Purchase v Tesco Stores Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 29 February 1984 |
| Date | 29 February 1984 |
| Court | Chancery Division |
Chancery Division.
Mr. R. Carnwath (instructed by the Solicitor of Inland Revenue) for the Crown.
Mr. S. A. Stamler Q.C. and Mr. M. C. Hart (instructed by Messrs. Berwin Leighton) for the taxpayer.
Before: Warner J.
Corporation tax - Stock relief - Increase in value of trading stock - Whether major alteration in conduct of trade - Whether exceptional increase in stock held - Test to be applied - Finance Act 1976 schedule 5 subsec-or-para 9 schedule 5 subsec-or-para 23Finance Act 1976, Sch. 5, para. 9, para. 23(1)(b).
This was an appeal by the Crown from a decision of the Special Commissioners that the increase in the taxpayer company's trading stock did not amount to an exceptional increase in the stock held and did not result from a major alteration in the conduct of their trade, so that the principles for ascertaining entitlement to stock relief in theFinance Act 1976 schedule 5 subsec-or-para 23Finance Act 1976, Sch. 5, para. 23(1)(b) did not apply.
In 1977 the company policy of giving Green Shield stamps was stopped and in a sales promotion campaign entitled "Operation Checkout" they sought to reduce prices instead. The increase in turnover exceeded all expectations. At the end of the accounting year in February 1978 the taxpayer company claimed stock relief under the Finance Act 1976 section 37 schedule 5Finance Act 1976, sec. 37 and Sch. 5in the sum of £33 million.
The Crown accepted that whether the alteration was a major one, and whether the increase in stock was an exceptional one, were both questions of fact and degree for determination by the Commissioners unless either of the Crown's two grounds of challenge, based onEdwards v. Bairstow ELR[1956] A.C. 14, was successful. They argued that the Commissioners, by their statements applying a qualitative test, had misconceived the law and so had misdirected themselves. Secondly, it was contended that the only reasonable conclusion on the facts as found by the Commissioners was contrary to their determination.
The taxpayer company did not attempt to defend the Commissioners' use of a qualitative rather than a quantitative test. They argued that although in general statements the Commissioners applied their own gloss, when they came to apply the law to the facts of the case they used the statutory words "major alteration" and "exceptional increase", and did not apply a qualitative test.
Held, allowing the Crown's appeal:
1. The words "major" and "exceptional" were to be given their ordinary English meaning, and the test which was to be applied to them was quantitative, not qualitative.
2. The Crown were correct in that it was likely that in place of adopting the above test the Commissioners had attributed their own interpretation to the words "major alteration" and so coloured their interpretation of "exceptional increase".
3. The Commissioners had misdirected themselves on the law and had failed to take into account other considerations which might have assisted them in determining the effects on the taxpayer's trade. The proper order in the circumstances was to remit the case to the Commissioners with a direction to apply the above test to the facts.
1. On 17, 18, 19 and 20 May 1982 the Commissioners for the special purposes of the Income Tax Acts heard the appeal of Tesco Stores Limited (hereinafter called "the Company") against a decision on a claim in respect of corporation tax, namely a claim to relief for increase in value of trading stock ("stock relief") under Finance Act 1976 section 37 schedule 5sec. 37 and Sch. 5 to the Finance Act 1976. The Company claimed such relief in respect of its accounting period ended 25 February 1978 in the sum of £33,684,310; by his decision dated 13 March 1981 H.M. Inspector of Taxes allowed such relief for that period in the sum of £16,500,000 only.
2. Shortly stated, the questions for our decision were:
(i) whether, on the facts of the case, there was during the relevant period of account "a major alteration in the conduct of the trade in question which resulted in an exceptional increase in [the Company's] trading stock", within the meaning of Finance Act 1976 schedule 5 subsec-or-para 23para. 23(1)(b) of Sch. 5 to the Finance Act 1976; and if (but only if) that question were answered in the affirmative-
(ii) what value should, for the purpose of computing stock relief, be attributed to the trading stock at the beginning of the period of account, in accordance with Finance Act 1976 schedule 5 subsec-or-para 23 schedule 5 subsec-or-para 23subpara. (2) and (3) of the said para. 23.
3. Mr. Leslie Porter, the Chairman and Chief Executive of the Company (and Chairman of the Company's parent company, Tesco Stores (Holdings) Ltd.); and Mr. George Miller, CA ATII, Senior Principal Advisory Accountant to the Board of Inland Revenue, gave evidence before us.
4. The following documents were proved or admitted before us:
(a) Computation of stock relief for the year to 25 February 1978.
(b) Schedule of stock figures at the end of February in the years 1967 to 1980 inclusive, showing both the actual figures in the Company's accounts and those figures adjusted by reference to the February Retail Price Index.
(c) Schedule of closing stock figures for the years 1974 to 1978 inclusive, showing those figures adjusted by reference to Price Index Numbers for Current Cost Accounting (PINCCA).
(d) Schedule showing sales for the years ending February 1974 to 1978, (together with closing stocks) and percentage increases therein.
(e) Schedule showing sales and percentages as in (d), the figures adjusted by reference to the Retail Price Index.
(f) Statement of sales area of stores as at the last Saturday in February 1978.
(g) The Annual Report and Accounts of Tesco Stores (Holdings) Limited for the 52 weeks to 25 February 1978.
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(h) Copy documents of the Company and its parent company, viz:
-a bundle of correspondence and internal memoranda
-extracts from minutes of board meetings
-a paper entitled "Operation Bookend"
-a paper entitled "Operation Bookend, Creative, Press and TV".
(i) Copy correspondence between the Company or its Accountants and H.M. Inspector of Taxes, viz:
- letters in 1971 and 1972 relating to inter-group stock transfers
- letter dated 9 April 1975 (with computation) claiming stock relief for 1974
- letters between 14 September 1979 and 4 May 1982 relating to the stock relief claim under appeal.
Other documents before us duplicated material contained in the documents listed above.
A copy of the document lettered (b) above is attached to our Decision. Copies of the other documents are available for inspection by the court if required.
5. We were referred in argument to D.I.K. Transmissions (Dundee) Ltd. v. I.R. Commrs. UNK[1980] STC 724; Whiteman & Wheatcroft on Income Tax (2nd ed.) para. 9-34; Tiley's Revenue Law(1978 ed.) para. 13.210; and to the definitions in the Shorter Oxford English Dictionary of "major", "alteration", and "conduct".
6. We the Commissioners who, with the late Mr. H.H. Monroe Q.C., heard the appeal took time to consider our decision and gave it in writing on 7 June 1982. The Decision, which is annexed to and forms part of this case, sets out the facts (in the form of a summary of the evidence, both oral and documentary, which we accepted), the submissions of the parties and our reasons for allowing the Company's claim in full. It having transpired during the course of the hearing that the Company's computation of the stock relief probably required to be amended, we gave our decision in principle only. Mr. Monroe was a party to the decision but he died before it was issued.
7. The figure was subsequently agreed between the parties and on 30 June 1982 we determined the appeal by holding that relief was allowable in the sum of £33,682,870.
8. The inspector of taxes immediately after the determination of the appeal declared to us his dissatisfaction therewith as being erroneous in point of law and on 2 July 1982 required us to state a case for the opinion of the High Court pursuant to the Taxes Management Act 1970 section 56Taxes Management Act 1970, sec. 56;which case we have stated and do sign accordingly.
9. The questions of law for the opinion of the court are:
(i) whether we were correct in not accepting that we should lean in favour of the applicability of Finance Act 1976 schedule 5 subsec-or-para 23para. 23(1)(b) of Sch. 5 to the Finance Act 1976 on the ground that stock relief is designed to give relief for increases in values due to inflation only; and
(ii) whether there was evidence on which we could properly find that the said Finance Act 1976 schedule 5 subsec-or-para 23para. 23(1)(b) did not apply in the present case.
Warner J.: This is an appeal by the Crown against a decision of the Special Commissioners dated 18 October 1982, as to the entitlement of Tesco Stores Ltd. (which I shall call "the Company") to stock relief under Finance Act 1976 section 37sec. 37 of andFinance Act 1976 schedule 5Sch. 5 to the Finance Act 1976, for its accounting...
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