Taxpayer’s accounts prepared according to generally accepted principles of commercial accounting – Whether taxpayer entitled to deduct expected loss on future rent liabilities in advance – Special Commissioners dismissing taxpayer’s appeal – Appeal allowed.
The appellant firm (the taxpayer) leased four offices in London. In 1990 it vacated the offices and moved to one central office. However, it was only able to terminate its continuing obligations for rent in respect of two of the offices, and was therefore left with two leases, one expiring in 1992 and the other in 2008. In its audited accounts for the 12-month period to 30 April 1990 (the basis period), a provision of £5,511,258 was made for the expected loss on the two leases; in one case for the remainder of the lease and in the other until 1998, the date of a rent review, beyond which the position could not be reliably forecast. The Revenue made an assessment on the basis that, although this was a proper approach according to generally accepted principles of commercial accounting, for income tax purposes, the taxpayer’s profits for the basis period could not be subject to a other than the rent falling due during that period itself. The commissioners dismissed the taxpayer’s appeal. The commissioners accepted that the evidence showed that the making of the provision for rent liability in the accounts was required by generally accepted principles of commercial accounting, as a matter of prudence, but held that the application of the concept of prudence should be ignored in certain cases for the computation of profits for tax. They held that common sense and commercial reality required that the rent shortfall should be deducted year by year, as it occurred, rather than by way of the advance provision made in the accounts. The taxpayer appealed. The respondent submitted: first, that the commissioners’ conclusion was correct; and second, even if the commissioners’ reasoning was incorrect, the taxpayer’s approach involved an anticipation of liabilities, which was illegitimate as a matter of tax law.
Held The appeal was allowed.
1. The Revenue’s approach involved submitting a rival method of accounting for the rent shortfall, which was not supported by any accepted principle of commercial accounting, and which therefore could not be said in any sense to present a true view of the financial position of the taxpayer in the relevant year. The commissioners’ decision was not justified on the evidence before them and was erroneous.
2. A general rule against the anticipation of liabilities was inconsistent with generally accepted principles of commercial accounting, as in many cases, such a rule would have disallowed any provision made in accordance with the concept of prudence: Threlfall v Jones (Inspector of Taxes) [1994] Ch 107 considered.
Edward Walker-Arnott (senior partner for Herbert Smith) appeared for the appellant; Nicholas Warren QC and Rabinder Singh (instructed by the solicitor to the Inland Revenue) appeared for the respondent.
Sarah Addenbrooke, barrister