Warehouse company’s new access road–Cost held capital outlay for tax purposes, though road built merely as a replacement to avoid local residents’ complaints
This was an
appeal by the Inland Revenue from a decision of special tax commissioners
holding that the cost of providing a new access road to the premises of the
respondents, Castle Hill Warehousing Co Ltd, at Sunningdale Estate, Lincoln,
was of an income nature, not capital, and was therefore deductible in computing
profits for the purpose of corporation tax.
Mr H K Woolf
(instructed by the Solicitor of Inland Revenue) appeared for the Crown, and Mr
A R Thornhill (instructed by Wedlake, Bell, agents for R A & C P
Heptonstall, of Goole, represented the respondents.
Giving
judgment, MEGARRY J said that the respondents were a warehousing company at
Lincoln. Residents of Sunningdale Drive complained about the disturbance caused
by heavy lorries using the road, so the company approached Lincoln Corporation
regarding a new access to their site. The corporation agreed to an arrangement
whereby the company were to convey a strip of their land to the corporation and
build a road, after which the corporation would take the road over. What was
now at issue was the nature, for tax purposes, of £5,227 spent by the company
on the construction of the road. The Crown contended that it was expenditure
incurred on capital account, and relied on the Income and Corporation Taxes Act
1970, section 130. The company argued that the expenditure was incurred on
revenue account because it was spent to preserve the company’s trade and
warehousing property. The special commissioners agreed with the company, and
the Crown now appealed from that decision.
The undoubted
purpose of the transaction was to preserve the good name and business of the
company by stopping complaints from residents. What the company had obtained
was an access to their premises which was no better and no worse than they
formerly had, but different in direction, location and legal rights. In their
decision, the special commissioners had said, ‘Looking at the matter in a
commonsense way, we found that no new capital asset had been created when the
company, for the sake of its good name, gave up one road and built
another.’ He (his Lordship) felt some
difficulty about two phrases in that sentence–‘no new capital asset had been
created’ and ‘gave up one road and built another.’ The first phrase left it uncertain which of
the elements of the compound phrase the commissioners were denying. Was it a
capital asset, but not new, or was it neither new, nor capital nor asset? It seemed that the commissioners’ sentence
should have read that no ‘additional’ capital asset had been created and that
the company had merely given up one means of access for another.
What, in fact,
the company did was to dispose of a tiny piece of their land, so shutting
themselves off from access to a highway, and acquire instead a perpetual
easement of way in consideration of constructing a new road which gave access
to another part of the same highway. The company then had what they never had
before, an easement and their own road, part of which they were to retain and
part of which they were to surrender when a new ring road came close by. It
seemed that by paying once and for all a lump sum of £5,227 the company acquired
an asset with enduring qualities intended to be used indefinitely in the manner
of a fixed asset of a capital nature, as appurtenant to certain fixed assets,
consisting of their warehouses. Counsel for the company contended that the
company acquired nothing that could be shown as an asset in the balance sheet,
but he (his Lordship) would be surprised to find that problem beyond the wit of
accountants. In the end, he could not see how giving up a tiny strip of land
and so cutting off access to Sunningdale Drive could transform a capital
transaction of that nature into an income transaction. He would be very slow to
accept, on those facts, the doctrine of equivalent replacement which seemed to
be explicit in the commissioners’ decision. The appeal would accordingly be
allowed.
