Threlfall v Jones (Inspector of Taxes) ; Gallagher v Same

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
Judgment Date30 Jun 1993
Judgment citation (vLex)[1993] EWCA Civ J0630-2
Docket NumberNo's CHRVF 93/0205/B

[1993] EWCA Civ J0630-2





(Mr. Justice Harman)

Before: The Master of The Rolls Lord Justice Nolan and Sir Christopher Slade

No's CHRVF 93/0205/B

CHRVF 93/0206/B

Geoffrey Stanley Gallagher
Appellant (Respondent)
Jeffrey Charles Jones (HM Inspector Of Taxes)
Respondent (Appellant)
Kevin Patrick Threlfall
Appellant (Respondent)
Jeffrey Charles Jones (HM Inspector Of Taxes)
Respondent (Appellant)

MR. G. R. BRETTEN Q.C. and MR. R. GRIERSON (instructed by Messrs. Herbert Wilkes, Birmingham) appeared on behalf of the Appellant (Respondent).

MR. I. GLICK Q.C. and MR. L. HENDERSON (instructed by the Solicitor of Inland Revenue, Somerset House) appeared on behalf of the Respondent (Appellant)


THE MASTER OF THE ROLLSIn each of these cases the Inland Revenue appeal against a decision of Harman J made on 29 January 1993. The learned judge then allowed appeals by the taxpayers against a decision of a Special Commissioner in favour of the Inland Revenue. The Inland Revenue now challenge the judge's decision. The taxpayers seek to support it on additional grounds.


The two appeals raise identical issues of law. It is accordingly necessary to summarise the facts of one case only. It is convenient to take the case of Mr Threlfall, as the judge did.


Mr Threlfall started to trade, under the style of Tettenhall Leisure Company, from an address in Wolverhampton on 29 November 1989. The trade was the short-term hiring of narrowboats.


On 29 November 1989 Mr Threlfall entered into three agreements under which he hired three narrowboats from a lessor. One of those narrowboats was called "Golden Serenade", which will serve as an example. The lease agreement provided for a Primary Period of 24 months and a Secondary Period of 21 years. During the Primary Period the agreement required an initial payment of £14,562.31 (made on the date of the agreement) and 17 monthly payments each of £2080.33. During the Secondary Period the rental was £5 per year : the total of £105 for this Secondary period was invoiced and paid on the last day of the Primary Period. It is evident that the payment due from the lessee for the 23 years' hire of the narrowboat was very heavily concentrated in the opening months of the hire period.


The leases provided that the lessor could terminate them if the lessee failed to pay rentals as they fell due. During the Secondary Period the lessee was entitled, as agent of the lessor, to sell each of the narrowboats and retain 99% of the net proceeds of sale "by way of rebate of rental".


The first accounts of Tettenhall Leisure Company were for a trading period from 29 November 1989 to 30 April 1990, a period of just over five months. These accounts were submitted to the Inland Revenue and showed a trading loss for the period of £77,200. Most of this loss derived from the early payments made under the narrowboat leasing agreements. In a letter accompanying the accounts a claim was made under section 381 of the Income and Corporation Taxes Act 1988 for a trading loss of £64,586 for the 1989/90 year of assessment to be carried back and set against Mr Threlfall's income for the year of assessment 1986/87. This was advantageous to him, since the rate of tax was higher in those years and the benefit of the loss correspondingly greater.


The Inland Revenue did not allow this claim. In December 1990 they issued a Notice of Decision allowing loss relief for 1986/87 in the sum of £27,983 only. Nothing turns on the figures for purposes of these appeals.


Mr Threlfall appealed against the Inland Revenue's partial rejection of his claim. His appeal (together with that of Mr Gallagher) was heard by Mr D.A. Shirley sitting as a single Special Commissioner on 29 July 1991. In a written decision on principle given on 28 August 1991 he dismissed the taxpayers' appeals.


The Special Commissioner described the issue between the parties as clear cut and the choice between their competing submissions as stark. I agree. The appeals raise a short and readily intelligible, but nonetheless significant and potentially far reaching, question for decision by the court.


For Mr Threlfall it has throughout been argued that the full sum of the initial payment and the monthly payments made under the lease agreements during the five month trading period covered by the accounts was correctly shown as a debit in the accounts. This is because (it is submitted) our law requires expenditure under these hiring agreements to lie where (or more accurately when) it falls : thus expenditure must be debited in the period in respect of which or in relation to which it is incurred. To redraw the accounts is, moreover, to violate the rule that neither profit nor loss may be anticipated. It is not permissible to reconstruct the genuine transactions into which Mr Threlfall entered for the purpose of assessing tax.


The Inland Revenue's case has throughout been this. The assessment of Mr Threlfall's tax liability and loss position depends on a correct computation of his receipts and his expenditure during the relevant accounting period. Such computation is ordinarily (and in the present case) to be made according to accepted principles of commercial accountancy. According to these principles the full sum of the initial payment and the monthly payments made under the lease agreements during the five month trading period were not correctly shown as a debit in the accounts. Such treatment did not give a true and fair view, and indeed gave a wholly misleading picture, of his trading results during the period. The Revenue's treatment involved no anticipation of profits or losses and no disregard of the transactions into which Mr Threlfall entered but simply an analysis, along conventional lines, of the financial effect of what he had done.


As this brief summary of the opposing arguments makes clear, the Revenue's case was founded on what were said to be accepted principles of commercial accountancy. Reliance was placed on two Statements of Standard Accounting Practice, known respectively as SSAP 2 and SSAP 21.


SSAP 2 was promulgated over 20 years ago and its authority is not doubted. It is entitled "Disclosure of Accounting Policies". I quote the following paragraphs :

"1. In accounting usage terms such as "accounting principles", "practices", "rules", "conventions", "methods" or "procedures" have often been treated as interchangeable. For the purpose of this Statement it is convenient to distinguish between fundamental accounting concepts, accounting bases and accounting policies.

2. Fundamental accounting concepts are here defined as broad basic assumptions which underlie the periodic financial accounts of business enterprises. It is expedient to single out for special mention four in particular: (a) the "going concern" concept; (b) the "accruals" concept; (c) the "consistency" concept; and (d) the "prudence" concept. The use of these concepts is not necessarily self-evident from an examination of accounts, but they have such general acceptance that they call for no explanation in published accounts and their observance is presumed unless stated otherwise. They are practical rules rather than theoretical ideals and are capable of variation and evolution as accounting thought and practice develop, but their present generally accepted meanings are restated in paragraph 14 below.



5. The main difficulty in applying the fundamental accounting concepts arises from the fact that many business transactions have financial effects spreading over a number of years. Decisions have to be made on the extent to which expenditure incurred in one year can reasonably be expected to produce benefits in the form of revenue in other years and should therefore be carried forward, in whole or in part; that is, should be dealt with in the closing balance sheet, as distinct from being dealt with as an expense of the current year in the profit and loss account because the benefit has been exhausted in that year.

6. In some cases revenue is received for goods or services the production or supply of which will involve some later expenditure. In this case a decision must be made regarding how much of the revenue should be carried forward, to be dealt with in subsequent profit and loss accounts when the relevant costs are incurred.

7. All such decisions require consideration of future events of uncertain financial effect, and to this extent an element of commercial judgment is unavoidable in the assessment.

8. Examples of matters which give rise to particular difficulty are: the future benefits to be derived from stocks and all types of work-in-progress at the end of the year; the future benefits to be derived from fixed assets, and the period of years over which these will be fruitful; the extent to which expenditure on research and development can be expected to produce future benefits.



14. Fundamental accounting concepts are the broad basic assumptions which underlie the periodic financial accounts of business enterprises. At the present time the four following fundamental concepts (the relative importance of which will vary according to the circumstances of the particular case) are regarded as having general acceptability:



(b) the "accruals" concept: revenue and costs are accrued (that is, recognised as they are earned or incurred, not as money is received or paid), matched with one another so far as their relationship can be established or justifiably assumed, and dealt with in the profit...

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