Cost of unsuccessful applications for permission to win gravel held capital expenditure and not deductible in computing profits for tax purposes
This was an
appeal by ECC Quarries Ltd, a wholly-owned subsidiary of English China Clays
Ltd, from a decision of special commissioners for income tax holding that the
cost of certain unsuccessful applications for planning permission for
extraction of sand and gravel was a capital expenditure which could not be
deducted when the company’s profits were computed for tax purposes.
Mr C N Beattie
QC and Mrs H Watson (instructed by Robbins, Olivey & Lake, agents for
Stephens & Scown, of St Austell) appeared for the appellants, and Mr M
Nolan QC and Mr Brian Davenport (instructed by the Solicitor of Inland Revenue)
represented the Crown.
Giving
judgment, BRIGHTMAN J said that the company owned leasehold land at Blackhill
and Colaton Raleigh, Devon, a freehold site at Rockbeare, a few miles away from
Blackhill, and a number of other sites from which extraction was at present
proceeding. It was estimated that Rockbeare and the permitted area of Blackhill
would be exhausted by the mid-1970s, and in 1965 the company bought land at
Straitgate Farm and Lowlands Farm, Ottery St Mary, Devon, as a medium-term
replacement for the Rockbeare deposits. In February 1967 the company lodged
applications for planning permission for the winning and working of sand and
gravel from 151 acres of the Straitgate and Lowland Farms, from a further 626
acres at Blackhill, and alternatively from 570 acres at Colaton Raleigh. If
granted, these applications would have enabled the company’s activities to be
pursued at the three sites well after the year 2000. In the summer of 1969 the
Minister, who had called in the applications for decision, refused all three,
though he indicated that subject to certain qualifications they might be
renewed at some future time. The applications had cost the company about
£24,000, and it was now sought to charge such expenses, which had become more
substantial than formerly, to the profit and loss account for tax purposes.
Counsel for the company did not contend that the expenses of a planning
application would be allowable against revenue in all circumstances. He said
that here the deduction was permissible because of the combination of the
following four circumstances: first, the company’s object was not to create a
new asset or addition to any existing asset; secondly, planning permission
would not have created a new asset or right, but merely removed a fetter from
an existing asset; thirdly, such expenditure was chargeable against revenue
according to ordinary principles of commercial accounting; and fourthly, the
money was spent on an attempt to free replacement assets and preserve the
continuity of the company’s trading activities.
It seemed to
him (his Lordship) that the company had spent money for the purpose of securing
a permanent alteration to the nature of the land it owned or occupied; in other
words, a change from land confined to its existing use and of little or no
value to the company for the purposes of its trade to land capable of being
turned to account in pursuance of the company’s trading activities. It was, he
thought, unbusinesslike to say that if planning permission had been granted no
new asset would have belonged to the company. The company’s assets would have
been radically and enduringly changed, and could have been written up in value
in the balance sheet. On commonsense principles, and with the benefit of the
guidance of the authorities to which he had been referred, including Pendleton
v Mitchells & Butlers Ltd [1969] 2 All ER 928 and Pitt v Castle
Hill Warehousing Co Ltd [1974] 1 WLR 1624, he thought the expenditure was
of a capital and not an income nature. The planning permission, if obtained,
would in some sense have been an intangible asset of a capital nature, and if
that was right, money spent in seeking to acquire such an asset must equally be
expenditure of a capital nature. The only remaining question was whether the
unchallenged evidence as to accountancy practice ought to persuade him
(Brightman J) to a different view. There were unqualified statements of high
authority in the cases which established that this question, capital or income,
was ultimately one of law, which meant that he need not be persuaded by the
accountancy evidence if he did not want to be. He had formed his own view,
based on the decided cases, that the expenditure here was of a capital nature,
and the accountancy evidence was not sufficient to persuade him to alter that view.
In reaching this conclusion, he did not intend to say that it would be
erroneous, in drawing up a balance sheet for the purposes of the Companies Act
1948, to debit the cost of unsuccessful planning applications against revenue
or to appropriate the balance of profit towards that expenditure. Accounts
drawn up to comply with the Act and show shareholders what was the divisible
profit involved a somewhat different form of exercise from the drawing-up of
accounts on strict accountancy principles, and he was not concerned with the
statutory form of accounts.
The appeal
was dismissed with costs.
