West Burton Property Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 18 May 2021 |
| Neutral Citation | [2021] UKFTT 160 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 160 (TC)
Judge Tony Beare
Mr Malcolm Gammie QC, instructed by Enyo Law LLP appeared for the appellant
Mr Jonathan Bremner QC and Ms Barbara Belgrano, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Corporation tax – Deferred revenue expenditure incurred in the course of carrying on a property business and forming part of the cost of the property in the taxpayer's accounts – On sale of the property, the difference between sale proceeds and cost of the asset required by generally-accepted accounting practice to be accounted for in the taxpayer's profit and loss account – The deferred revenue expenditure was brought into account as a debit in calculating the taxpayer's accounting profits in the financial year in which the sale occurred, and so was to be allowed – Relief for the deferred revenue expenditure not to be denied on the basis that the sale did not take place in the course of the property business.
The First-tier Tribunal allowed the taxpayer's appeal: deferred revenue expenditure incurred in the course of carrying on a property business and forming part of the cost of the property in the taxpayer's accounts was properly taken as a deduction for tax purposes in the accounting period of sale of the property concerned.
The taxpayer, West Burton Property Limited (“WB”), owned the West Burton coal-fired power station. In November 2001, WB granted a lease to its parent company Power Ltd for ten years, to enable Power Ltd to operate the power station. In December 2001, EDF Energy Ltd acquired Power Ltd (and with it WB) from its then US owners. In November 2011, shortly before expiry of the lease, WB sold the freehold interest in the power station, together with all associated fixed property, plant and equipment, to Power Ltd. In connection with the sale, Power Ltd also took on the benefit and burden of any existing contracts and other commitments relating to the power station and assumed responsibility for any liabilities incurred following the sale.
The consideration for the sale was equal to the net book value of the assets in question (that is, the total cost of the assets in question less accumulated depreciation). The net book value was £244m (a total cost of some £698m less accumulated depreciation of some £454m). As the sale took place at net book value, the sale gave rise to neither a profit nor a loss for accounting purposes and, consequently, WB's profit and loss account for the financial year ending 31 December 2011 (“FY 2011”) did not show a profit or loss in respect of the sale.
The net book value of the power station at the time of the sale included some £65m of unamortised deferred revenue expenditure (“DRE”). WB had incurred costs in maintaining the power station. Although those costs were revenue in nature – in that they related to the maintenance of the power station – the costs incurred in each financial year were initially capitalised in WB's accounts for the financial year in which they were incurred and then amortised over four years.
WB had incurred some £156.5m of DRE in aggregate over the 10 years in which it leased the power station. Of that, some £91.5m was depreciated in WB's profit and loss account in the financial years preceding FY 2011, with the result that, at the time when the sale of the power station to Power Ltd took place, some £65m of the DRE remained undepreciated in the profit and loss account.
HMRC disallowed the deductibility of the DRE in question (the £65m), in calculating the taxable profits of WB's property business for the relevant accounting period, on two grounds:
- that the sale of the power station was a transaction which fell outside the scope of WB's property business and therefore, even if the sale meant that the DRE was brought into account as a debit in calculating the profits which were shown in the profit and loss account for FY 2011, the DRE could not be taken into account in calculating the taxable profits of the property business (Issue One).
- even if wrong in relation to Issue 1, the DRE was not brought into account as a debit in calculating the profits which were shown in the profit and loss account for FY 2011, and thus there was no basis on which WB was entitled to claim a deduction in respect of that DRE in computing the taxable profits of its property business for the relevant accounting period (Issue Two).
WB appealed to the Tribunal.
The judge said the accounting experts for the two sides had agreed FRS 15 and FRS 3 required that the profit or loss on the disposal of a tangible fixed asset be accounted for as the difference between the sale proceeds and the asset's carrying value (cost less accumulated depreciation). The book-keeping entries to determine that profit or loss were recorded in an account. Those entries involved crediting the relevant account with the sale proceeds and debiting the relevant account with the net book value of the power station at the time of the sale. The net amount reflecting that credit and debit in the book-keeping account was then recorded in the profit and loss account. In this case, the net amount was nil as the power station had been sold at its net book value (though the same approach would have been adopted if the power station had been sold for more or less than its net book value).
There was no credit or debit in the FY 2011 profit and loss account itself in respect of the sale of the power station even though that event – ie the sale – had been recognised and accounted for in the profit and loss account.
The judge said the accounting treatment adopted by WB was in fact not relevant to Issue One and, so far as Issue Two was concerned, it was necessary solely to consider whether each of the sale proceeds and the net book value of the power station at the time of the sale - which is to say, the gross amounts used to calculate the net amount which appeared in respect of the sale in WB's profit and loss account for FY2011 – were “items brought into account as credits or debits in calculating the profits [of WB's property business for the relevant period of account]” (see CTA 2009, s. 48).
HMRC argued the sale of a property for a capital sum did not concern the “exploitation of land as a source of rent or other receipts” because it did not involve making use of the land in order to generate rent or other receipts. It followed, the argument went, that the sale of the property which had been used in the property business for a capital sum could not be regarded as a transaction taking place “in the course of the property business”. And consequently, no amount which was brought into account as a credit or debit in calculating the profits shown in the profit and loss account as a result of the sale could feature in the computation of the taxable profit or loss of the property business.
The judge did not agree. Once a property business existed because the condition as to “exploitation of land” was satisfied, a transaction which would naturally fall to be regarded as taking place in the course of that business but which did not give rise to a receipt of an income nature should be taken into account in computing the taxable profits of that business. CTA 2009 Part 4, Ch. 3 outlined how the taxable profits of a property business were to be calculated once it had been determined that a property business existed. In that context, it seemed inconceivable that the taxable profits of the property business would not fall to be determined by taking into account both the acquisition and the disposal of the property which had been the main asset of that business. In doing so, of course, CTA 2009, s. 93 (applied to property businesses pursuant to CTA 2009, s. 210) contained the well-known exclusion for capital receipts.
Even if wrong on this, the judge said the DRE in question was quite plainly incurred for the purpose of maintaining and overhauling the power station in the period in which leased to Power Ltd. As the DRE was revenue expenditure incurred in the course of carrying on the property business, WB was entitled to relief for that DRE if and when the DRE was brought into account as a debit in calculating the profits shown in the profit and loss account, and that was the case even if the transaction which triggered the DRE's being so reflected was a transaction occurring other than in the course of carrying on the property business.
HMRC argued that even if wrong on Issue One, no item was in fact brought into account as a debit in calculating the profits shown in the profit and loss account for FY 2011 in connection with the sale of the power station. This was because:
- The only amount which appeared in the profit and loss account in respect of the sale of the power station was the difference between the sale proceeds and the net book value of the power station.
- Although the sale proceeds and the net book value had been brought into account in WB's underlying books, those books themselves were not part of the accounts.
The judge considered HMRC were wrong to say the sale proceeds and the DRE in this case were not “items brought into account as credits or debits in calculating the profits” shown in the profit and loss account. There was nothing in the language used in CTA 2009, s. 46 and s. 48 which compelled the conclusion that the only credits and debits which may be taken into account for this purpose were those credits and debits which appeared in the profit and loss account itself. All that mattered was that the relevant item had been brought into account as a credit or debit “in calculating the profits”.
In the judge's view, when the nil amount was recognised in WB's profit and loss account in respect of the sale of the power station, that involved bringing into account in the calculation of the profits for the relevant financial year a credit in respect of the sale...
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