Symons (HM Inspector of Taxes) v Weeks and Others (sub nom Symons (HM Inspector of Taxes) v Lord Llewelyn Davies' Personal Representative)
| Jurisdiction | England & Wales |
| Judgment Date | 08 December 1982 |
| Date | 08 December 1982 |
| Court | Chancery Division |
Chancery Division.
Mr. D.K. Rattee Q.C. and Mr. R. Carnwath (instructed by the Solicitor of Inland Revenue) for the Crown.
Mr. J.L. Knox Q.C. and Mr. R.M. Bramwell (instructed by Messrs. Farrer & Co.) for the taxpayers.
Before: Warner J.
Income tax - Computation of profits and gains - Progress payments for long-term contracts received by firm of architects - Returns furnished on an earnings basis - Method of treatment in accounts - Whether accounts should be drawn up on correct principles of commercial accountancy - Whether accounts provided a proper basis for determining profit and loss - Whether total progress payments received should have been included - Whether accounts should be re-written to alter estimates to reflect subsequent events - Income and Corporation Taxes Act 1970 section 115Income and Corporation Taxes Act 1970, sec. 115.
This was an appeal by the Crown from a decision of the Special Commissioners that the accounts of a partnership of architects were correctly drawn up so as to reflect the profits of the partnership in accordance with the prevailing system of commercial accountancy.
The accounts in issue were those of the taxpayer partnership which were drawn up for the periods between 1 October 1966 and 30 September 1975. (At the latter date the practice was transferred to an unlimited company in which the former partners were shareholders.) The Revenue had required the accounts to be prepared on an earnings basis rather than on a cash basis. The particular matter in dispute in the case was the treatment in those accounts of progress payments received by the firm from clients during the course of the performance by the firm of long-term contracts.
The partnership practiced both in the UK and abroad. Most of the UK contracts were in the form suggested by the Royal Institute of British Architects (the RIBA contract). Under the RIBA contract, fees for the normal stages of an architect's work in relation to a building project are paid in instalments, with the fees for many of the early stages being disproportionately high when related to the expense to the architect of carrying out the work at each stage. Similarly the partnership's contracts abroad were made on the basis that a large proportion of the fee was paid in the early stages of the contract when the expenses incurred by the firm were relatively low. Projects undertaken by the partnership usually took several years to complete which gave rise to difficulty in forecasting how much expenditure the firm would incur in performing its contract in respect of each project. Since fees were calculated as a percentage of the total cost of construction of the project, the result was that adjustments in the amounts of the fees paid or payable often occurred. These could, in some circumstances, be adjustments which reduced those fees.
Evidence, on behalf of the partnership, as to the normal accountancy practice in cases where progress payments were received in respect of long-term contract work was given to, and accepted by, the Special Commissioners. An expert witness on behalf of the partnership explained that the current practice is to include an element of profit in the valuation of work in progress, but not at the early stages when no reliable estimate of the ultimate profit can be made. At the later stages the estimated attributable profit is to be added to prime cost and overheads, but the judgment of the amount of the estimates should be exercised with prudence to avoid anticipating profits.
The partnership's accounts were prepared on those principles, with the progress payments not being shown in the profit and loss account. Those accounts were prepared after 30 September 1975. They were used in 1977 as the basis of the arrangements made between the partners on the retirement of two of them. However, they were not submitted to the Revenue until 1979.
The Revenue did not agree with the method used in drawing up the accounts and, following the finding of the Special Commissioners that the method used was appropriate, appealed to the Chancery Division of the High Court.
The primary contention of the Crown before the High Court was that the progress payments should have been brought into the profit and loss account as and when they fell due because the contracts under which they fell due were divisible and not entire: and that only expenditure actually incurred should have been deducted. Although the Commissioners had taken it to be common ground between the parties that correct principles of commercial accountancy must be applied, the Crown disputed that this was so. It was submitted that even accounts drawn up on correct accountancy principles must be rejected for income tax purposes if they conflicted with income tax law. In this instance, it was argued, the accounts failed to provide a proper basis for determining the profits or losses of the firm for income tax purposes. The accounts showed a loss of over £1/2 million, whereas in fact a profit of over £1.6 million had been made. The alternative argument for the Crown was that the accounts should be re-written to reflect the facts known when they were drawn up and should not have been based on estimates of the value of work in progress, although such estimates might have been appropriate had the accounts for each year been prepared shortly after the end of that year. In making that alternative submission the case of Simpson v. Jones WLR[1969] 1 W.L.R. 1066 was relied on.
Held, appeal dismissed.
1. The Crown's argument that the accounts should be re-written to reflect matters that were able to be seen at the time they were drawn up was, initially, based on the effect thereon of a written agreement between the partners and the company which was to take over the practice. It was not possible for that agreement to be relied on because, in the agreed statement of facts before the Commissioners, it was shown that the written agreement had been subjected to adjustments until July 1979.
2. The claim that those accounts should be re-written on the principle laid down in Simpson v. Jones is also not accepted. In that case it was necessary to re-open accounts because a mistake was made in them. That case is not authority for re-opening accounts which have been correctly drawn up. In such a case the Revenue are not entitled to treat the accounts as open for as long as it may take to ascertain whether subsequent events prove or disprove the accuracy of estimated items in them.
3. No evidence was given to show that the prevailing system of accountancy practice adopted by the partnership did not correspond to the correct principles of commercial accountancy practice. In theSun Insurance Office case ELR[1912] A.C. 443 it was clearly stated that there is no rule of law as to when receipts should be brought into account.
4. It was suggested that the use of the prevailing accountancy practice had, in this case, the effect of anticipating losses. However, the expert evidence showed that the purpose and effect was to avoid anticipating profits which had not then been earned and ascertained.
5. There is no obvious ground on which the accounts of the partnership can be seen to have been drawn up, other than on the correct principles of commercial accountancy, and they must be upheld.
Warner J.: This is an appeal by the Crown against a decision of the Special Commissioners. The Respondents are the former partners, or in one case the executrix of a former partner, in a firm of architects which was in practice from 1 October 1966, to 30 September 1975. For convenience and for the sake of brevity, I will call the firm "Messrs. Llewelyn-Davies", though that is not its full name. On the former date the partners in Messrs. Llewelyn-Davies took over the practice of a previous firm which had consisted of the three senior of them. On the latter date they transferred the practice to an unlimited company in which they were the shareholders. That transfer occasioned a "discontinuance" of their profession for tax purposes. There is no suggestion, however, that it was brought about for tax reasons. The findings of the Special Commissioners are to the effect that it was brought about for administrative reasons.
I do not propose to rehearse all the facts recorded in, or appearing from, the Case Stated and the documents annexed thereto, but rather to begin by trying to state the problem to which the case gives rise, as I understand it. That problem is as to the correct method of computing, for income tax purposes, the profits of the firm for the period between 1 October 1966, and 30 September 1975. More precisely, it is as to the correct way of treating, in those computations, payments received by the firm from clients during the course of the performance by the firm of contracts with them. Those payments were referred to by the Special Commissioners as "progress payments" and they were so referred to in argument before me.
It is a feature of the case that the firm's practice expanded rapidly between 1966 and 1975, and that it did so not only in the United Kingdom but also abroad.
Most of the firm's work in the United Kingdom was done under contracts in the standard form of "Conditions of engagement" suggested by the Royal Institute of British Architects or under contracts in substantially similar form. The RIBA standard...
To continue reading
Request your trial
-
Threlfall v Jones (Inspector of Taxes) ; Gallagher v Same
...Office v Clark TAX(1912) 6 TC 59 Stephenson (HMIT) v Payne, Stone, Fraser & Co TAX(1967) 44 TC 507 Symons (HMIT) v Weeks & Ors (1982) TAXTAX56 TC 630; [1983] BTC 18 Vallambrosa Rubber Co Ltd v Farmer (HMIT) TAX(1910) 5 TC 529 Whimster & Co v IR Commrs TAX(1925) 12 TC 813 Willingale (HMIT) v......
-
Carroll Industries Plc v Ó Culacháin, S. (Inspector of Taxes)
...372. Stainers Executors v Purchase 32 TC 408. Strick v Regent Oil Co Ltd 43 TC 1. Sun Insurance Office v Clarke 6 TC 773. Symons v Weeks [1983] STC 195. Thomson Hill Ltd v Comptroller of Income Tax [1984] STC Ushers Wiltshire Breweries Ltd v Bruce 6 TC 185. Case stated Case stated under ITA......
-
Herbert Smith (A Firm) v Honour (Inspector of Taxes)
...specifically justifying the computation of profits for commercial purposes on that basis; see the Odeon case,Symons (HMIT) v Weeks TAXTAX[1983] BTC 18; 56 TC 630 and theBritannia Airways Ltd case. In our view, such an established and specific accounting practice is lacking in the present ca......
-
Threlfall v Jones (Inspector of Taxes) ; Gallagher v Same
...at page 851 does, however, show that in appropriate circumstances the accounting practice of accrual may be acceptable. 82In Symons v Lord Llewelyn-Davies (1982) 56 TC 630 the Revenue challenged the taxpayers' treatment of progress payments received by them as architects during the plannin......