Finance Act 1965 Schedule 6–Computation of allowable deductions from capital gains on assignment of lease–Question of rent arrears paid by liquidator–Held not expenditure qualifying for deduction–Taxpayer company’s appeal dismissed
This was an
appeal by Computer Time International Ltd (in liquidation) from a decision of
Fox J on December 18 1975, [1976] 1 WLR 749, allowing an appeal by the Crown
from a decision of special commissioners who allowed an appeal by the taxpayer
company against an assessment to corporation tax in respect of chargeable gains
on the disposal of assets, being the assignment of leasehold premises in Oxford
Street, London W1.
Peter Whiteman
(instructed by Kingsley, Napley & Co) represented the appellants, and Peter
Gibson (instructed by the Solicitor of Inland Revenue) appeared for the Crown.
Giving the
first judgment, ORR LJ said that the taxpayer company, incorporated in 1969,
carried on business hiring out computer time from their premises in Oxford
Street. The total annual rental for the premises was £35,000. The business was
not a success and it went into voluntary liquidation in April 1970 at a time
when it was in arrears with the rent. On condition that all arrears would be
met, the landlord agreed to the liquidator assigning to new tenants the
leasehold interests in the premises. The arrears were paid and the liquidator
received consideration of £93,155 from the new tenants. Appealing against an
assessment to corporation tax for 1970-71 of £22,352, the company contended
that £6,131 of that sum was paid to the landlord for arrears of rent due after
the date of liquidation and qualified as an allowable deduction.
Paragraph 4(1)
of Schedule 6 to the Finance Act 1965 provided that
. . . the
sums allowable as a deduction from the consideration in the computation under
this Schedule of the gain accruing to a person on the disposal of an asset
shall be restricted to . . . (b) the amount of any expenditure wholly and
exclusively incurred . . . for the purpose of enhancing the value of the asset
being expenditure reflected in the state or nature of the asset at the time of
the disposal, and any expenditure . . . in establishing, preserving or
defending his title to, or a right over, the asset.
Paragraph 5(2)
provided that
. . . there
shall be excluded from the sums allowable . . . as a deduction in the
computation under this Schedule any expenditure which, if the assets . . . were
. . . used as part of the fixed capital of a trade the profits or gains of
which were . . . chargeable to income tax would be allowable as a deduction in
computing the profits or gains or losses of the trade for the purposes of
income tax.
The issue was
whether the £6,131 was an allowable deduction in computing the capital gains
arising from the disposal of the taxpayer company’s interests in the premises
in Oxford Street. If the payment did not fall within paragraph 4(1)(b) of
Schedule 6 it failed to qualify as a deduction. If it did fall within it, it
was necessary to go on to decide whether it was disqualified as a deduction by
paragraph 5(1) or (2). To qualify under 4(1)(b) the payment must be expenditure
incurred either wholly and exclusively ‘for the purpose of enhancing the value
of the asset’ or ‘in establishing, preserving or defending’ title to the asset.
The special commissioners had been satisfied that the liquidator’s purpose in
entering into the agreement with the landlord was to obtain the right to assign
the leases and as such the payment did ‘enhance the value.’ As to the second stage, paragraph 5, they
held that the payment was a capital payment and not therefore disqualified. On
the Crown’s appeal from that decision, Fox J held that it was not apt to
describe the payment as ‘enhancing the value,’ but he thought, without deciding
the point, that it was possibly correct to say the payment ‘preserved’ the
title because, had it not been made, the landlord could have taken forfeiture
proceedings. However, he did allow the appeal on the ground that the payment was
rent coming within the express exclusion from allowable deductions in paragraph
5(2).
The first
question in the company’s appeal was whether the judge had been right in
assuming that the payment qualified as a deduction under paragraph 4(1)(b). He
(his Lordship) did not find it possible to fit the performance of obligations
under a lease into either of the phrases used in the subparagraph. If a tenant
in breach of covenants allowed premises to fall into disrepair, they became
less valuable; if the tenant then effected repairs the value of the premises
would be restored, but it would be a misuse of language to say that their value
had been ‘enhanced.’ Similarly a payment
of rent overdue under a lease did not ‘enhance’ the value. Further, the phrase
expenditure ‘incurred in establishing, preserving or defending’ title to an
asset, applied to such matters as evicting a squatter or registering a charge,
but had no application to the performance of a tenant’s obligations under a
lease.
The conclusion
having been arrived at that the payment failed to qualify for deduction under
paragraph 4(1)(b), it was not strictly necessary to consider whether the judge
had been right in holding that the payments were excluded by paragraph 5(2).
However, the court had heard argument on the point. His (his Lordship’s) view
was that the judge had been right. The company’s argument was that the
expenditure was not disqualified under paragraph 5(2), as the payments had been
made with a view of disposing of the properties. But the subparagraph required
the assumption to be made that the assets were to be treated as being at all
times ‘held or used as part of the fixed capital of a trade the profits or
gains of which were chargeable to income tax.’
Thus, the premises must be assumed to have been used as such fixed
capital up to the time of the disposals. Mr Whiteman then, relying on Littlewoods
Mail Order Stores Ltd v IRC [1969] 1 WLR 1241 and IRC v Land
Securities Investment Trust Ltd [1969] 1 WLR 604, invited the court to
treat the payment as being capital and not revenue expenditure. These cases,
however, had rightly been distinguished by Fox J on the ground that in those
cases new capital assets had been acquired. That was not so in this case and no
expenditure of a capital nature had been incurred in relation to the existing
assets.
Finally, Mr
Whiteman claimed that the taxpayer should be able to obtain relief either under
the capital gains tax provisions or as a deduction under Schedule 6. He invited
the court to construe paragraphs 4 and 5 so as to achieve that result. But the
court’s duty was to apply the terms of the statute and for the reasons given it
was not possible to construe the provisions in the way suggested.
The remaining
issue related to paragraph 5(1) and involved matters of accountancy practice,
as to which there was no evidence before the commissioners. It was sufficient
to say that the Crown had accepted that the burden was on it to show that the
subparagraph applied, and it had failed to discharge it. He (his Lordship)
would dismiss the appeal.
GOFF LJ
delivered a concurring judgment and BUCKLEY LJ agreed.
The appeal
was dismissed. Leave to appeal to the House of Lords was refused.
