Airfield use for temporary drag-racing — Article 4 direction revoking permitted development — Planning permission refused — Claim for compensation for loss of profits — Lands Tribunal awarding sum after allowance for income tax — No grossing up for tax on compensation — Inland Revenue intimating that compensation sum to be treated as capital gain — Whether tribunal erred in law in relation to effect of tax on compensation
The appellant company held a licence to use an airfield for drag-racing. In 1974 the respondent council made an article 4 direction under the Town and Country Planning General Development Order 1973, in respect of the airfield, revoking the planning permission deemed granted by that order to use land on 14 days per year for motor racing; this was confirmed by the Secretary of State for the Environment and an express application for the same use was refused by the respondents. The appellants claimed compensation under section 164(1) of the Town and Country Planning Act 1971 for their “loss or damage which is directly attributable to” the revocation of the planning permission deemed granted by the 1973 Order.
The Court of Appeal held ([1983] QB 382) that the licence under which the appellants had use of the airfield had the effect of making the appellant company “a person interested in the land” within the meaning of section 164 of the 1971 Act. The Lands Tribunal ([1984] RVR 85), in awarding compensation for loss of profits, made deductions to allow for the corporation income tax which would have been payable by the appellants had those profits been earned in the relevant years. The tribunal assumed that the compensation for loss of profits would not be assessed to corporation income tax and accordingly did not gross up to allow for this.
The Inland Revenue took the view that the compensation sum would be subject to corporation capital gains tax. The appellants obtained leave to appeal, contending that the tribunal had erred in law in making the adjustments to deduct for notional income tax and in assuming that the compensation sum was not itself subject to tax.
Held The appeal was allowed. Capital gains tax is chargeable under section 20 of the Capital Gains Act 1979 and there is no general proposition that compensation awarded by statute is outside that provision. Where a capital sum is “derived” from an asset it may fall within section 20.
The appellants had a licence, and this asset depreciated in value when the planning permission was revoked. They were entitled to a capital sum by way of compensation for that depreciation; their right to compensation was under section 164 of the 1971 Act. The capital sum was clearly “derived” from the asset and the Inland Revenue were correct in believing that the compensation was therefore subject to capital gains tax.
The Lands Tribunal was therefore in error in awarding a net sum and in assuming that that sum was not itself subject to tax. The proper course was for the respondents to pay the sum gross and to leave the proper taxation of it to the Inland Revenue.
Stoke-on-Trent City Council v Wood Mitchell & Co (1978) 248 EG 870 applied.
William Massey (instructed by Booth & Co, of Leeds) appeared for the appellants; and Robin Matthew (instructed by the solicitor to Kirklees Metropolitan Borough Council) appeared for the respondents.