Tucker (HM Inspector of Taxes) v Granada Motorway Services Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 23 May 1979 |
| Date | 23 May 1979 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Corporation tax - Deduction in computing profits under Case 1 of Schedule D - Payment to landlord of lump sum to amend onerous lease - Whether capital or income.
The Minister of Transport, as landlord, leased to G Ltd., the taxpayer company, a motorway service area for 50 years from 16 October 1964 at a fixed rent and an additional variable rent on a percentage which rose steeply with the gross takings-including tobacco duty. As gross takings and tobacco duty alike increased, the inclusion of the latter in computing the former proved progressively disastrous to G Ltd. As a result of representations by G Ltd., the Minister agreed to accept from it in August 1974 a lump sum of £122,220 in consideration of tobacco duty being thenceforth excluded in computing the gross profits. G Ltd. appealed to the Special Commissioners against a corporation tax assessment for the period ended 30 September 1974 on the basis that the whole of that sum was revenue expenditure which should be deducted in computing that period's profits. The Commissioners, applying Anglo-Persian Oil Co., Ltd. v. Dale 16 TC 253; [1932] 1 KB 124, upheld G Ltd.'s contentions. The Crown demanded a Case.
The Chancery Division, allowing the appeal, held that since the sum had been paid to obtain an improvement in a fixed capital asset of G Ltd., viz., in its lease, it was capital expenditure. The Company appealed.
Mallett v. Staveley Coal and Iron Co. Ltd. 13 TC 772; [ 1928] 2 KB 405 applied; E.C.C. Quarries Ltd. v.Watkis 51 TC 153; [1975] 3 All ER 843 followed.
The Court of Appeal, unanimously dismissing the appeal, held that as the sum paid had procured G Ltd. a more favourable lease and thus had brought into existence an advantage which endured for the benefit of its trade in the way that fixed capital endures, the sum was capital expenditure. The Company appealed.
Dictum of Viscount Cave L.C. in Atherton v.British Insulated & Helsby Cables Ltd. 10 TC 155, at pages 192-3; [1926] AC 205, as explained by Rowlatt J. in Anglo-Persian Oil Co., Ltd. v.Dale16 TC 253, at page 262, applied.
Held, in the House of Lords (Lord Salmon dissenting), that the expenditure in question had been incurred by G Ltd. once for all on its lease-which, though non-assignable, and hence having no balance-sheet value, was valuable for its trade and hence a capital asset, designed to make it more advantageous. It was therefore undoubtedly a payment of a capital nature.
Stated under the Taxes Management Act 1970, s 56, 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 21 and 25 June 1976 Granada Motorway Services Ltd. (hereinafter called "the Respondent") appealed against the following assessment to corporation tax: accounting period ended 30 September 1974 £250,000.
2. Shortly stated the question for our decision was whether in computing the profits of its trade under Case I Schedule D the Respondent was entitled to deduct a sum of £122,220 paid in commutation of part of the rent under certain leases.
3. There was produced and is annexed hereto as part of this Case a statement of agreed facts with documents annexed as follows: (i) Copy of a lease dated 7 July 1965 and made between the Minister of Transport and the Respondent in respect of the Toddington site. (ii) Copy of correspondence between officers of the Department of the Environment and persons acting on behalf of the Respondent. (iii) Copies of the Respondent's accounts for the years ended 1 October 1973 and 30 September 1974. There was also produced, and can be made available for inspection by the Court if required, a copy of the Respondent's memorandum and articles of association.
4. We also heard evidence from Mr. A. Bernstein, a director of the Respondent, and from Mr. C.C. Hubbard F.C.A., the partner in the firm of Chantrey Button & Co. who were responsible at the material time, and are responsible, for auditing the Respondent's accounts.
The evidence of these witnesses confirmed and explained what was stated in the statement of agreed facts. Tobacco duty was included in the price of cigarettes and tobacco purchased and resold by the Respondent in the course of its trade. The gross profit margin on such sales was around 11 per cent., and on many motorway sites, including the Toddington site, the additional rent exceeded the gross profit margin. The item "fixed assets" in the Respondent's balance sheet included the cost to the Respondent of erecting buildings on the motorway sites. Nothing was included as representing the cost of the leasehold interests or in respect of the £122,220. Mr. Hubbard had taken the view that this sum was a prepayment of a future liability. As such he considered that it should properly be regarded as an expense of a revenue nature and also that it might appropriately be charged in the profit and loss account. He agreed that the balance of the sum might properly have been shown in the 1974 accounts as an exceptional item, as was the provision or estimate of £75,486 included in the 1973 accounts. We heard further evidence on accountancy matters from Mr. E. Lawson F.C.A., principal advisory accountant to the Board of Inland Revenue. He took the view, which was not disputed, that the leases represented fixed capital assets. He further took the view that the £122,220 represented a sum of money paid to remedy a clause in a lease which had proved to be "defective" (in the sense that neither party had appreciated, when it was executed, just how onerous to the tenant its terms might prove). As such it represented expenditure on improving a fixed capital asset. On this basis Mr. Lawson regarded the £122,220, from an accountancy point of view, as capital expenditure. There was, of course, no objection to writing off such expenditure in the profit and loss account but that did not make it revenue expenditure.
5. We were referred to the following reported decisions: J.P. Hancock v. General Reversionary Interest and Investment Co., Ltd. 7 TC 358; [1919] 1 KB 25; Atherton v.British Insulated and Helsby Cables Ltd. 10 TC 155; [1926] AC 205; Mallett v.Staveley Coal and Iron Co., Ltd. 13 TC 772; [1928] 2 KB 405;Anglo-Persian Oil Co., Ltd. v. Dale 16 TC 253; [1932] 1 KB 124; Odeon Associated Theatres Ltd. v. Jones 48 TC 257; [1973] Ch 288; Chancery Lane Safe Deposit and Offices Co. Ltd. v. Commissioners of Inland Revenue 43 TC 83; [1966] AC 85; Pitt v. Castle Hill Warehousing Co. Ltd. 49 TC 638; [1974] 1 WLR 1624; E.C.C. Quarries Ltd. v. Watkis51 TC 153.
6. It was contended on behalf of the Appellant that:
(2) the three leases were fixed capital of the Respondent's trade as contrasted with circulating capital;
(3) a tenant who negotiated with a landlord for a 40-year lease of premises vital to the carrying on of the tenant's trade on the basis that instead of paying a fixed sum of so much plus a variable amount each year throughout the term, he would pay the fixed sum as rent each year plus a lump sum of £122,220 immediately, would for tax purposes be regarded as agreeing to pay the £122,220 as a capital, and not as a revenue outgoing. This would be so whatever the size of the fixed sum payable each year;
(4) the present case differed in no material particular from this example;
(5) the £122,220 was capital expenditure and should not be deducted in computing the Respondent's taxable profits.
7. It was contended on behalf of the Respondent that:
(2) the £122,220 was a payment made to get rid of an annual charge against revenue in the future;
(3) the payment put an end to an expensive method of carrying on the Respondent's trade which remained the same trade throughout;
(4) the payment was not made with a view to bringing, nor did it bring, into existence an asset or advantage of an enduring nature;
(5) the payment was distinguishable from a premium since it was not consideration for the acquisition of an interest in the motorway site;
(6) the payment was made on revenue, not capital account, and should be deducted in computing the Respondent's taxable profits.
8. We, the Commissioners who heard the appeal, took time to consider our decision and gave it in writing on 30 June 1976 as follows:
In 1965 the Minister of Transport granted to the Company leases of three motorway service areas. The leases were for terms of 50 years and the rent payable by the Company in each case consisted of two elements, a fixed element of so much a year to be paid by equal quarterly payments in advance on the usual quarter days and a variable element. This variable element was to be a percentage of the Company's gross takings (exclusive of petrol duty) derived from the provision of those services such as the supply of petrol and catering which the Company agreed to provide under the leases in the motorway service areas. The percentage of gross takings payable as additional rent was to increase as the takings increased. Only after the Company had begun to provide the agreed services in the motorway service areas was it appreciated that in so far as the gross takings defined for the purposes of the leases included sums received for the sale of cigarettes and tobacco, the additional rent was, to a substantial extent, calculated by reference to tobacco duty. In company with other motorway service area operators the Company sought to remedy this situation since as matters stood it was proving difficult to operate the service areas profitably.
Negotiations took place with the relevant ministry, by now the Department of the Environment. The negotiations were protracted. The matter was said to have been first raised in February 1966. Throughout the expression "renegotiations of leases for the elimination of...
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