise as in the present case. The total amount of tax liability depending upon the result of this appeal is accordingly very large.
The evidence of a number of exceptionally distinguished accountants, accepted by the Special Commissioners, was that in accordance with the established principles of sound commercial accounting the disputed items of expenditure were a charge to revenue. The learned Vice-Chancellor held that in law these items were properly chargeable to revenue and that the profits for the years in question should be assessed for tax on that basis. From that Judgment, the Crown now appeals.
Few commercial questions have been responsible for so much litigation as: What is the true profit in a particular year? Sometimes this question depends, as in Duple Motor Bodies Ltd. v. C. I. R. 39 Tax Cases, page 537, upon the correct method of assessing work in progress; sometimes, as in B.S.C. Footwear Ltd. v. Ridgway (Inspector of Taxes). 1971 2 Weekly Law Reports, page 1313, upon the correct method of assessing stock in trade;and sometimes, as in the present case and many others, upon deciding which items of expenditure are to be attributed to capital and which to revenue.
In solving this question as to what is the true profit "…first the ordinary principles of commercial accounting must as far as practicable be observed, and secondly…the law relating to income tax must not be violated…that is to say, by one means or another the full amount of the profits and gains must be determined" - see Lord Simonds' speech at page 566 in the Duple. Motor Bodies case.
In the Lothian Chemical Co. Ltd. v. Rogers (H. M. Inspector of Taxes), 11 Tax cases, page 508. Lord Clyde observed at pages 520 to 521: "My Lords, it has been said time without number…you deal in the main with ordinary principles of commercial accounting. They do expressly exclude a number of deductions and allowances some of which according to the ordinary principles of commercial accounting might be allowable. But where the ordinary principles arc not invaded by Statute they must be allowed to prevail. It is according to the legitimate principles of commercial practice to draw distinctions, and sharp distinctions, between capital and revenue expenditure, and it is no use criticising these, as it is easy to do, upon the ground that if you apply logic to them they become more or less indefensible. They are matters of practical convenience, but practical convenience which is undoubtedly embodied in the generally understood principles of commercial accounting".
I confess that in the present case I find it difficult to discern any conflict between logic the established principles of sound commercial accounting. Lord Clyde was merely re-stating a principle of law which has been laid down in countless other authorities - see, for example, Stott v. Hoddinott 7 Tax Cases, page 85, per Mr Justice Atkin at page 91; Sun Insurance Office v. Clark, 1912 Appeal Cases, page 443, per Viscount Maldane at page 455; Roebank Printing Co. v. C.I.R., 13 Tax Cases, page 864, per Lord Clyde at page 874.
In my judgment, the true proposition of law is well established, namely that in detremaining what is capital expenditure and what is revenue expenditure in order to arrive at the profit for tax purposes in any particular year, the Courts will follow the established principles of sound commercial accounting unless they conflict with the law as laid down in. any statute.
In the present case, it is argued on behalf of the Crown that to charge the items in question to revenue is contrary to the following provisions of Section 137 of the Finance Act, 1952: "Subject to the provisions of this Act. in computing the amount of profits or gains to be charged under Case 1 or Case II of Schedule D, no sum shall be deducted in respect of:
(a) any disbursement or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation;
(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;
(f) any capital withdrawn from, or any sum employed or intended to be employed as capital in, such trade, profession or vocation;
(g) any capital employed in improvements of premises occupied for the...
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