Compulsory purchase order — Water authority acquiring land for sewage treatment works — Landowner claiming compensation — Lands Tribunal making award for loss of use of land — Defendants treating sum as income for tax purposes — Whether compensation constituting income or capital — Claim dismissed
A water company made a compulsory purchase order (CPO) in respect of land owned by the claimant company to construction a sewage treatment works. The water company served a notice to treat but, after it had taken possession, no construction works were undertaken.
Prior to the CPO, the claimant had obtained consent to use the land for the disposal of hazardous waste. It submitted a claim for compensation for more than £22m in answer to the notice to treat. On receipt of the claim, the water company withdrew the notice and vacated the site.
The Lands Tribunal awarded the claimant £2.185m for the loss of the use of the land, pursuant to section 31(3) of the Land Compensation Act 1961. The claimant considered that this sum amounted to capital for tax purposes, but the defendants regarded the sum as income and issued a notice of amendment to the claimant’s tax return. The claimant appealed.
The defendants dismissed the appeal finding that: (i) the profitability of the operation carried out on the land was a method of valuing a revenue loss caused by an interruption of use; (ii) the claimant had suffered no permanent loss but merely the interruption of its use of the land for a finite period; and (iii) the compensation had been paid in recognition of the claimant’s inability to exploit the land as it had intended.
The claimant appealed contending that the defendants’ decision was perverse and was wrong in law since its loss was so permanent that it had to be regarded as a capital loss.
Held: The claim was dismissed.
The defendants had been entitled to conclude that the compensation paid to the claimant amounted to income, rather than capital, where claimant had suffered only a temporary interference with its use of its fixed asset.
The enduring loss to the claimant by the making and withdrawal of the CPO was not a diminution in the value of its land (other than temporarily during the period of interruption), but a permanent loss of the opportunity to put the land to its most beneficial use during the uniquely favourable market conditions.
Viewed objectively, the claim was for the difference in value between two alternative business schemes on the basis that the making and withdrawal of the order caused the claimant to adopt the less profitable of the two. In the circumstances, the defendants had been entitled to reach the inevitable conclusion that the claimant had regarded its claim as being for loss of profit.
The compensation took its character as capital or income from that of the loss which required the application of business common sense, rather than a purely juristic classification. In cases where only a temporary interference with the trader’s use of its fixed assets had taken place, the general rule was that compensation for such interference (even if associated with a change in the precise nature of the business or with a depreciation in the value of the capital asset) was likely to be classified as income.
Compensation was not capital where it was paid in respect of partial sterilisation of an asset or for hindrance or interference that left the claimant’s asset intact but merely caused it to be used for a time in a different, less profitable, way: White (inspector of taxes) v Davies [1979] 1 WLR 908 considered; Glenboig Union Fireclay Co Ltd v CIR [1922] SC (HL) 112 distinguished.
Richard Vallat (instructed by Vantis Walkers, chartered accountants, of Middlesborough) appeared for the claimant; David Rees (instructed by the legal department of Revenue & Customs) appeared for the defendants.
Eileen O’Grady, barrister