Land Compensation Act 1961 – Compulsory purchase order (CPO) – Landfill site owned by appellant – CPO withdrawn but appellant kept out of possession of land for three years – Compensation awarded under section 31(3) of 1961 Act – Respondent treating compensation as income for tax purposes – Whether properly characterised as capital or income – Appeal dismissed
The appellant owned land that it used as a landfill tipping site. A water company made a compulsory purchase order (CPO) in respect of part of the appellant’s land. This was ultimately withdrawn, but resulted in the appellant being kept out of possession of its land for three years. By the time the appellant had regained control of the CPO site, the local landfill market had changed; the market for household and general waste had shrunk and the only significant waste-disposal market open to the appellant was that for hazardous and contaminated waste.
The appellant brought a claim for compensation under section 31(3) of the Land Compensation Act 1961, and was awarded £2,185. It considered that this sum should be regarded as capital for tax purposes, but the respondent treated it as income and issued a notice of amendment to the appellant’s tax return.
That approach was upheld by the respondent’s general commissioners and by the High Court on appeal. The judge held that the compensation should be treated as income since the loss to which it related was not the permanent sterilisation of the use of the land for landfill, but only a temporary restriction on the appellant’s trading opportunities.
The appellant appealed. It submitted that the temporary disruption to the use of the landfill site had, in reality, had the consequence of permanently exhausting the opportunity to use the site for general waste, thereby diminishing its capital value as an asset.
Held: The appeal was dismissed.
The correct characterisation of the compensation depended upon why the compensation was paid and whether the sum that the appellant ought to have received would have been credited as an income receipt of its trade: London & Thames Haven Oil Wharves Ltd v Attwooll [1967] Ch 772 applied. The profit-earning capacity of an asset was reflected in its value. Where an asset could provide a number of distinct sources of income, and its capital value reflected each of those sources, compensation paid for the exhaustion or realisation of one of those sources could constitute a capital receipt if the value of the asset was thereby diminished: Glenboig Union Fireclay Co Ltd v ICR (1921) 12 TC 427 and Trustees of Earl Haig v Inland Revenue Commissioners 22 TC 725 applied; McClure (Inspector of Taxes) v Petre [1988] 1 WLR 1386 considered. In the instant case, it was impossible to identify any source of income derived from the landfill site that was exhausted or realised. The value of the land depended upon its capacity as a landfill site to produce profits from the deposit of waste. Although that capacity had been temporarily interrupted, it was not exhausted and the site remained licensed for the deposit of general and special waste. The appellant’s inability to use the site for the deposit of general waste was attributable not to the exhaustion of any profit-earning capacity, but to a change in market conditions. The case could not be distinguished from other cases in which the compensation paid for a temporary loss of use of a capital asset had been recognised as an income receipt and where compensation had been paid to replace the loss of profits that would otherwise have been earned: London & Thames and White (Inspector of Taxes) v Davies [1979] 1 WLR 908 applied.
Richard Vallat (instructed by Gregory Rowcliffe Milners) appeared for the appellant; David Rees (instructed by the legal department of HM Revenue & Customs) appeared for the respondent.
Sally Dobson, barrister