Income and Corporation Taxes Act 1970–Expenditure on cattle market–Works to cattle sale ring, including new walls and roof–Whether improvements or repairs–Held to be capital expenditure on improvements–Not deductible for purposes of corporation tax–Nature of ‘repairs’ discussed–Revenue’s appeal allowed
This was an
appeal by the Crown from a decision of the General Commissioners for the Thirk
division of Yorkshire, who held that expenditure on works to the sale ring of a
livestock auction market at Bedale, owned by the respondents, Bedale Auction
Ltd, was expenditure on repairs and therefore properly deductible in the
computation of corporation tax.
Brian
Davenport (instructed by the Solicitor of Inland Revenue) appeared for the
appellants, and R M Bramwell (instructed by Hunton & Garget, of Richmond,
Yorkshire) represented the respondents.
Giving
judgment, FOSTER J said: This is an appeal by way of case stated under section
56 of the Taxes Management Act
who held that a sum of £8,605 could be deducted from the profits of the
respondents, Bedale Auction Ltd (to which I shall refer as ‘the company’), for
the year ended December 31 1973, for the purpose of calculating corporation
tax. It was common ground that the company was liable to corporation tax under
section 238 of the Income and Corporation Taxes Act 1970 on the profits of the
company, and those profits were to be assessed under Schedule D, Case I. The
rules which apply to that case are to be found in section 130 of that Act. The
question which the commissioners had to decide was shortly this: was the
expenditure of £8,605 to be regarded as a sum expended for repairs and
therefore deductible under section 130(d) or was it capital employed in
improvements to the premises under section 130(g), in which case it cannot be
deducted in calculating the company’s profits?
The rules in
section 130 are in these terms: ‘Subject to the provisions of the Tax Acts, in
computing the amount of the profits or gains to be charged under Case I or Case
II of Schedule D, no sum shall be deducted in respect of . . . (d) any sum
expended for repairs of premises occupied, or for the supply, repairs or
alterations of any implements, utensils or articles employed, for the purposes
of the trade, profession or vocation, beyond the sum actually expended for
those purposes, . . . (g) any capital employed in improvements of premises
occupied for the purposes of the trade, profession or vocation.’
The Appeal. It is clear that the answer to the question is largely, if not
entirely, a question of fact. A court hearing an appeal is bound to follow the
rules laid down by Lord Radcliffe in Edwards v Bairstow &
Harrison, reported in (1954) 36 TC 207, where he says this at p 229:
If the case
contains anything ex facie which is bad law and which bears upon the
determination, it is, obviously, erroneous in point of law. But, without any
such misconception appearing ex facie, it may be that the facts found
are such that no person acting judicially and properly instructed as to the
relevant law could have come to the determination under appeal. In those
circumstances, too, the court must intervene. It has no option but to assume
that there has been some misconception of the law and that this has been
responsible for the determination. So there, too, there has been error in point
of law. I do not think that it much matters whether this state of affairs is
described as one in which there is no evidence to support the determination or
as one in which the evidence is inconsistent with and contradictory of the
determination or as one in which the true and only reasonable conclusion
contradicts the determination.
In this case
the Crown submits that the decision reached is contrary to the only reasonable
conclusion to which, on the facts, the commissioners could have come.
The Facts. The company was incorporated early in 1972 and it carried on
business as auctioneers of cattle. It purchased as a going concern an auction
mart (which I shall refer to as ‘the mart’) at Bedale, in North Yorkshire,
though I do not know the actual date of purchase. The purchase price paid was
£16,000, of which £13,000 was paid for the freehold and £3,000 for the goodwill
of the business. The mart has a roughly rectangular area of some 23,400 sq ft,
and largely comprises livestock pens and stalls constructed from tubular metal,
some of which are covered by corrugated iron roofing supported on posts and
some of which are open. In addition to the pens and stalls there is a large
yard behind the cattle ring which is used by cattle lorries. Apart from the
auction ring (which I shall call ‘the ring’), the only other building on the
mart was a small office building of some 392 sq ft.
The Ring. Its area is 1,820 sq ft or about one-thirteenth of the whole.
Livestock enter the ring by way of a weigh-bridge contained in a railed
enclosure, and, after having paraded round the centre of the ring, the cattle
are contained in a second railed enclosure known as ‘the crush’ until the
auction is over and they return to the pens.
The Works. The original ring building was roughly circular in shape and was
partly roofed, the centre of the ring being open. The walls were of timber clad
with corrugated iron, and apart from the centre of the ring itself, which was
concreted, the remainder of the floor was earth, with seating for the proposed
buyers and an auctioneer’s podium. During the year ended December 31 1973 the
existing walls and the roof were demolished. The only parts which were left
were the weighbridge, the crush and certain gates. New walls of
externally-rendered breeze block were erected in a rectangular shape, and a new
single-span roof which covered the whole area and incorporated a ventilation
system. In addition the whole of the floor was also concreted and parts were
raised on three levels with seats upon them. This work cost £8,605 (the sum in
question) and it is fair to say that almost nothing of the ring remained except
the weighbridge, the crush and a few gates. On these facts the decision of the
commissioners was in these terms: ‘We, the commissioners, . . . decided as
follows: (a) that in our opinion the ‘ring’ is an integral but a subsidiary
part of the auction mart, the latter being the entirety; (b) that the ‘cattle crush’
and the ‘weighbridge’ (inter alia) were retained, and accordingly the
‘ring’ was not replaced in its entirety; (c) that the expenditure of £8,605 was
in the nature of a repair and was required to ensure the safety of people using
the mart and was therefore an allowable deduction; (d) that the assessment
should accordingly be reduced to nil and the appeal determined accordingly.’
The Law. Three cases were cited to the commissioners. The first was O’Grady
v Bullcroft Main Collieries Ltd, reported in (1932) 17 TC 93, where
Rowlatt J at p 101 said this:
I am of
opinion that the commissioners were right in both these cases. As regards the
chimney, I think it is really very clear. Of course, every repair is a
replacement. You repair a roof by putting on new slates instead of old ones,
which you throw away. There is no doubt about that. But the critical matter
is–as was pointed out in the passage read from Buckley LJ’s judgment in the
case which has been referred to–what is the entirety? The slate is not the entirety in the roof.
You are repairing the roof by putting in new slates. What is the entirety? If you replace in entirety, it is having a
new one and it is not repairing an old one. I think it is very largely a question
of degree, but it seems to me the commissioners have taken the only possible
view here. What was this? This was a
factory chimney to which the gases and fumes, and so on, were led by flues and
then went up the chimney. It was unsafe and would not do any more. What they
did was simply this: they built a new chimney at a little distance away in
another place; they put flues to that chimney and then when it was finished,
they switched the gases from the old flues into the new flues and so up the new
chimney. I do not think it is possible to regard that as repairing a subsidiary
part of the factory. I think it is simply having a new one. And they had them
both. Perhaps they pulled down the old one; perhaps they kept it, because they
thought it was an artistic thing to look at. There is no accounting for tastes
in manufacturing circles. Anyhow, they simply built a new chimney and started
to use that one instead of the old one. I think the chimney is the entirety
here and they simply renewed it. I think they are right on this point.
The second case
to which the commissioners were referred is the Scottish case of Samuel
Jones & Co (Devonvale) Ltd v Commissioners of Inland Revenue,
which is reported in (1952) 32 TC 513, where the Lord President, Lord Cooper,
said this at p 518:
On these
facts I take it from the way in which the case is stated that the decision by
the Special Commissioners against the company is based, and solely based, upon
the fact that they found themselves unable to distinguish the case before them
from the case of O’Grady v Bullcroft Main Collieries Ltd. . . .
The Special Commissioners agreed (what is plain from the report) that there is
a distinction between the case now before us and the case of O’Grady, in
respect that in the O’Grady case the new chimney was in many respects an
improvement upon the old chimney; but they found it impossible to discover in
that distinction any ground for not following Rowlatt J’s judgment. Looking at
the O’Grady
that in giving judgment Rowlatt J put the matter thus: ‘The critical matter is
. . . what is the entirety? . . . I think it is very largely a question of
degree.’ Then after describing the
chimney with which he was concerned he says: ‘I think the chimney is the entirety
here and they simply renewed it.’ It is
no part of our duty to review the decision of Rowlatt J as applied to the facts
in the O’Grady case, but so far as this case is concerned the facts seem
to me to demonstrate beyond a doubt that the chimney with which we are
concerned is physically, commercially and functionally an inseparable part of
an ‘entirety,’ which is the factory. It is quite impossible to describe this
chimney as being in the words of Rowlatt J the ‘entirety’ with which we are
concerned. It is doubtless an indispensable part of the factory, doubtless an
integral part; but none the less a subsidiary part, and one of many subsidiary
parts, of a single industrial profit-earning undertaking.
In the third
case cited to the General Commissioners–another Scottish case: William P
Lawrie v Commissioners of Inland Revenue, reported in (1952) 34 TC
20–the Lord President, again Lord Cooper, said this at the top of p 25:
In the first
place, relying upon the decisions in the cases of the Bullcroft Main Collieries
and Margrett, they express the opinion that the ‘entirety’ to be
considered is the roof, and that it was impossible to say on the facts before
them that the roof was merely a subsidiary or subordinate part of the building
as a whole which was repaired. I dislike that ground of judgment, and refer to
the opinions which we gave in a case decided subsequently to the disposal of
the present appeal, now reported under the name Samuel Jones & Company (Devonvale)
Ltd v Commissioners of Inland Revenue. In this case it seems to me
that, if we have to look for an ‘entirety’ in order to determine whether in a
business sense the operation under consideration was a repair or a renewal or
improvement within the meaning of the Income Tax Acts, the ‘entirety’ to be
considered is the building as a whole and not its roof, and the Inland Revenue
before us were content to take the case on that footing.
Lord Carmont,
at p 26, said this:
I agree. I
think that the commissioners were wrong in thinking that the entirety that they
had to consider was the roof. The entirety was the building as a whole, and I
think if they had had the opinions which were subsequently delivered in the Samuel
Jones case before them, they would have had no doubt as to what conclusion
they should have reached in this matter. The importance of considering an
entirety is, of course, with a view to determining the character of the work
done because what might at first look like a renewal may, when applying the
matter to a larger unit, be shown to be only a repair.
I had the
benefit of having a number of other cases cited to me, in particular the
well-known passage in Lurcott v Wakely and Wheeler, reported in
[1911] 1 KB 905, from the judgment of Buckley LJ, who was dealing with a
covenant to repair in a lease. At p 923 he said this:
‘Repair’ and
‘renew’ are not words expressive of a clear contrast. Repair always involves
renewal; renewal of a part; of a subordinate part. A skylight leaks; repair is
effected by hacking out the putties, putting in new ones, and renewing the
paint. A roof falls out of repair; the necessary work is to replace the decayed
timbers by sound wood; to substitute sound tiles or slates for those which are
cracked, broken or missing; to make good the flashings, and the like. Part of a
garden wall tumbles down; repair is effected by building it up again with new
mortar, and, so far as necessary, new bricks or stone. Repair is restoration by
renewal or replacement of subsidiary parts of a whole. Renewal, as
distinguished from repair, is reconstruction of the entirety, meaning by the
entirety not necessarily the whole but substantially the whole subject-matter
under discussion.
In the first
two cases the decisions rest, I think, on what the court considered was the
entirety. Here I find Buckley LJ contrasting repairs with renewals. And in Phillips
v Whieldon Sanitary Potteries Ltd, reported in (1952) 33 TC 213, Donovan
J (as he then was) applied the test of what were the premises. He said this at
p 219:
In my
judgment, the ‘premises’ for the purpose of rule 3(d) may sometimes be the
whole of the trader’s business premises and may sometimes be a specific
building forming part of those premises. Thus, if a factory window were blown
out and had to be repaired, it would be obviously wrong to argue that as the
entirety of the window had been restored it was not a repair to the premises.
In such a case the ‘premises’ would be the entire factory, in relation to which
the window would be a repair and nothing else. But if, for example, a retort
house in a gasworks was destroyed and had to be rebuilt, one would hardly call
that a repair to the gasworks. The size of the retort house would compel one to
regard that as the premises for the purpose of rule 3(d); and since it had been
replaced in full it could not be said to have been repaired. These examples
illustrate what I think is the truth, that there is no one line of approach to
the problem which is exclusively correct. In some cases it will be right to
regard the premises as the entire factory, and in others as some part of the
factory. Whichever alternative is the right one to adopt will depend upon the
facts of the particular case. Rowlatt J took the view in the O’Grady
case that he must regard the chimney itself as the premises, or, as he
described it, the ‘entirety,’ and I would respectfully agree with him.
However, in
the Irish case of Hodgins v Plunder & Pollak (Ireland)
Ltd, which is reported in [1957] IR 58, Kingsmill Moore J at p 70 said
this:
It was
contended that the work done in connection with the weigh-house was not a
repair in as much as it was a replacement. Repair and replacement are
conceptions which are not mutually exclusive. This is made clear in the
judgments in Lurcott v Wakely and Wheeler.
Then he quotes
the passage from Buckley LJ and goes on:
Lurcott v Wakely and Wheeler was concerned with liability under a
covenant to repair, and when Buckley LJ refers to the ‘entirety’ he is
referring to the ‘subject-matter of the covenant.’ The principles enunciated have been accepted
as applying to the interpretation of the word ‘repair’ in the income tax code,
but the application of the principles is not always easy. If the question as to
whether certain work is, or is not, a repair depends on the proportion between
the work done and the ‘entirety,’ what is to be considered ‘the entirety’? There is no convenient indenture, as there
was in Lurcott v Wakely and Wheeler, to solve the problem. Is the
‘entirety’ merely the building unit in respect of which the repair or
replacement has been effected, or is it the congeries of buildings and premises
occupied for the purposes of the trade–in this case the whole factory? Rule 3(d) speaks of ‘premises occupied . . .
for the purposes of the trade.’ If the
words were ‘the premises’ then it would be clear that the totality of the
premises was referred to, but in the absence of the definite article ‘premises’
might mean ‘all or any of the premises.’
The difficulty may, I think, be eased by reminding ourselves that what
is sought to be resolved is a commercial and business problem. What expenses
are necessary to earn the profits? In a
big undertaking there will be a necessity to do minor repairs every year and
also a recurrent necessity to replace units which have fallen into such a state
of age or dilapidation that patching is no longer economical. The
profit-earning entity is the whole of the premises taken together, and the
replacement of a unit, even if such a unit be a separate building, must be
viewed in relation to the profit-earning entity. If the work done is only ‘a
renewal or replacement of a subsidiary part of the whole’ it seems to me that
it rightly ranks as a repair. It is a question of degree.
There the question
posed was: What is the profit-making entity?
In Conn v Robins Bros Ltd, reported in (1966) 43 TC 266–a
case upon which the respondents greatly relied–Buckley J said this at p 274:
On the
question of whether these works were or were not repairs on the one hand or
improvements on the other, I have got, as I have said, an express finding by
the commissioners, and it appears to me that that is a finding of fact which I
ought not to disturb unless I am satisfied on the primary facts found in the
case that the commissioners could not reasonably have arrived at that
conclusion. Looking at those primary facts, it seems to me that they are
certainly capable of supporting the conclusion at which the commissioners
arrived, and that it would be impossible for me to say that the deduction from
those primary facts and the consequential finding that the work was work of
repair was so unreasonable that the court ought to displace the commissioners’
finding. I proceed, therefore, on the footing that these works
in this case there are any special circumstances which would lead to the
conclusion that the expenditure ought nevertheless to be regarded as
expenditure of a capital nature.
Then later on
that page he says:
In the light
of that circumstance it seems to me that this was expenditure incurred by the
company with a view to enabling it to continue to earn profits from its
business, not by acquiring some asset for that purpose but by putting the
company’s existing asset into a state of repair which would enable it to
continue to use that asset. No doubt in the course of carrying out these works
certain structural alterations were made, as one would expect with any
extensive repair of a building over 400 years old, when repairs were being
carried out at a time when building techniques have completely altered. But the
fact that there were alterations in the structural details of the building does
not seem to me to be a good ground for proceeding upon the basis that the work
produced something new. On the contrary, I think it is implicit in the
commissioners’ finding that the result of this work was not to produce
something new but to repair something which had previously existed. Upon that
basis it seems to me that there is no ground for regarding this expenditure as
a capital expenditure. It was expenditure incurred for the purpose of enabling
the company to continue to earn its profits, and was therefore in my judgment
expenditure which would properly be chargeable to income. For these reasons I
think the commissioners were right in the conclusion at which they arrived and
this appeal fails.
But in that
case the property was very ancient, and though the work was extensive and
expensive the learned judge came to the conclusion that no new asset was
brought into existence.
Conclusion. I find it difficult, if not impossible, to spell any one test from
these cases, and there are many others in the law reports. For the Crown it was
submitted that for the purpose of the phrase ‘improvements of premises’ in this
case the premises can only be the ring itself. For the company, it was
admitted, and rightly so, that if one looked only at the ring itself the
expenditure could only be capital expenditure; but on the company’s behalf it
was submitted that one must look at the mart as a whole and, if one does that,
the expenditure was not a substantial improvement to the whole mart. In my
judgment each case must turn on its own facts and no exhaustive test can be found
to assist the court. I find the idea that one can have premises within premises
a difficult one, though it has behind it the weighty views of both Rowlatt J
and Donovan J, judges of the highest repute, particularly in tax matters. I am
not forced into saying in this case that the ring itself must be considered the
premises, for if I take the mart as a whole the ring is the nerve centre where
the whole of the business of buying and selling takes place and all the rest of
the mart is only ancillary to the ring, permitting the transport and movement
of animals to the ring and their exit and removal after the auction. I do not
think that the conclusion of the commissioners that the ring, though an
integral part, is a subsidiary part of the mart can be sustained. On any view
as to what the test should be, their second decision–that because the crush and
the weighbridge were retained the ring was not replaced in its entirety–is in
my judgment irrelevant. The question is: was the expenditure capital employed in
improvements of premises occupied for the purposes of the trade? The question was never discussed by the
commissioners, nor answered. On the facts of this case, in my judgment, the
only answer to that question can be ‘Yes.’
Appeal
allowed with costs and case remitted to the General Commissioners with a
direction that the sum of £8,605 was not an allowable deduction in computing
the company’s profits, the exact terms of the order to be agreed between
counsel.
