Threlfall v Jones (Inspector of Taxes) ; Gallagher v Same
| Jurisdiction | England & Wales |
| Judgment Date | 29 January 1993 |
| Date | 29 January 1993 |
| Court | Chancery Division |
Chancery Division.
Harman J.
Rex Bretten QC and Robert J Grierson (instructed by Herbert Wilkes, Birmingham) for the taxpayers.
Launcelot Henderson (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
BSC Footwear Ltd (formerly Freeman, Hardy & Willis Ltd) v Ridgway (HMIT) TAX(1970) 47 TC 495
Duple Motor Bodies Ltd v Ostime (HMIT) TAX(1961) 39 TC 537
Minister of National Revenue v Anaconda American Brass LtdELR[1956] AC 85
Owen (HMIT) v Southern Railway of Peru Ltd TAX(1956) 36 TC 602
Sun Insurance 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 International Commercial Bank Ltd TAX(1977) 52 TC 242
Income tax - Schedule D deductions - Finance leasing - Front-loaded leasing agreements for purchase of narrowboats for hire - Large initial payments under leases claimed as deduction producing large losses in first accounting period - Whether accounts should follow commercial accounting practice which would spread deductions over future years -Income and Corporation Taxes Act 1988 section 381Income and Corporation Taxes Act 1988, sec. 381.
These were appeals by two taxpayers. They claimed to take into account in the tax computations for their respective first periods of trading payments made under finance leases of capital equipment although, because the initial rental payments were much greater than later payments, commercial accounting practice might require the initial payments to be spread over the projected life of the assets.
Both the taxpayers, who commenced the trade of hiring out narrowboats towards the end of 1989, entered into leasing agreements with finance companies. All the lease agreements were in similar form. One, as an example, was for an equipment lease for an initial period of 24 months. An initial payment of £14,562.81 was to be followed by 17 primary rentals of £2,080.33 payable monthly with a final payment not specified. A secondary period commencing on the expiry of the primary period followed at a rental of £5 per annum. The lessee was entitled to 99 per cent of the price as a rebate on rental payments if the boat was sold.
On 29 November 1989 Mr Threlfall entered into three leasing agreements for three named boats. His trading accounts were drawn up for the period 29 November 1989 to 30 April 1990 showing a trading loss of £77,200. A consequent trading loss of £64,586 was claimed for 1989-90 after time-apportionment to the fiscal year. Mr Gallagher, who had entered into a leasing agreement for one boat started trading on 23 December 1989. He claimed a loss of £17,445 for 1989-90.
The inspector allowed a reduced amount of the losses claimed. It was not stated how he had arrived at the figures but it appeared that he had calculated the total amount payable by each taxpayer during the primary period and divided that total by the number of months in the period. The taxpayers both appealed.
At a hearing before a special commissioner expert evidence was given on behalf of the Revenue to the effect that the accounts drawn up on an earnings basis and submitted to the inspector on behalf of the taxpayers were misleading although they accurately recorded the accrued income and expenditure incurred. The preferred method of accounting for the expenditure under the leases was based on SSAP 21 (Accounting for leases and Hire Purchase Contracts) published in 1984 taking into account the useful life of the boat, the estimated capital cost, rates of interest and depreciation.
The special commissioner dismissed the taxpayers' appeals. He found that the accounts were misleading and accepted the method of accounting preferred by the Revenue expert. He held, moreover, that an established rule that losses might not be anticipated would be breached if the rental payments were allowed as deductions when they were incurred.
The taxpayers appealed to the High Court. They submitted that where accepted principles of commercial accounting practice conflicted with a principle of law, the law must prevail, and it had been long established that expenditure was taken into account when it was incurred.
The Revenue accepted that the accounts in the present appeals were not incorrect and that accounts prepared in accordance with correct principles of accountancy practice were not conclusive. However, those principles were the proper basis for the computation of a tax assessment unless overridden by some other principle. In the absence of any contrary expert opinion, the method preferred by the Revenue's expert witness should be accepted. Moreover, it was established that it was not permitted to bring in receipts which would result in anticipating profits, and similarly expenditure which would anticipate losses must also be excluded.
Held, allowing the taxpayers' appeals:
1. It was a fundamental principle of law that expenditure wholly and exclusively incurred for the purposes of a trade was deductible when it was incurred, notwithstanding that it would produce only future benefits, unless there was some overriding statutory provision or principle developed in the cases to the contrary: Duple Motor Bodies Ltd v Ostime (HMIT) (1961) 39 TC 537 per Lord Simonds at p. 567, Lord Reid at p. 571 and Lord Guest at p. 575 and Vallambrosa Rubber Co Ltd v Farmer (HMIT) (1910) 5 TC 529 followed.
2. Although it was true that amounts actually received need not necessarily be brought into account when received it was not inevitable that a symmetry or parity of reasoning had to be achieved by applying such a rule to expenditure. Symons (HMIT) v Weeks [1983] BTC 18 and Owen (HMIT) v Southern Railway of Peru Ltd (1936) 36 TC 602distinguished.
3. Accordingly, notwithstanding that following prudent and proper principles of commercial accounting the expenditure under the leases would be spread forward over a number of years to give a more balanced picture of the true position, that did not invalidate the long-established principle that expenditure should be taken into account when it was incurred.
At a hearing before a single commissioner for the special purposes of the Income Tax Acts on 29 July 1991 Kevin Patrick Threlfall and Geoffrey Stanley Gallagher appealed against the decision of the inspector of taxes, Wolverhampton District rejecting their claims under theIncome and Corporation Taxes Act 1988 section 381Income and Corporation Taxes Act 1988, sec. 381 for trading losses.
The issue in both cases was whether the whole amount of leasing charges falling due in the relevant period was allowable in computing for tax purposes the taxpayers' loss in the trade of hiring out narrowboats.
The question of law for the opinion of the court was whether the commissioner erred in his decision answering the question in issue in each case in the negative. The commissioner issued one decision covering both appeals.
I have before me two appeals which give rise to the same question of law. The circumstances in which the question arises are the same with immaterial differences in detail. The accountants of both taxpayers are Messrs Farmiloes and Mr G R Bretten QC appears on behalf of both the taxpayers. The taxpayers are Kevin Patrick Threlfall trading as Tettenhall Leisure Co and Geoffrey Stanley Gallagher trading as Wincote Services. On 23 May 1990 Messrs Farmiloes made a formal claim underIncome and Corporation Taxes Act 1988 section 381sec. 381 of the Income and Corporation Taxes Act 1988 for a trading loss of £13,899 for 1989-90 to be carried back and set against Mr Gallagher's taxable income for 1986-87. On 24 May 1990 Messrs Farmiloes made a similar claim in the sum of £64,586 on behalf of Mr Threlfall. By notice to each taxpayer dated 5 December 1990, Mr S A N Leathley, inspector of taxes, Wolverhampton District, rejected the claims deciding that the loss relief was limited to £6,566 in the case of Mr Gallagher and £27,983 in the case of Mr Threlfall. It is against such decision that each taxpayer respectively appeals.
A statement of agreed facts was put in on behalf of each taxpayer.
On 29 November 1989 Mr Threlfall commenced trading as Tettenhall Leisure Co from an address in Wolverhampton. The trade of that company consisted of the short term hiring out of narrowboats. On 29 November 1989 Tettenhall Leisure Co entered into three leasing agreements with Benchmark Farm Finance Two Ltd in relation to three named narrowboats. The leasing agreements are exhibited to the statement of agreed facts as are also the agreements under which the narrowboats are managed by Alvechurch Boat Centre Ltd (two narrowboats) and Brummagen Boats Ltd (one narrowboat) The accounts for Tettenhall Leisure Centre were drawn up by Messrs Farmiloes for the period 29 November 1989 to 30 April 1990. They show a trading loss for the period of £77,200. The trading loss of £64,586 which is the subject of Mr Threlfall's claim for 1989-90 is128/153 of £77,200, 128 being the number of days from 29 November 1989 to 5 April 1990 and 153 the number of days in the whole period.
Mr Gallagher commenced trading as Wincote Services on 29 December 1989. The trade of Wincote Services consists of the short-term hiring out of one narrowboat held under a leasing agreement entered into with Benchmark Farm Finance Two Ltd on 28 December 1989. The narrowboat is managed by Alvechurch Boat Centre Ltd under an agreement dated 29 December 1989. The accounts of Wincote Services were drawn up by Messrs Farmiloes for the period 29 December 1989 to 30 April 1990. They show a trading loss of £17,445. The trading loss of £13,899, the subject matter...
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