Turners (Soham) Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 26 February 2019 |
| Neutral Citation | [2019] UKFTT 131 (TC) |
| Date | 26 February 2019 |
| Court | First Tier Tribunal (Tax Chamber) |
[2019] UKFTT 0131 (TC)
Judge Charles Hellier
Julian Hickey instructed by Qubic Tax, appeared for the appellant
Rupert Baldry QC and Ben Elliott, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Corporation tax – Computation of profits – Deductions for replacement of tools – Implements, utensils, articles – CTA 2009, s. 68 and ICTA 1988, s. 74(1)(d) – Mistake claim – FA 1998, Sch. 18, para. 51A – Whether generally prevailing practice.
The First-tier Tribunal (FTT) decided that the statutory renewals basis did not apply to expenditure on tractor and trailer units of a haulage firm and that the prevailing practice was to claim capital allowances or use the non-statutory renewals practice.
This decision concerned:
- the correct construction of CTA 2009, s. 68 and its predecessor, ICTA 1988, s. 74(1)(d) concerning the deductibility of expenditure on implements, utensils and articles; and
- the application of the facts to FA 1998, Sch. 18, para. 51 Case G which removes HMRC's liability to make a repayment where a claim is based upon a mistake if the mistake was based on generally prevailing practice.
The appellant had claimed deductions for expenditure on tractor and trailer units used in its haulage business in the years ending 31 December 2009 to 31 December 2013 under CTA 2009, s. 68, although HMRC did not open an enquiry into the appellant's returns for the years ended 31 December 2011 and 2012.
In the year ended 31 December 2008, the appellant had claimed capital allowances for the cost of replacement tractor and trailer units, but made a “mistake claim” in 2011 in relation to the 2008 year, disclaiming the capital allowances and claiming a deduction for the replacements under ICTA 1988, s. 74(1)(d).
The appellant's statutory accounts were prepared in accordance with generally accepted accounting practice (GAAP) and the tractor and trailer units were capitalised at acquisition cost on the balance sheet as tangible fixed assets and were depreciated over their useful economic life.
The FTT started by considering whether ICTA 1988, s. 74(1)(d) authorised a deduction before contemplating whether the tractor and trailer units were implements, utensils or articles.
In claiming that ICTA 1988, s. 74(1)(d) authorised a deduction, the appellant first argued that such authorisation is in the words of the provision. The FTT considered that the words admit the possibility that something outside the prohibition may be deductible, but do no more.
The appellant then went on to argue that various case authorities indicate that ICTA 1988, s. 74(1)(d) or its predecessors authorised a deduction. The FTT was not persuaded that the cases compelled it to conclude that it authorised a deduction and noted that none of the cases involved the issue of whether ICTA 1988, s. 74 authorised a deduction.
Next, the appellant argued that ICTA 1988, s. 74(1)(d) implicitly allows a deduction notwithstanding that no expense appears for the cost in the commercial accounts. The appellant contended that by denying a deduction for amounts beyond those actually expended, the legislation specifically permits a deduction for expenditure up to that point and that if a deduction is only available if an item has been recognised in the commercial accounts, ICTA 1988, s. 74(1)(d) would be otiose. The FTT disagreed and considered the section to be merely prohibitive.
Finally, the appellant argued that a deduction was permitted whether or not the costs were capital in nature. The FTT was not persuaded by the authorities or by the view of Parliament in enacting the successor legislation in CTA 2009, s. 68 that ICTA 1988, s. 74(1)(d) authorised a deduction of capital expenditure.
The FTT concluded that for the year ended 31 December 2008, ICTA 1988, s. 74(1)(d) did not authorise a deduction and that no deduction was available as no deduction for the costs appeared in the commercial accounts and the costs were not deductible as they were capital in nature.
In case it was wrong in that conclusion, the FTT went on to consider whether the tractor and trailer units were implements, utensils or articles. The FTT accepted that while some things may lie on the boundary of the meaning of those words, it considered that the tractor and trailer units in this case clearly fell outside the scope. Therefore, even the legislation authorised a deduction, the FTT concluded that a deduction would not be available for the tractor and trailer units.
For the remaining periods that were the subject of the appeal, the FTT considered the rewritten provisions in CTA 2009.
CTA 2009, s. 48 states that:
references to receipts and expenses are to any items brought into account as credits or debits in calculating the profits
HMRC argued that the debits and credits must be in the company's GAAP accounts, but the appellant argued that “brought into account” was not the same as brought into the accounts. The FTT considered that “brought into account” indicates that the sums are part of the calculation of profit.
The appellant put forward arguments concerning “tax debits” leading to the conclusion that CTA 2009, s. 68 is an adjustment required by law so that “expenses” must include the tax debits and credits created by it. The FTT considered this argument to be circular.
The appellant referred to various sections in CTA 2009, Pt. 3, Ch. 5 which expressly authorise deductions and claimed that if “expenses” were limited to GAAP profit debits, the provisions would have little or no meat and that elsewhere in CTA 2009, the legislation used the terms debit and credit to mean amounts determined for tax purposes. The FTT could find nothing based on the examples given that suggested that HMRC's interpretation of CTA 2009, s. 48 was wrong.
The appellant argued that CTA 2009, s. 48(3) states that subsection (1) is subject to any express provision to the contrary and that CTA 2009, s. 68 was such a provision. The FTT disagreed as it makes no reference to debits or credits.
The appellant also contended that as CTA 2009, s. 68 referred to “expenses incurred” rather than “expenses”, this concerned the actual expense rather than the accounting debit. The view of the FTT was that a debit can be “incurred” in computing profits and that “incurred” indicates suffering the effect of something and need not refer to a cash payment.
When CTA 2009, s. 68 was repealed, transitional rules applied so that the repeal had effect for expenditure incurred after 1 April 2016. The appellant argued that this meant that CTA 2009, s. 68 was concerned with actual expenditure and not accounting debits. The FTT could see no anomaly from treating “expenditure incurred” in the transitional rules as having a different meaning to “expenses” in CTA 2009, s. 68.
The appellant claimed that as CTA 2009, s. 48 originated with FA 1998, s. 46 which was headed “minor and consequential provisions about computations”, it could not oust the effect of CTA 2009, s. 46 and 68 which was that GAAP profit must be adjusted by the CTA 2009, s. 68 deduction to obtain taxable profits. The FTT considered that based on the view that it had taken of the predecessor legislation, FA 1998, s. 46 makes no difference to its application.
The appellant also reasoned that the explanatory notes to CTA 2009 indicated that the CTA 2009, s. 68 deduction related to actual expenditure rather than GAAP accounts debits. However, the FTT noted that the explanatory notes also indicated that the section was intended to be based on ICTA 1988, s. 74(1)(d) and that section had already been interpreted as meaning the expenditure appearing in the GAAP profit and loss account.
The appellant contended that the way in which TCGA 1992, s. 41 describes and deals with renewals allowances requires that CTA 2009, s. 68 be construed as referring to actual expenditure. The FTT considered that there was no limitation in the efficacy or purpose of TCGA 1992, s. 41 by limiting the “expenses” in CTA 2009, s. 68 to GAAP accounts debits.
The appellant stated if CTA 2009, s. 68 was limited to GAAP accounts debits, the section would be redundant because capital items are not written off in the GAAP accounts. The FTT accepted that the scope of the provision was limited, but as capital items that do not have an enduring benefit could be written off in the GAAP accounts, the provision was not illusory.
The appellant claimed that as the object of the Tax Law Rewrite Project was not to change the law, as items were deductible under the prior law, they should remain so. The FTT noted that although CTA 2009, s. 68 is based on ICTA 1988, s. 74(1)(d), it does not replicate its effect.
Overall, the FTT concluded that as no debit was recognised in the appellant's GAAP profit and loss account, no deduction was available under CTA 2009, s. 68. For the same reasons as the conclusion in respect of ICTA 1988, s. 74(1)(d), the FTT also considered that the tractor and trailer units were not tools.
The FTT reviewed various published materials and concluded that before and in the period surrounding the company's 2008 return, there were three bases upon which relief for expenditure on the replacement of certain equipment could be claimed:
- capital allowances for plant and machinery;
- the statutory renewals basis (ICTA 1988, s. 74(1)(d)); and
- the non-statutory renewals practice.
The FTT considered that the terms of the capital allowance regime and the renewals practice were clear. However, beyond the replacement of items akin to loose tools, it was not clear that the statutory renewals basis applied to large items of plant and equipment. The only source that made confident statements that the cost of items such as lorries would be deductible on this basis was a magazine article.
The FTT concluded that the appellant's original corporation...
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