Taxation — Corporation tax — Liability of company to corporation tax on a sum paid in settlement of claim against estate agents — Appeal by taxpayer company against decision of special commissioner — Company held a lease subject to a rent review clause — Landlords served a trigger notice in accordance with the lease specifying an increased rent — Company tenant instructed estate agents to serve the appropriate counternotice objecting to the proposed increase but the estate agents negligently failed to do so within the specified time-limit — In an action by the landlords against the tenant company, the estate agents being joined as third party, a settlement was reached under which the estate agents agreed to pay the company the sum of £14,000 and costs — The £14,000 was paid by the estate agents as compensation for their negligence, which had led to the company having to pay a higher rent during the residue of the lease than would have been payable if the agents had not been negligent — As a consequence of the negligence the company’s profits were less than they would have been — The sum of £14,000 was in effect paid to restore the diminution which the company would otherwise suffer in its profits and in the opinion of the special commissioner was correctly treated as part of the company’s trading income — Held by Walton J that the special commissioner had come to the right conclusion — The case of Tucker v Granada Motorway Services Ltd, which was cited by the appellants as supporting their appeal, was distinguishable — On the other hand, the judgment of Diplock LJ (as he then was) in London & Thames Haven Oil Wharves Ltd v Attwooll, cited on behalf of the inspector of taxes, gave guidance which was directly in point — The company was liable to be assessed for corporation tax on the £14,000 — Appeal dismissed
Gray v Lord Penrhyn [1937] 3 All ER 468
London
& Thames Haven Oil Wharves Ltd v Attwooll [1967]
Ch 772; [1967] 2 WLR 743; [1967] 2 All ER 124; [1967] 1 Lloyd’s Rep 204; (1966)
43 TC 491; [1966] TR 411, CA
Rolfe v Nagel (1981) 55 TC 585; [1982] STC 53; [1981] TR 373, CA
Tucker
v Granada Motorway Services Ltd [1979] 1 WLR
683; [1979] 2 All ER 801; (1979) 53 TC 92; [1979] STC 393, HL
This was an
appeal by the taxpayers, Donald Fisher (Ealing) Ltd, against an adverse
decision of one of the special commissioners upholding the liability of the
appellants to be assessed to corporation tax on a sum of £14,000 received by
the company under the terms of settlement of an action concerning the rent of a
property at 191 High Street, Acton, London W3. The respondent was Neil Spencer
(H M Inspector of Taxes).
Andrew Cosedge
(instructed by Somers & Co, of West Ealing) appeared on behalf of the
appellant; Philip Vallance (instructed by the Solicitor of Inland Revenue)
represented the respondent.
Giving judgment,
WALTON J said: This is an appeal by the taxpayer company, Donald Fisher
(Ealing) Ltd, against a decision of the special commissioner. The facts which
give rise to the dispute in the present case are set out with admirable
clarity, as usual, in the case stated, and I will read the opening of the case
accordingly:
Donald Fisher
(Ealing) Ltd (‘the company’) appeals against an estimated assessment to
corporation tax for the accounting period ended April 5 1982 in the sum of
£1,000. The question for my decision is whether a sum of £14,000 received by
the company during the relevant accounting period under the terms of a
negotiated settlement of an action concerning the rent payable by the company
for 191 High Street, Acton (‘the property’), formed part of the profits of the
company chargeable to corporation tax.
The Facts: 1.
On July 6 1973 the company took a lease (‘the lease’) of the property from
Millmar Properties Ltd (‘the landlord’) for a term of 15 years from the date of
the grant of the lease. 1.1. The rent reserved by the lease was £5,000 per
annum subject to reviews by the landlord at the end of the 5th and 10th years
of the term. 1.2. The rent review clause in the lease provided that the
landlord should serve written notice on the company specifying the amount of
rent required by the landlord and unless the company served a written
counternotice upon the landlord within a specified period objecting to the
amount of the proposed rent, that rent would become payable under the terms of
the lease.
2. The
company entered into possession of the property, which was used in connection
with the company’s trade running amusement businesses. The ground floor of the
property was used as a bingo club and the first floor as a snooker centre.
3. On
December 7 1977 a representative of the landlord received a letter from its
agents, Messrs Athawes Son & Co, advising the landlord that the market rent
for the property at that time was approximately £8,750 per annum but suggesting
that when operating the rent review clause the landlord should specify a rental
figure of £12,500 per annum payable from July 6 1978.
4. On
December 16 1977 the landlord served a notice in writing on the company
reviewing the rent for the property with effect from July 6 1978 in the sum of
£12,500.
5. The
company was advised by a local estate agent, valuer and surveyor that in his
opinion a proper market rent for the property would be approximately £7,500 per
annum. On receiving that advice the company instructed that estate agent to
serve the appropriate counternotice upon the landlord and to try to negotiate a
proper market rent. The agent negligently failed to serve the counternotice on
the company’s behalf within the time specified in the lease and the landlord
claimed that the rent payable thereunder with effect from July 6 1978 was
£12,500 per annum.
6. A dispute
having arisen as to the rent properly payable under the terms of the lease with
effect from July 6 1978 as between the landlord and the company, the landlord
commenced an action in the High Court against the company and two of its
directors as guarantors under the terms of the lease. Subsequently the
company’s agent was joined in the action as a third party.
7. The
company and its directors disputed the validity of the rent review notice
served by the landlord and also claimed damages for negligence against its own
agent.
8. On October
21 1981 the action was settled before trial, the terms of the settlement being
as follows: (a) The landlord agreed to accept a rent of £11,500 per annum in
lieu of the claimed rent of £12,500 per annum. (b) The company’s agent agreed
to pay to the company the sum of £14,000 as damages. (c) The company’s agent
agreed to pay the costs.
9. The
company accepted
that sum
. . . on the
basis of advice given by counsel . . .
10.
Subsequently the company tried without success to sell the lease.
11. At a
later date
one of its
directors [Mr Slack]
attended a
public auction and successfully bid £110,000 for the freehold reversion of the
property.
I may add on
that last point that there is no evidence whatsoever, and
special commissioner, that Mr Slack was bidding on behalf of the company or
that it was the company which acquired the freehold reversion. In my judgment
it would not matter at all if in fact Mr Slack had been bidding as an agent for
the company.
Now what was
the £14,000 paid for? It was undoubtedly
paid by the agent as damages for the agent’s negligence which led to the damage
which was suffered by the company. And what was the damage suffered by the
company? The damage suffered by the
company was that for the remaining five years of the lease (or something of
that order) the company would have to pay a rent of £11,500 per annum in lieu
of whatever the proper rent ought to have been. It is of course possible to put
the matter in the alternative form — and this is indeed what Mr Cosedge, for
the appellant, has attempted to do — and to say that the sum of £14,000 was
damages for the diminution in value of the lease in the hands of the company.
That is undoubtedly the case, but why had the lease diminished in value in the
hands of the company? The answer to that
question can only be that it was because there was more rent payable thereunder
than would have been payable had the agent not been negligent. So it appears to
me that, although there is an alternative way of putting the damage caused to
the company, there is no real difference in principle whatsoever. The damage is
that from then on the company had to pay more rent than otherwise it would have
done.
Of course, at
the relevant times — and we have to consider only what happened at the relevant
times and not what might have happened or indeed did happen subsequently, and
that is one reason why the acquisition of the freehold reversion, even if on
behalf of the company, would make no difference — the company was occupying the
premises for the purposes of its business. Inevitably, therefore, the effect of
the agent’s negligence was that the profit made by the company was less than it
otherwise would have been by the amount of the excess rent year by year; and it
was precisely to compensate the company for the payment of the excess rent that
the £14,000 was paid.
So far as I
can see, it matters not how that £14,000 was calculated. It may have been
calculated by some formula based upon the excess rent year by year; it may have
been calculated upon the assumed diminution in value of the lease in the hands
of the company; or the figure may have been plucked completely out of the air
on the basis of surveyors’ intuition as to what the damages really were. I do
not think any of that matters. What matters is what it was paid in respect of,
and what it was paid in respect of was something which year by year, so long as
the company occupied the premises for the purposes of its business, would
inevitably result in diminution of the profits of the company. Therefore, prima
facie it seems only common sense and common justice that the sum of £14,000
paid to put back the diminution which the company will suffer in its profits
year by year should be treated as part of the trading income of the company.
Now Mr Cosedge
has really denied that that follows, and he has denied that it follows because
he said that what really has happened is not that the trading outgoings of the
company have been increased year by year but that an asset in the hands of the
company (to wit, the lease) has been depreciated in value. I can follow that as
a submission, but as I have already said I do not think that that in any way
affects the position, because the question, I repeat, must be: ‘What was the
payment by the negligent agent made in respect of?’, and what it was made in
respect of was the fact that the taxpayer had to pay more year by year by way
of rent.
Mr Cosedge has
sought to rely very heavily upon the case of Tucker v Granada
Motorway Services Ltd, reported in (1979) 53 TC 92 and the facts of that
case are set out in the headnote as follows:
The Minister
of Transport, as landlord, leased to G Ltd, the taxpayer company, a motorway
service area for 50 years from October 16 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 September 30 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 . . ., 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, namely, in its lease, it was
capital expenditure. The Company appealed . . . 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 to the House of Lords, and it was 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.
Mr Cosedge
submits that if in that case it was a payment of a capital nature so a payment
the other way round, which would be the case here, is equally a payment of a
capital nature. But I think that he does not understand the basis of the Granada
Motorway Services Ltd case sufficiently accurately. It is by no means every
payment which enhances the year-by-year profits of the taxpayer that constitutes
a sum which is deductible for its trading purposes. One of the questions which
can arise is whether the sum in question is not paid for the acquisition of
some more or less permanent asset. I take as the simplest possible example in
this line of country the payment of a premium for the acquisition of a lease.
There is no doubt that if one pays a premium to the landlord for the
acquisition of a lease the rent will be less than it otherwise would have been:
otherwise, there is no point in making that sort of payment. But what one is
paying for there is to acquire the asset, to acquire the lease.
Similarly, in
the case of Tucker v Granada Motorway Services Ltd the payment
which was being made was a payment to obtain in substance a better lease. The
lease there had something like 40 years to run, and it was a permanent
improvement — a permanent improvement to an already held asset of the company,
namely, the lease. Therefore, in that case the House of Lords (with Lord Salmon
dissenting) had no dubiety in holding that the payment there was a capital
payment. But here the payment is a payment which was not made in any way
because the lease itself had altered. Throughout its existence the lease has
been exactly and precisely the same. All that has happened is that there has
been negligence on the part of the agent which has led to the rent payable
under the lease being at any rate temporarily more than it should have been.
Under those
circumstances it appears to me that the cases upon which the special commissioner
relied of Gray v Lord Penrhyn [1937] 3 All ER 468 and Rolfe v
Nagel [1982] STC 53 are undoubtedly very much in point. The proposition
is put, in a case which was cited to me by Mr Vallance, on behalf of the
inspector of taxes, very forcibly and very accurately at the beginning of
Diplock LJ’s judgment in London & Thames Haven Oil Wharves Ltd v Attwooll,
reported in [1967] 2 All ER 124, in the Court of Appeal. This is an area where
it is almost too easy to see what the correct solution to the problem ought to
be but very difficult to formulate in fully acceptable terms what the relevant
rule as a dry proposition of law is, but that is exactly what Diplock LJ
attempts, and in my view successfully attempts, in his judgment in this case.
This is what he said:
The question
whether a sum of money received by a trader ought to be taken into account in
computing the profits or gains arising in any year from his trade is one which
ought to be susceptible of solution by applying rational criteria; and so, I
think, it is. I see nothing in experience as embalmed in the authorities to
convince me that this question of law, even though it is fiscal law, cannot be
solved by logic, and that, with some temerity, is what I propose to try to do.
I start by
formulating what I believe to be the relevant rule. Where, pursuant to a legal
right, a trader receives from another person compensation for the trader’s
failure to receive a sum of money which, if it had been received, would have
been credited to the amount of profits (if any) arising in any year from the
trade carried on by him at the time when the compensation is so received, the
compensation is to be treated for income tax purposes in the same way as that
sum of money would have been treated if it had been received instead of the
compensation. The rule is applicable whatever the source of the legal right of
the trader to recover the compensation. It may arise from a primary obligation
under a contract, such as a contract of insurance; from a secondary obligation
arising out of non-performance of a contract, such as a right to damages,
either liquidated, as under the demurrage clause in a charterparty, or
unliquidated; from an obligation to pay damages for tort, as in the present
case; from a statutory obligation, or in any other way in which legal
obligations arise.
The source of
a legal right is relevant, however, to the first problem involved in the
application of the rule to the particular case, namely, to identify for what
the compensation was paid. If the solution to the first problem is that the
compensation was paid for the failure of the trader to receive a sum of money,
the second problem involved is to decide whether, if that sum of money had been
received by the trader, it would have been credited to the amount of profits
(if any) arising in any year from the trade carried on by him at the date of
receipt, ie would have been what I shall call for brevity an income receipt of
that trade. The source of the legal right to the compensation is irrelevant to
the second problem. The method by which the compensation has been assessed in
the particular case does not identify for what it was paid; it is no more than
a factor which may assist in the solution of the problem of identification. I
will not again traverse the cases. They seem to me to be directed to the
solution of one or other of these two problems, which are not always
distinguished in the judgments. In the course of these judgments different
metaphors and similes (appropriate no doubt to the particular facts of the
case) have been used. But I do not think that any of these conflict with the
rule as I have expressed it.
Of course, in
the present case we have what Mr Vallance felicitously called the mirror image
of that. Here the compensation is compensation because of increased
expenditure, and because it is that and not for the trader’s failure to receive
money which if it had been received would have been credited to the amount of
profits (if any) arising in any year from the trade carried on by him at the time
the compensation was so received, one has the mirror image; that is to say,
that the compensation is payable for increased expenditure — not diminished
receipts but increased expenditure. But from the point of view of the trader
the result is in both cases the same; that is to say, that the profits are less
than they ought to have been. If compensation is received which is in substance
payable in respect of either the non-receipt of what ought to have been
received or the extra expense which would not have been incurred if all had
gone properly, it seems to me that the principle is exactly the same.
That being so,
it appears to me beyond a shadow of doubt that the decision to which the
learned special commissioner came was absolutely correct and for the reasons
given by him, and that all that it falls to me to do is to dismiss this appeal.
The appeal
was dismissed with costs.
