Tod v South Essex Motors (Basildon) Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 15 December 1987 |
| Date | 15 December 1987 |
| Court | Chancery Division |
Chancery Division.
Mr. Alan Moses (instructed by the Solicitor of Inland Revenue) for the Crown.
Mr. D.C. Potter Q.C. (instructed by Judge, Sykes & Harrison) for the company.
Before: Knox J.
The following cases were referred to in the judgment:
Caffoor & Ors. v. Commr. of Income Tax, Colombo ELR[1961] A.C. 584
Cenlon Finance Co. Ltd. v. Ellwood (H.M.I.T.) TAX(1962) 40 T.C. 176
I.R. Commrs. v. Sneath TAX(1931) 17 T.C. 149
Scorer (H.M.I.T.) v. Olin Energy Systems Ltd. TAXTAX(1982) 58 T.C. 592; [1982] BTC 279
Corporation tax - Chargeable gains - Losses - Settlement of appeal to Commissioners by negotiation - Earlier loss carried forward exceeded gain realised in accounting period to which agreement related - Earlier loss later found to have been wrongly computed - Whether Revenue bound by settlement to accept loss as correct for purpose of carry forward to later years - Taxes Management Act 1970, Taxes Management Act 1970 section 54 subsec-or-para (1)sec. 54(1); Income and Corporation Taxes Act 1970, Income and Corporation Taxes Act 1970 section 265 subsec-or-para (1)sec. 265(1).
This was an appeal by the Crown against a decision of the General Commissioners for Basildon that an allowable loss of £99,751 was available to be carried forward for deduction from the company's chargeable gains arising in its accounting period ending 31 December 1981, by virtue of the Income and Corporation Taxes Act 1970,Income and Corporation Taxes Act 1970 section 265 subsec-or-para (1)sec. 265(1).
Before 6 April 1965 the company acquired a long lease of premises at Basildon on which it incurred expenditure after 6 April 1965 amounting to £125,000. During its accounting period ending 31 December 1968 the company disposed of that leasehold interest by way of sale and leaseback for £260,000. The leasehold interest was valued at £260,000 as at 6 April 1965.
The company elected under the Finance Act 1965 schedule 6 subsec-or-para 25Finance Act 1965, Sch. 6, para. 25(1) (now theCapital Gains Tax Act 1979 schedule 5 subsec-or-para 12Capital Gains Tax Act 1979, Sch. 5, para. 12(1) for the lease to be deemed to have been sold and reacquired at market value on 6 April 1965. Under Finance Act 1965 schedule 6 subsec-or-para 25para. 25(1) the result of the election would have produced a loss of £100,125 but the application of the limitation provided byFinance Act 1965 schedule 6 subsec-or-para 25para. 25(2) would have resulted in a no gain, no loss disposal.
An estimated assessment to corporation tax was made on the company for its accounting period ending 31 December 1975 which was appealed. The appeal was settled in 1977 by agreement under the Taxes Management Act 1970 section 54Taxes Management Act 1970, sec. 54. The sum agreed was computed on the basis that the election made in relation to the disposal of the leasehold interest had produced a loss of £100,125. On that footing a gain of £374 realised in 1975 was set off resulting in a balance of £99,751 available to be carried forward pursuant to the Income and Corporation Taxes Act 1970,Income and Corporation Taxes Act 1970 section 265 subsec-or-para (1)sec. 265(1).
In assessing for the period ending 31 December 1981 (the company having realised no chargeable gains in the meantime) the Revenue disallowed the set-off of the £99,751 on the grounds that the election underFinance Act 1965 schedule 6 subsec-or-para 25para. 25(1) had, by virtue of Finance Act 1965 schedule 6 subsec-or-para 25para. 25(2), produced neither a gain nor a loss.
The taxpayer claimed that the Revenue was bound by the Taxes Management Act 1970 section 54sec. 54 agreement to accept that the company had an allowable loss of £100,125 in the accounting year ending 31 December 1968 which fell to be deducted so far as necessary from gains realised in the accounting period ending 31 December 1975, and that the balance of the loss remained available to be carried forward in later years.
The Crown contended that the company suffered no such loss in the 1968 accounting year and any agreement to that effect reached in 1977 was not binding in subsequent years.
The General Commissioners allowed an appeal by the company. They decided that the Crown was precluded by the agreement under Taxes Management Act 1970 section 54sec. 54 from challenging the allowable loss claimed by the company, although they found that the inspector's computation made in 1977 had overlooked the effect ofFinance Act 1965 schedule 6 subsec-or-para 25Sch. 6, para. 25(2). The Crown appealed.
The issue was whether the company had an allowable loss of £99,751 which had to be deducted pursuant to the Income and Corporation Taxes Act 1970, Income and Corporation Taxes Act 1970 section 265 subsec-or-para (1)sec. 265(1) in the computation of chargeable gains for the accounting period ending 31 December 1981.
Held, allowing the Crown's appeal:
1. The binding effect of an agreement under Taxes Management Act 1970 section 54 subsec-or-para (1)sec. 54(1) of the Taxes Management Act 1970 could be no wider than the binding effect of a determination by the Commissioners, which was limited to the matters affecting the assessment under appeal. There was no machinery provided for determination by the Commissioners of the size of an allowable loss which both the company and the inspector agreed was more than large enough to wipe out all the chargeable gains in the relevant accounting period.
2. The Commissioners erred in law in holding that the Crown was precluded by the agreement from challenging the allowable loss. (Dictum of Lord Radcliffe in Caffoor & Ors. v. Commr. of Income Tax, Colombo ELR[1961] A.C. 584, at p. 598, followed.)
1. At a meeting of the Commissioners for the general purposes of the income tax for the Division of Grays held at Grays Parish Church Hall, West Street, Grays, in the County of Essex on 13 December 1984 South Essex Motors (Basildon) Ltd. ("the company") appealed against an assessment in the sum of £458,714 total profits chargeable to corporation tax for the accounting period ending 31 December 1981.
2. The questions for determination were:
(a) Whether the company had allowable losses brought forward from previous years which could in the circumstances of the case be set against chargeable gains subsequently made.
(b) Whether interest paid on loans from Barclays Merchant Bank was deductible in computing the company's trading profits for the purposes of Income and Corporation Taxes Act 1988Sch. D, Case Ior whether it was deductible as a charge on income under Income and Corporation Taxes Act 1970 section 248sec. 248 of the Income and Corporation Taxes Act 1970.
3. At the hearing the company was represented by Mr. R.M. Walkden of R.M. Walkden & Co. Ltd., tax consultants, and evidence was given by Mr. George Jacobs the chairman of the company and by Mr. Clive Stewart Jacobs the finance director of the company and a certified accountant. The inspector appeared in person.
4. [Paragraph 4 listed the documents proved or admitted before the Commissioners.]
5. From the evidence given orally and the documents before us we found the following facts proved or admitted.
(i) The company carries on the business of motor car distributors and has been for many years main agents for the Ford Motor Co.
(ii) In the company's accounting period ended 31 December 1968 the company entered into a sale and leaseback transaction with its premises at Cherrydown East, Basildon. On 22 August 1968 the company sold its long leasehold interest in the premises to London County Freehold and Leasehold Properties Ltd. for £260,000 and took a long sub-lease back. The transaction was a financing transaction.
(iii) As part of the transaction the purchaser also lent the company £380,000 (subsequently increased to £435,000) to expend on extensions and additions to the property.
(iv) The rental the company paid under the sub-lease from the purchaser was £71,000 p.a.
(v) The inspector at Basildon contended that the sale and leaseback was a chargeable occasion for capital gains tax purposes and asked for information and documents relating to the transaction. Full details were provided to him by correspondence and also at an interview with two directors of the company on 15 April 1971.
(vi) The inspector submitted the assignment of the lease and the sub-lease to the district valuer for his valuations.
(vii) On 5 May 1971 the company made a formal election underFinance Act 1965 schedule 6 subsec-or-para 25Sch. 6, para. 25 to the Finance Act 1965 for the property which had been acquired prior to 6 April 1965 to be valued at 6 April 1965 for capital gains tax purposes.
(viii) On 14 March 1974 the inspector wrote to the company's then accountants, Messrs. Landau Morley, in the following terms:
The District Valuer has now advised me of the agreed valuations which enable the Capital Gains for the year ended 31st December 1968 to be determined. The market value of the Company's leasehold interest in its premises as at 6th April 1965 has been agreed at £260,000 and the market value of its interest following the sale and lease-back agreement is agreed at Nil. This means that the whole of the expenditure has to be related to the disposal of the lease and that there is none left to carry forward against future disposals. My computation of the Capital Losses is as follows:
£ |
|
Value at 6th April 1965 |
260,000 |
Subsequent expenditure |
95,538 |
Legal fees |
4,587 |
360,125 |
|
Disposal proceeds |
260,000 |
Capital loss |
100,125 |
I shall be pleased to hear that you agree.
I look forward to receiving the accounts for the years to 31st December 1971 and 31st December 1972 in the very near future as promised in your letter of 28th February 1974.
(ix) On 6 August 1974 Landau Morley replied:
…In reply to your letter of 14th March 1974 concerning capital gains, we are now able to agree a capital...
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