R v Commissioners of Inland Revenue, ex parte S G Warburg & Company Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 29 March 1994 |
| Date | 29 March 1994 |
| Court | Queen's Bench Division |
Queen's Bench Division (Crown Office List).
Hidden J.
John Gardiner QC and Jonathan Peacock (instructed by Slaughter and May) for the applicant.
Ian Glick QC and Alan Griffiths (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Associated Provincial Picture Houses Ltd v Wednesbury CorporationELR[1948] 1 KB 223
BSC Footwear Ltd (Formerly Freeman, Hardy & Willis Ltd) v Ridgway (HMIT) ELR[1972] AC 544
Council of Civil Service Unions & Ors v Minister for the Civil Service ELR[1985] AC 374
Duple Motor Bodies Ltd v Ostime (HMIT) WLR[1961] 1 WLR 739
Gallagher v Jones (HMIT); Threlfall v Jones (HMIT) TAX[1993] BTC 310
IR Commrs v Goldstraw TAX[1983] BTC 241
IR Commrs v National Federation of Self-Employed and Small Businesses Ltd ELR[1982] AC 617
Minister of National Revenue v Anaconda American Brass LtdELR[1956] AC 85
Odeon Associated Theatres Ltd v Jones (HMIT) WLR[1971] 1 WLR 442
Pearce (HMIT) v Woodall Duckham Ltd WLR[1978] 1 WLR 832
R v A-G, ex parte Imperial Chemical Industries plc TAXTAX(1986) 60 TC 1; [1986] BTC 8015
R v Birmingham City Council, ex parte Ferrero & Ors UNK[1993] 1 All ER 530
R v Chief Constable of the Merseyside Police, ex parte Calveley & Ors ELR[1986] 1 QB 424
R v General Commrs (Brentford Division), ex parte Chan & OrsTAX[1986] BTC 50
R v IR Commrs, ex parte MFK Underwriting Agencies Ltd & OrsWLRTAX[1990] 1 WLR 1545; [1989] BTC 561
R v IR Commrs, ex parte Opman International UK WLRTAX[1986] 1 WLR 568; [1985] BTC 606
R v IR Commrs, ex parte Preston ELRTAX[1985] AC 835; [1985] BTC 208
R v Jockey Club, ex parte RAM Racecourses Ltd (1993) 5 Admin LR 265
R v Panel on Take-overs and Mergers, ex parte Guinness plcELRUNK[1990] QB 146; (1988) 4 BCC 714
R v Secretary of State for the Environment & Anor, ex parte Powis WLR[1981] 1 WLR 584
R v Secretary of State for the Home Department, ex parte Brind & Ors ELR[1991] AC 696
R v Secretary of State for the Home Department, ex parte SwatiWLR[1986] 1 WLR 477
R v Special Commr, ex parte Napier TAX[1988] BTC 218
Sun Insurance Office v Clark ELR[1912] AC 443
Willingale (HMIT) v International Commercial Bank Ltd ELRELR[1977] Ch 78 (CA); [1978] AC 834 (HL)
This was an application for judicial review seeking a declaration that a decision of an inspector of taxes in relation to a change from one method of valuation of stock in trade to another was ultra vires.
In response to inquiries from the accountancy profession, the Revenue published a statement of practice in the Accountant on 17 November 1962 with regard to the way it would treat any change in a taxpayer's basis of stock valuation. It was stated that the Revenue would accept any method of computing the value of work in progress and finished stock, which "is recognised by the accountancy profession, so long as it does not violate the taxing statutes as interpreted by the Courts". Such a basis was referred to as a "valid basis". There also had to be "good reason" for a change of the basis of valuation. It was indicated that a change within the terms of the statement would not give rise to a charge to tax.
The applicant was a merchant bank which had, for many years, valued its stock in trade consisting of investments on the basis of the lower of cost or market value ("LCM").
In 1986, as a result of the imminent deregulation of city institutions (the Big Bang), the applicant was involved in merger arrangements to join a group of City firms the members of which all used the "mark to market" ("MTM") basis of stock valuation. For good reasons which had nothing to do with fiscal considerations, it was decided was that the applicant should be brought into line with the other members of the group so that the whole group would value stock in trade on an MTM basis. The change produced an increase in stock value between the closing and opening amount in March 1986 of £4,147,271.
By a decision letter of 15 November 1991 the inspector stated that the change was not a change to a valid basis of stock valuation because MTM was not such a valid basis.
It was common ground that the fact that the practice statement was withdrawn in 1990 did not affect events in 1986.
The applicant contended first that the inspector's decision was ultra vires in the sense that it amounted to a breach of general representation given to all taxpayers by the 1962 statement. The applicant had a legitimate expectation that the statement would be followed and refusal to apply it in this case was an unreasonable exercise by the Revenue of its powers. The change from LCM to MTM was recognised by the accountancy profession and did not violate the taxing statutes as interpreted by the courts within the practice statement. The evidence was that, by 1986, the MTM method was recognised and accepted by the accountancy profession. It was also the method preferred and most commonly adopted method used by market makers and dealers in securities. The MTM method was not contrary to the rule that profits must not be anticipated. It was merely a method of measuring or recording profits which were recognised as realised in both accounting and business terms. Moreover, refusal to apply the practice statement was discriminatory in that the MTM method had been accepted by the Revenue in other cases. The applicants submitted that they were being treated in a manner different from other taxpayers which was therefore unfair and amounted to an abuse of the Revenue's powers.
The Revenue contended that MTM was not a valid basis for calculation of stock valuation and the increase was therefore a taxable profit. However, that question was not to be decided on an application for judicial review. The court in judicial review proceedings should only determine whether a reasonable inspector could have formed the view that MTM was not a valid basis on the the material before him. It was not the task of the court to try such cases de novo, but to look at the inspector's decision and decide whether it was a decision which a reasonable inspector could have made. The Revenue further submitted that judicial review proceedings were not appropriate since there was an alternative remedy available of an appeal under the Taxes Management Act 1970.
Held, dismissing the application:
1. The question was not whether MTM was a valid basis for calculating stock value but whether the inspector's decision not to regard MTM as a valid basis within the 1962 statement of practice was unreasonable or perverse. The applicants had failed to show that the inspector's decision was unreasonable: Associated Provincial Picture Houses Ltd v Wednesbury Corporation ELR[1948] 1 KB 223applied.
2. The inspector's decision was not discriminatory since it had not been shown that there was any practice on the part of the Revenue permitting other taxpayers to obtain the benefit of a tax-free uplift on a change to the MTM basis of valuation.
3. Judicial review proceedings were not appropriate since there was an alternative remedy under the Taxes Management Act and the alternative statutory appeal procedure would satisfactorily have achieved a just resolution of the applicants' claim. R v IR Commrs, ex parte Opman International UK TAX[1985] BTC 606 at p. 609 followed.
Hidden J: The decision which the applicant seeks to impugn in this case is that made by Her Majesty's Inspector of Taxes in a letter dated 15 November 1991 in which he refused to comply with a statement of practice which had been published by the respondent commissioners of Inland Revenue on 17 November 1962.
The applicant is a merchant bank and has by statute to make yearly returns to the Revenue for tax purposes. For those returns the applicant has, of necessity, to value its stock-in-trade. For many years it made that valuation on the basis of a value which was the lower of cost and market value, otherwise known as "LCM". A different basis for valuation would have been for the bank to value its stock at market value, and that basis is known as "mark to market" or "MTM".
Until 1 April 1986 the applicant and the Revenue had been content with an LCM valuation. In 1986, however, for good reasons, the applicant wished to change its basis of valuation of stock-in-trade from LCM to MTM, and this it did for the financial year from April 1986 to April 1987.
There was in existence a practice published by the Revenue on 17 November 1962 in regard to the way it would treat any change in the basis of stock valuation. It was entitled "Inland Revenue Practice with regard to a change in the basis of Stock Valuation" and was published in "The Accountant" on that date. The first paragraph of the practice read as follows:
The Revenue accepts any method of computing the value of work in progress and finished stock, which is recognised by the accountancy profession, so long as it does not violate the taxing statutes as interpreted by the Courts. Such a basis is referred to in this note as a "valid basis".
The applicant contends that a change from an LCM basis to an MTM basis is a change to a "valid basis" which the Revenue should accept. The Revenue claims, as did the inspector in his letter of 15 November 1991, that such a change was not a change to a "valid basis", because MTM was not a valid basis.
In raw figures, the change produced an increase in value of the applicant's stock of £4,174,271, which the applicant says is not taxable, not a profit, but a prior year adjustment to reserves. The Revenue, on the other hand, contends that it is a profit and is therefore taxable. The applicant seeks a declaration in these proceedings that the decision contained in the letter of 15 November 1991 is ultra vires the Revenue.
That, in a nutshell, is the dispute between the parties. It is a dispute which is essentially concerned with what is the applicant's liability for tax in the...
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