Strick (HM Inspector of Taxes) v Regent Oil Company Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 27 July 1965 |
| Date | 27 July 1965 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income tax, Schedule D - Profits tax - Deduction - Oil dealing company - Exclusivity agreement with retailers - Premises leased from retailer and sublet to him - Whether premium for lease paid on capital or revenue account - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), s. 137(f).
The Respondent Company's main business consisted in importing oil and selling it to garages and service stations. In the years to 31st December 1956 and 31st December 1959 it entered into agreements with certain retailers who were prepared to sell its products exclusively, in the form that the retailer, in consideration of a lump sum premium based on the amount of oil expected to be sold, leased his filling station to the Company for a term of years at a nominal rent, and the Company sublet the station back to the retailer at a nominal rent for the same period less three days. The sublease contained covenants binding the retailer to continue to take all his supplies of oil from the Company and to continue to carry on business at the station.
On appeal against assessments to income tax under Case I of Schedule D for the years 1957-58 and 1960-61, and to profits tax for the corresponding chargeable accounting periods, the Company contended that the premiums were properly chargeable to revenue and were deductible in computing profits for tax purposes. The Crown contended that the premiums were paid for the acquisition of an interest in land, and since the Company was not a dealer in land they were of a capital nature and not deductible. The Special Commissioners held that the payments were of a revenue nature.
Held, that the payments could not be allowed as revenue outgoings.
Bolam v. Regent Oil Co. Ltd. (1956) 37 T.C. 56distinguished.
(1) Strick (H.M. Inspector of Taxes) v. Regent Oil Co. Ltd.
CASE
Stated under the Income Tax Act 1952, s. 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 10th, 11th and 12th December 1962, Regent Oil Co. Ltd. (hereinafter called "Regent") appealed against assessments made upon it under Case I of Schedule D of the Income Tax Act 1952 for the years 1957-58 and 1960-61 as a dealer in oil in the respective sums of £1,600 and £500,000. The question for our decision was whether Regent was entitled to deduct, in computing its profits as a dealer in oil, certain payments made to retailers in the circumstances hereinafter appearing, or whether such payments were (as the Crown contended) of a capital nature the deduction of which is prohibited by s. 137(f) of the Income Tax Act 1952. (It was admitted on behalf of the Crown that they were made wholly and exclusively for the purpose of Regent's trade, and that accordingly the deduction of these payments was not prohibited by s. 137(a).)
2. Regent's main business consisted in importing oil and selling it to garages and service stations (known in the trade as "outlets" but hereinafter referred to as "stations") which in turn resold such oil to the public. From 1950 onwards it had been forced to take part in a struggle with its two main competitors to obtain agreements with the owners of stations which would sell its products exclusively, making therefor what were termed "exclusivity" payments to the owners of such stations. The right to deduct certain of such payments for years previous to those now under appeal, namely, the years to December 1951, 1952 and 1953, was the subject of a previous appeal to the Special Commissioners and from their decision by way of Case Stated to the High Court: see Bolam v. Regent Oil Co. Ltd.(1956) 37 T.C. 56. The Case stated by the Special Commissioners in that appeal contains in paragraphs 4 to 15 a full account of the early history of what may be termed the "exclusivity war" between the three major oil companies, and it was agreed between the parties that the facts therein stated together with exhibits "A", "C" and "D" therein referred to were material to the present appeal. (The said exhibits, which are not printed in Tax Cases, are available for inspection by the Court if required.) To save repetition and expense such facts are not repeated herein; but they were admitted as such and the attention of the Court is directed to them as preliminary to those stated in the next succeeding paragraphs. The present appeal is concerned with certain "exclusivity" payments made by Regent to retailers in subsequent years, namely, the years to 31st December 1956 and 31st December 1959, and details of such payments and of the circumstances in which they were made appear in the succeeding paras. 3 to 12.
3. As the years went by the "exclusivity war" intensified, and Regent was compelled to make payments to retailers in a form increasingly favourable to them in order to retain its stations, since its rivals made tempting offers to retailers whose contracts with Regent were about to expire in order to obtain such stations for themselves. Regent was not entirely successful, even with such new form of payments, in holding on to its previous share of the market: there is attached hereto, marked "A"(1), a statement showing the percentage that Regent's sales of motor spirit bore to the total sales in the United Kingdom. It will be seen that such percentage declined from 14 per cent. in 1955 to 12 per cent. in 1961.
4. The form of payments to retailers with which the present case is concerned is that arising from a transaction of lease and sublease. Retailers were no longer content with payments to them of sums year by year calculated on gallonage sold; they demanded to be paid lump sums in advance, although these lump sums were still calculated by reference to the gallonage which it was anticipated would be sold at the station concerned. Retailers were also anxious that any payment received by them should if possible take a non-taxable form. To achieve these objects the transaction took a new and somewhat peculiar form: the retailer leased his entire station to Regent for a term of years at a nominal rent in return for the desired lump sum expressed as a premium, and simultaneously Regent leased the station back to the retailer at a nominal rent for the same term of years less three days. The sublease by Regent to the retailer contained, in addition to the clauses for payment of rent and for repair usual in a lease, clauses binding the retailer to take all his supplies of oil from Regent and to continue to carry on business at the station. There was also a proviso for re-entry in the case of any breach of covenant by the dealer, which it was hoped might prove of advantage to Regent in the event of the dealer getting into financial difficulties or wishing to assign to another dealer, by preserving the station for Regent, and it was recognised by Regent that in this respect the lease and sublease transaction gave it somewhat greater security than the old type of sales agreement, but the validity as against a receiver or liquidator of the proviso for re-entry was regarded as somewhat uncertain. (Details of the old type of payment appear, as will have been noted, in para. 9 and exhibit "C" of the previous Case Stated(2). It is hereinafter referred to as the "old sales agreement".)
5. An example of the new kind of transaction is that between Regent and Green Ace Motors Ltd., of Ipswich. Green Ace Motors in 1956 declined to renew an old sales agreement with Regent, and Green Ace Motors proposed that they should be treated on the lease and sublease basis just described. A copy of the lease by Green Ace Motors Ltd. to Regent and sublease by Regent back to Green Ace Motors Ltd. are hereto annexed, marked "B" and "C" respectively(1). The sum of £5,000 paid by Regent to Green Ace as premium for the lease was calculated by reference to the gallonage which it was expected would be sold at the station during the currency of the sublease. At the commencement of the exclusivity war the oil companies were paying a rebate of1/4d. per gallon in return for exclusivity. In 1956, when the Green Ace transaction was entered into, the amount had risen to 1d., and the premium of £5,000 paid by Regent to Green Ace was calculated at 1d. per gallon on an anticipated sale of 1200,000 gallons at that station for the period of the sublease. If less was sold the retailer did not have to repay anything, but if more was sold he was to get 1d. per gallon on the extra amount. This extra amount was provided for by an agreement, a copy of which is hereto annexed, marked "D"(1), between Regent and Green Ace executed at the same time as the lease and sublease. The extra amount is described in the agreement as a rebate in the purchase price of the oil.
6. A similar transaction of the lease and sublease type was entered into by Regent with one of its leading retailers, C. V. Clapp Ltd. of Bristol (hereinafter called "Clapps"). By the time that Clapps' old type of sales agreement had expired one of Regent's competitors offered Clapps a lease and sublease agreement, and Regent had to match its offer to keep the station. The only differences between the Clapps and the Green Ace transaction detailed in the last paragraph were that, as the amount of oil likely to be sold at Clapps' station could be accurately assessed, there was no supplementary agreement for any payment by Regent beyond the premium for the lease, which was based on anticipated sales, and also that the security offered to Regent by the sublease was somewhat better than in the Green Ace transaction in that, before assigning the sublease or subletting, Clapps had to offer to surrender the sublease to Regent, and there was to be no assignment or subletting (if...
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