[2009] UKFTT 357 (TC)

									TC00295

Appeal number SC/3036/2008

Corporation tax – deductibility of loss on written down expenditure on residential property transferred to director as bonus – treated as current asset in accounts – whether on capital or revenue account – s 74(1)(e) ICTA 1988

FIRST-TIER TRIBUNAL

TAX 

	LION CO	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Corporation tax)	Respondents

				TRIBUNAL: 	JUDGE ROGER BERNER
						JOHN WHITING (Member)

Sitting in private in London on 1 December 2009

Alun James and Anne Redston, instructed by BTG Tax LLP, for the Appellant

Ian Hutton, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	The hearing of this appeal was directed, pursuant to Rule 32 of the Tribunal Procedure) (First-tier Tribunal) (Tax Chamber) Rules 2009, to be heard in private.  Accordingly, under Rule 32(6) this decision is published in anonymised form.
2.	The Appellant appeals against assessments in respect of accounting periods to 31 October 1998 and 1999.  The issue for determination is whether amounts written down in the accounts for the relevant periods in respect of a property acquired by the Appellant and on which it incurred expenditure on repairs and improvements with the intention of transferring the property in specie by way of bonus to a director, is a deductible expense in computing profits for corporation tax purposes.
3.	The Appellant was represented by Alun James and Anne Redston.  Ian Hutton appeared for HMRC.
The facts
4.	There was no dispute on the facts.  The parties produced an agreed statement of facts which we reproduce below in a slightly amended and redacted form:
1. [Introductory]
2. The Appellant handles the exploitation of image rights, the provision of appearances and so on for Mr Lion, [text redacted].  It is not and never has been engaged in property development.  The two directors of the Appellant are Mr Lion (Chairman) and his wife Mrs Lion (Company Secretary).  The shares in the Appellant are held as to 10 by Mr Lion and 5 by Mrs Lion.
3. A residential property was purchased by the Appellant, as shown in the completion statement on the 7 September 1998, with the intention of making a payment in kind to Mr Lion by way of a discretionary bonus of the property, once repairs and improvements had been carried out.  The Appellant understood that this would be a NIC-efficient means of remunerating Mr Lion.
4. The property was [text redacted].  The purchase price was £800,000 and the overall acquisition cost of the property including associated costs and Stamp Duty was £850,000.  During the Appellant’s period of ownership further monies were spent by the Appellant on repairs and improvements in the aggregate sum of around £750,000 (detail of which is set out in the analysis of the expenditure dated 23 October 2001 by Ernst & Young, auditors to the Appellant).  Overall expenditure on the property therefore totalled approximately £1.6m over the accounting periods to 31.10.98 and 31.10.99.
5. Mr and Mrs Lion were allowed into occupation of the property in February 1999 whilst it was still owned by the Appellant, a certificate of practical completion having been issued on 12 February 1999.  The occupation of the Appellant’s property by the directors and the use of furniture was disclosed as a benefit P11d item for 98/99 and 99/00 (until 30 July 1999).
6. Subsequently the Appellant transferred the property to them to hold as joint tenants by way of discretionary bonus for Mr Lion on 31 July 1999.  (Board minutes for April 1999 state that the property was given as a discretionary bonus for the year to 31 October 1998.)  At the date of transfer, the property was valued at £1.2m; this was an independent valuation that has been agreed with HMRC, which was approximately £400,000 less than the total cost of the property to the Appellant including repairs and improvements.
7. The accounts were correctly prepared in accordance with GAAP and the property was treated in the accounts as a current asset.  Over the two periods to 31.10.98 and 31.10.99 the Appellant’s profits were reduced by the aggregate cost of around £1.6m.  £1.2m of this was represented in the accounts as the cost of the bonus (appropriately accrued for in the accounts to 31.10.98), being the value of the property at the date of transfer, with the balance being represented as the written off costs of additions to the property in excess of that figure (accrued as to £309,041 in the accounts to 31.10.98 and £115,498 in the accounts to 31.10.99).
8. The Appellant accounted for and paid corporation tax for the accounting periods to 31.10.98 and 31.10.99 in line with the figures for profit disclosed by its accounts with only minor adjustments.  In particular, no substantive adjustment was made to the amounts charged to profit and loss account in respect of the property being for tax purposes in total £1,591,823. 
Discussion
5.	There is no dispute that the amount of the bonus to Mr Lion (£1.2 million) is a deductible expense.  The dispute is as to the treatment of the costs of the additions to the property that were written off in the Appellant’s accounts in the accounting periods to 31 October 1998 and 31 October 1999.
6.	The Appellant’s case, in outline, is:
(1)	The property was acquired on revenue and not capital account and as such the deduction of the written off expenditure is not prohibited by s 74(1)(e) of the Income and Corporation Taxes Act 1988 (“TA”) or otherwise;
(2)	The relevant distinction is not determined solely by whether there has been a trading transaction;
(3)	There are other types of revenue expenditure and loss which are not on capital account and are therefore allowable for tax purposes;
(4)	This case is an example of such revenue expenditure; and
(5)	Further, the accountancy treatment, whilst not determinative of the capital/revenue distinction, is and should be very relevant.
7.	HMRC contend that:
(1)	The property was acquired by the Appellant as a capital asset because it was acquired as an investment (albeit a short-term one) rather than as a trading asset;
(2)	Although the Appellant bought the property with the ultimate intention of, after a limited period, passing that asset to a director as a remuneration bonus, that intention cannot change the nature of the asset or the fact that it was necessarily during that period held as an investment;
(3)	The loss in this case did not arise from the trade as the Appellant did not deal in property.  The loss was a capital loss on disposal of a capital asset.  It therefore falls within s 74(1)(e) TA; and
(4)	This case must be determined by reference to established case law and not accountancy practice.
The relevance of accountancy practice
8.	Mr James, for the Appellant, did not argue that the question whether the relevant loss or written off expenditure in this case was on capital or revenue account should be determined by the accountancy treatment.  Nevertheless he differed from Dr Hutton, for HMRC, in this respect, as he argued that such treatment must be seen as relevant or persuasive.  He accepted that the capital/revenue question was one of law, but argued that where there is any doubt we should lean towards a conclusion that reflected the accountancy treatment.
9.	There is no dispute on the correctness of the Appellant’s treatment in its accounts of the property, the expenditure on it or the writing off of expenditure in excess of its market value on transfer to Mr and Mrs Lion.  The audited accounts for the year ended 31 October 1999 (which included corresponding figures for the year ended 31 October 1998) were produced to us as an agreed document, along with an analysis of the expenditure on the property over that two-year period produced by Ernst & Young, the Appellant’s auditors.  The analysis shows the calculations of the amounts of the write down.  For 1998 this was based on a comparison of the actual realised value of the property of £1.2 million and the aggregate of the purchase price, the amounts actually paid for alterations and an accrual for future alterations.  For 1999, the 1998 accrual was reversed, and the write down was calculated by reference to the net expenditure (after reversal of the accrual).  These written down amounts were reflected in the profit and loss account of the Appellant for each of the years in question as “Write Down of property held for disposal to estimated net realisable value”, and so went to reduce profit before tax (or, in 1998, resulted in a loss before tax).  The property was accounted for in the balance sheet for 1998 as a current asset under “Property held for disposal to directors”, at its net realisable value of £1.2 million.  As the property was transferred during 1999, it no longer appeared in the 1999 balance sheet.
10.	We were referred to International Accounting Standard 1 in relation to classification of an asset as a current asset as follows:
“An asset shall be classified as current when it satisfies any of the following criteria:
i. It is expected to be realised in, or is intended for sale or consumption in, the entity’s normal operating cycle;
ii. It is held primarily for the purpose of being traded;
iii. It is expected to be realised within twelve months after the balance sheet date; or
iv. It is cash or a cash equivalent … unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the balance sheet date.
		All other assets shall be classified as non-current.”
In addition, s 262 of the Companies Act 1985 (which at the material time was in force) provided:
“ ‘fixed assets’ means assets of a company which are intended for use on a continuing basis in the company’s activities, and ‘current assets’ means assets not intended for such use.”
11.	Although enacted with respect to accounting periods beginning after the material times with respect to this appeal, we were referred to s 42(1) of the Finance Act 1998 which, in its unamended form, read as follows:
“For the purposes of Case I or II of Schedule D the profits of a trade, profession or vocation must be computed [on an accounting basis which gives a true and fair view], subject to any adjustment required or authorised by law in computing profits for these purposes.”
Section 42(1) was amended by the Finance Act 2002 by substituting, for the words in square brackets above, the phrase “in accordance with generally accepted accounting practice”.  Section 42 applies to periods of account beginning after 6 April 1999 (s 42(3)).  However, that section is recognised as having codified settled law that had been applicable for many years, the classic formulation of which was set out by Sir John Pennycuick in Odeon Associated Theatres Ltd v Jones 48 TC 257 at pp 272-273 (see per Lord Hoffman in Small v Mars (UK) Ltd 78 TC 442 at p 550).
12.	The extent to which accounting evidence might be decisive or relevant in determining the question whether expenditure is of a revenue or capital nature was considered by Brightman J in ECC Quarries Ltd v Watkiss 51 TC 153.  After referring to Owen v Southern Railway of Peru Ltd 36 TC 602, the learned judge said (at p 173):
“The Owen case would seem to establish that unchallenged evidence, or a finding, that a sum falls to be treated as capital or income on principles of correct accountancy practice is not decisive of the question whether in law the expenditure is of a capital or an income nature.”
He then referred to Odeon Associated Theatres Ltd v Jones 48 TC 257, in particular to the following observations of Buckley LJ in the Court of Appeal, where he said (at pp 285-6):
“As Lord Reid observed in Strick v Regent Oil Co. Ltd. [1966] A.C. 295, at page 313:
"The question [whether a particular outlay can be set against income or must be regarded as a capital outlay] is ultimately a question of law for the court, but it is a question which must be answered in light of all the circumstances which it is reasonable to take into account, and the weight which must be given to a particular circumstance in a particular case must depend rather on common sense than on strict application of any single legal principle."
In answering that question of law it is right that the Court should pay regard to the ordinary principles of commercial accounting so far as applicable. Accountants are, after all, the persons best qualified by training and practical experience to suggest answers to the many difficult problems that can arise in this field. Nevertheless, the question remains ultimately a question of law.”
13.	That the capital/revenue distinction is a question of law was confirmed in Heather v P-E Consulting Group Ltd 48 TC 293.  Lord Denning MR made it clear that the courts were not to be deflected from their true course by the evidence of accountants.  Lord Justice Orr said (at p 328):
“… the question whether an expenditure is for tax purposes on revenue or on capital account is ultimately a question of law. Accountancy evidence may be helpful in a case of this kind in so far as it discloses in what manner accountants deal in practice with a particular item; but it is for the Court to decide whether what is done in practice is in accordance with sound accountancy practices; and, further, what is in other respects properly done in practice may not, for the reasons given by Lord Greene M.R. in Associated Portland Cement Manufacturers Ltd. v Kerr (1945) 27 TC 103, at page 116, accurately reflect the difference between income and capital expenditure for the purposes of income tax.”
In Associated Portland Cement, Lord Greene said (at p 70):
“But before I leave the question of accounts I should say this. On the question of whether an item of expenditure is of a capital or a revenue nature, it is no doubt helpful to consider the circumstances from the accountancy point of view. But one must be careful to define one's terms. Whether or not an item of expenditure is to be regarded as of a revenue or capital nature must in many, and indeed in the majority of cases I should have thought, depend upon the nature of the asset or the right acquired by means of that expenditure. If it is an asset which properly appears as a capital asset in the balance sheet, then that is an end of the matter. But it must never be forgotten that, an asset which may properly and quite correctly appear and only appear in the balance sheet as an asset, may be acquired out of revenue. There is nothing in the world to force a company or a trader who buys a capital asset to debit the cost of it to capital. Conservatively managed companies every day pay for capital assets out of revenue if they are fortunate enough to have the revenue available. It is, therefore, no sufficient test to say that an asset has been paid for out of revenue, because the consequence does not by any means necessarily follow that it is an asset of a revenue nature as distinct from a capital nature. Similarly, there is nothing to prevent a company or a trader who has acquired a capital asset from refraining from placing any value on that asset in his balance sheet. I put to Mr. King an example which I think is worth repeating. If a trader buys up somebody else's business and pays £10,000 for the goodwill, that being the price on which the vendor insists, there is nothing in the world to prevent the purchaser paying the £10,000 out of revenue and debiting it to revenue account, and then writing down the goodwill in his own balance sheet to nothing. The fact that he has written it down in his own balance sheet does not mean that he has not got an asset. He has; he has the goodwill, but for his own domestic purposes he chooses not to put a value upon it: just in the same way as many companies, who have patents of very great value indeed, are in the habit of valuing them at a pound in their balance sheet, or at some other nominal sum. I venture to think, therefore, when one is considering the nature of an asset acquired by a piece of expenditure, it is by no means conclusive to find that the asset does not have any definite value set upon it in the balance sheet.”
In the Associated Portland Cement case it was held that certain payments out of revenue to improve the value of goodwill were in the nature of capital expenditure, notwithstanding that there was no valuation of that goodwill in the balance sheet.  This theme is also reflected in the decision of the Special Commissioners (Sir Stephen Oliver QC and Dr Nuala Brice) in Halifax plc v Davidson [2000] STC (SCD) 251, where, after referring to British Insulated and Helsby Cables Ltd v Atherton 10 TC 155, the Special Commissioners commented (at [141]) that “… expenditure can be of a capital nature even if the asset acquired does not appear on the balance sheet.”
14.	After reviewing the authorities, in ECC Quarries Brightman J concluded that the accounting evidence in that case – where the expenditure was treated as revenue expenditure in the company’s accounts – was not sufficient to persuade him to alter his view, based on the decided cases, that the expenditure in that case was of a capital nature.
15.	We were referred to Gallagher v Jones 66 TC 77, Johnston v Britannia Airways Ltd 67 TC 99 and Revenue and Customs Commissioners v William Grant & Sons Distillers Ltd, Small v Mars (UK) Ltd 78 TC 442.  In Gallagher v Jones (at p 123) Sir Thomas Bingham said, in an often-quoted passage:
“I find it hard to understand how any judge-made rule could override the application of a generally accepted rule of commercial accountancy which (a) applied to the situation in question, (b) was not one of two or more rules applicable to the situation in question and (c) was not shown to be inconsistent with the true facts or otherwise inapt to determine the true profits or losses of the business.”
16.	None of these cases concerned the distinction between capital and revenue.  We do not ourselves consider that the accounting treatment in this case is directed to the question we have to determine as to whether the write down of the value of the property is on capital or revenue account, and accordingly we do not consider that Gallagher v Jones or the cases that followed it alter the position as summarised by Brightman J in ECC Quarries, and as found in the cases referred to by him in that judgment.  The accounts are not determinative of matters that are questions of law and not of accountancy.  The issue of whether an item is of a capital or revenue nature is one such question.  This has now been recognised as a matter of statute law by the enactment in s 53(1) of the Corporation Tax Act 2009 of a specific provision disallowing any deduction for items of a capital nature.  From all of this we conclude that the Appellant’s accounting treatment, whilst in general the starting point for its corporation tax assessment, is not determinative of the capital/ revenue question, that we must ourselves determine the capital/revenue question as a matter of law, and only then consider if the accounting treatment in this case persuades us to alter that view.
Capital or revenue?
17.	It was common ground that the property was not acquired or held by the Appellant as trading stock.  Mr James argued that, notwithstanding this, in relation to a trading company (which was accepted to be the case of the Appellant) expenditure on revenue account in the course of the trade could take many forms beyond the acquisition of trading stock.  Expenditure on remuneration was one of these.  Mr James argued that in this case the entire purpose in acquiring and repairing and improving the property was with a view to remunerating Mr Lion in kind by making a discretionary bonus of the property.  Remuneration of employees is a revenue expense and the costs of remunerating an employee in kind are similarly revenue in nature.  It is a form of circulating not fixed capital.  This is true as much of the repair and improvement costs as of the original acquisition of the property.  The fact that the remuneration took the form of an asset such as real property does not in itself determine the issue one way or another.  The fact that the property was occupied for a short period prior to transfer as a bonus is similarly irrelevant and certainly does not turn it into an investment, short-term or otherwise.
18.	Mr James referred to the costs incurred on acquiring and altering the property as a form of circulating capital.  The distinction between fixed capital and circulating capital is a familiar one, but we think it is helpful to refer to two authorities in this connection.  The first is Ammonia Soda Company, Limited v Chamberlain [1918] 1 Ch 266, where (at p 286) Swinfen Eady LJ said:
“What is fixed capital? That which a company retains, in the shape of assets upon which the subscribed capital has been expended, and which assets either themselves produce income, independent of any further action by the company, or being retained by the company are made use of to produce income or gain profits. A trust company formed to acquire and hold stocks, shares, and securities, and from time to time to divide the dividends and income arising therefrom, is an instance of the former. A manufacturing company acquiring or erecting works with machinery and plant is an instance of the latter. In these cases the capital is fixed in the sense of being invested in assets intended to be retained by the company more or less permanently and used in producing an income. What is circulating capital? It is a portion of the subscribed capital of the company intended to be used by being temporarily parted with and circulated in business, in the form of money, goods or other assets, and which, or the proceeds of which, are intended to return to the company with an increment, and are intended to be used again and again, and to always return with some accretion. Thus the capital with which a trader buys goods circulates; he parts with it, and with the goods bought by it, intending to receive it back again with profit arising from the resale of the goods.”
The second is Golden Horse Shoe (New), Ltd v Thurgood 18 TC 280, where Romer LJ said (at p 301):
“… it is not always easy to determine whether a particular asset belongs to the one category or the other. It depends in no way upon what may be the nature of the asset in fact or in law. Land may in certain circumstances be circulating capital. A chattel or a chose in action may be fixed capital. The determining factor must be the nature of the trade in which the asset is employed. The land upon which a manufacturer carries on his business is part of his fixed capital. The land with which a dealer in real estate carries on his business is part of his circulating capital. The machinery with which a manufacturer makes the articles that he sells is part of his fixed capital. The machinery that a dealer in machinery buys and sells is part of his circulating capital, as is the coal that a coal merchant buys and sells in the course of his trade. So, too, is the coal that a manufacturer of gas buys and from which he extracts his gas.”
19.	We do not consider that it is possible to reach a conclusion on whether the property or the costs associated with it are fixed or circulating capital without engaging in the same or similar enquiry as to whether the loss or expenditure on the property is on capital account or revenue account.  It seems to us therefore that an assertion that something is circulating capital and is therefore on revenue account does no more than beg the question.  That said, on the basis of the test held by Lord Justice Romer to be determinative, it would appear that the fact that the Appellant did not deal in land would in any event suggest that the property would not, contrary to Mr James’ submission, form part of the circulating capital of the Appellant.
20.	A common starting point in considering whether expenditure is of a capital or a revenue nature for tax purposes is British Insulated and Helsby Cables Ltd v Atherton 10 TC 155, and the well-known phrase of Viscount Cave LC (at pp 192-3):
“… when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.”
This phrase was itself amplified by Rowlatt J in Anglo-Persion Oil Co Ltd v Dale 16 TC 253 where (at p 262) he explained that this meant that the benefit should endure in the way that fixed capital endures.
21.	Mr James referred us to a later passage of Viscount Cave’s judgment in British Insulated and Helsby Cables where, in summarising his conclusions, he said (at p 193):
“My Lords, in my opinion the present case falls within the same principle. The payment of £31,784, which is the subject of dispute, was made, not merely as a gift or bonus to the older servants of the Appellant Company, but (as the deed shows) to "form a nucleus" of the Pension Fund which it was desired to create; and it is a fair inference from the terms of the deed and from the Commissioners' findings that without this contribution the Fund might not have come into existence at all. The object and effect of the payment of this large sum was to enable the Company to establish the Pension Fund and to offer to all its existing and future employees a sure provision for their old age, and so to obtain for the Company the substantial and lasting advantage of being in a position throughout its business life to secure and retain the services of a contented and efficient staff. I am satisfied on full consideration that the payment was in the nature of capital expenditure, and accordingly that the deduction of the amount from profits, although not expressly prohibited by the Act, was rightly held by the Court of Appeal not to be admissible.”
Mr James argued that the acquisition of property in this case could not be regarded as bringing into existence an asset for the enduring benefit of the trade, but was more akin to the payment of a gift or bonus.
22.	In the Privy Council case of Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd [1964] AC 948, British Insulated and Helsby Cables was distinguished.  In that case the appellant company paid compensation to another group company for abandoning its copper production for one year.  It was held that this expenditure was of a revenue nature.  It had no true analogy with expenditure for the purpose of acquiring a business or the benefit of a long-term or enduring contract.  It bore a fair comparison with a monetary levy on the production of a given year.  Mr James argued, again by analogy, that expenditure related to remuneration should be regarded in the same way, and that loss or write down of the value of the property, as much as the payment of the bonus itself to Mr Lion, ought to be regarded as revenue expenditure.  He submitted that this case is clearly on the revenue side of the line and that it was impossible to separate the loss from the bonus and apply different treatment to each.
23.	Dr Hutton argued that the Appellant had acquired an identifiable capital asset.  He referred us to Tucker v Granada Motorway Services Ltd [1979] STC 393 in the House of Lords where Lord Wilberforce said (at p 396):
“It is common in cases which raise the question whether a payment is to be treated as a revenue or as a capital payment for indicia to point different ways. In the end the courts can do little better than form an opinion which way the balance lies. There are a number of tests which have been stated in reported cases which it is useful to apply, but we have been warned more than once not to seek automatically to apply to one case words or formulae which have been found useful in another (see Comr of Taxes v Nchanga Consolidated Copper Mines Ltd). Nevertheless reported cases are the best tools that we have, even if they may sometimes be blunt instruments.
I think that the key to the present case is to be found in those cases which have sought to identify an asset. In them it seems reasonably logical to start with the assumption that money spent on the acquisition of the asset should be regarded as capital expenditure. Extensions from this are, first, to regard money spent on getting rid of a disadvantageous asset as capital expenditure and, secondly, to regard money spent on improving the asset, or making it more advantageous, as capital expenditure. In the latter type of case it will have to be considered whether the expenditure has the result stated or whether it should be regarded as expenditure on maintenance or upkeep, and some cases may pose difficult problems.”
24.	Dr Hutton took us to Jones v Leeming 15 TC 333 and Simmons (as liquidator of Lionel Simmons Properties Ltd) v IRC 53 TC 461 as deciding that as regards an isolated transaction of purchase and re-sale of property, “It is either an adventure in the nature of a trade, or else it is simply a case of the sale and re-sale of property.” (per Lord Buckmaster in Jones v Leeming at p 354).  Mr James argued that these cases were concerned with whether an asset was bought and sold as trading stock or as an investment for the purposes of deciding whether an isolated transaction in property was a trade, and were not applicable to the present case, which concerned a property that was acquired, repaired and improved for the purpose of providing remuneration to Mr Lion.
25.	In our view, the approach to be derived from these cases is first to identify an asset that is not a trading asset of the particular trade carried on by the taxpayer or one acquired as part of an adventure in the nature of a trade.  If there is such an asset, the starting assumption is that expenditure on the acquisition and improvement of the asset should be regarded as capital expenditure.  It is then necessary to consider if there are other indicia that point in a different direction and to determine if those contra-indications outweigh the starting assumption.
26.	The fact that the purpose of acquisition of and the incurring of expenditure on the property was to pay a bonus, in the short term, to Mr Lion formed a central plank of the Appellant’s case.  On the relevance of purpose in determining whether expenditure is revenue and capital, Dr Hutton referred us again to Granada Motorway Services Ltd, this time to the judgment of Lord Edmund-Davies (at pp 401-2), where he said:
“I therefore confine myself to commenting on the great weight they [namely the Special Commissioners] manifestly attached to the purpose for which the appellants paid their landlords £122,220. Indeed, this 'purpose' element featured no less than three times in the reasons given by the Special Commissioners for concluding as they did, that is to say, under my headings (A), (B) and (F), above. Indeed, Sir David Cairns considered that they actually confined themselves to that test [1979] 1 All ER 23 at 28, [1979] 1 WLR 87 at 93, [1978] STC 587 at 592, while Stamp LJ concluded that [1979] 1 All ER 23 at 28, [1979] 1 WLR 87 at 92, [1978] STC 587 at 592: 
'... so far as the Special Commissioners ... decided the case on the ground that the payment was in their view not made with a view to bringing into existence some asset or advantage for the enduring benefit of the trade, they misdirected themselves. The questions that ought to have been asked were whether the payment did bring some asset or advantage into existence, and whether it was an enduring asset and advantage, ie enduring in the same way that fixed capital endures.'
If I may respectfully say so, these words commend themselves to me and they conform to the warning given by Lord Radcliffe in the Nchanga case [1964] 1 All ER 208 at 211, [1964] AC 948 at 958 about 'the undesirability of determining the nature of a payment by the motive or object of the payer ...' To apply that as the sole or principal test is unsatisfactory, for, as the Crown has rightly submitted, the purpose of any payment will generally be to improve a company's trading profits, even if the purchase is of an obvious capital asset. This could lead to the conclusion (contrary to many long-standing decisions in this field) that the purchase of any asset must be regarded as involving revenue expenditure if it be made in order to reduce recurrent expenditure charged against profits.”
In that case the taxpayer company held a 50-year lease of a motorway service area from the Ministry of Transport.  The lease was at a rent calculated by reference to factors including gross takings, which included tobacco duty.  As a result of increases in the duty, and consequently increases in the additional rent, the taxpayer company paid an amount of £122,220 to the MoT in return for a variation in the rent calculation to exclude tobacco duty.  The Special Commissioners held that the payment was on revenue account, on the basis that the purpose was to commute the obligation to pay additional rent and not for the purpose of getting rid of a burdensome capital asset.  The House of Lords held that the payment improved a fixed capital asset and as such was capital expenditure.  Dr Hutton argued that Granada Motorway Services largely provided the answer to the Appellant’s case on the intention behind the expenditure on the property.  We would say that it shows that the intention or purpose cannot be the sole or principal test, but that it does not fall out of account altogether.
27.	The Appellant also relies on the fact that the intention to transfer the property to Mr and Mrs Lion was acted upon in the short term, and that the holding of the property by the Appellant did not have an enduring quality.  The short-term nature of an asset, or of an advantage, has been considered in a number of decided cases.  As we have seen, in Nchanga a payment that was “wholly related to and an incident of [the taxpayer’s] output of the year” (at p 961) was held to be revenue expenditure.  On the other hand, Nchanga was regarded by Lord Wilberforce in Strick v Regent Oil Co Ltd 43 TC 1 as an exceptional case.  He said (at p 57):
“Is there, then, any line which can be drawn below which expenditure for a short-term asset has, or can have, a revenue character? It is noticeable, and I think significant, that, with one possible exception, there is no authority in favour of the view that, though an advantage has been identified, expenditure to gain it should be treated as revenue expenditure because of the short-term character of the asset. That one possible exception is Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd. [1964] A.C. 948, where the agreement was for the period of a year. Although there were other, possibly more important, considerations which led the Judicial Committee to consider the payment as having a revenue character, the contrast was pointed out between the payment in question, which exhausted itself and was created to exhaust itself within the twelve months' period "within which profits were ascertained", and a "contractual right to last for years", payment for which may be capital expenditure. Some other cases on short-term assets are of interest. McTaggart v Strump 10 TC 17 was a case of a premium paid for renewal of a lease for five years - this was held a capital expense - which the trader would probably make good out of his profits when earned. Commissioners of Inland Revenue v Adam 14 TC 34 was concerned with a right for eight years to deposit earth and slag on another's land; the right was held to be a capital asset, Lord President Clyde considering it as equivalent to any other capital asset of a "relatively permanent character". John Smith & Son v Moore  [1921] 2 A.C. 13 is a delusive case; it appears to involve precisely the critical area which we must consider here - namely, very short-term contracts - but no clear conclusions can be drawn from the decision. The difficulties inherent in it have been so fully analysed by the Judicial Committee in the Nchanga case and by others of your Lordships that I shall not take up time by a further discussion of them. More comprehensible is Henriksen v Grafton Hotel Ltd. 24 TC 453, where it was held in the Court of Appeal that a payment in respect of so-called monopoly value on the renewal for three years of a licence was a capital payment. The subject-matter of the payment there, though of a special character (but what asset is not?), was in the same area as the ties in the present case, and Lord Greene M.R. said :
"The thing that is paid for is of a permanent quality although its permanence, being conditioned by the length of the term, is short-lived";
and he regarded the fact that the licence had to be renewed every three years as irrelevant - there was "a false appearance of periodicity" about them. Lastly, there are certain cases concerned with opencast mining: Knight v Calder Grove Estates 35 TC 447; Stow Bardolph Gravel Co. Ltd. v Poole  35 TC 459; H. J. Rorke Ltd. v Commissioners of Inland Revenue 39 TC 194. In two of them the question of transience was raised, and in each it was decided that, once the conclusion was reached, on other considerations (the validity of which need not be here considered), that the asset acquired was fixed and not circulating capital, the fact that the asset was of a transient character is irrelevant. These authorities do little more than provide illustrations of the character of various types of assets in various trades. The principle seems to emerge that if, on a consideration of the nature of the asset in the context of the trade in question, it is seen to be appropriate to classify it as fixed rather than as circulating capital, the brevity of its life is an irrelevant circumstance. But it would still be correct, in my opinion, where the nature of the asset, taken together with other relevant factors, leaves the matter in doubt, to have regard, amongst other things, to its transient character. No rule can be laid down as to a minimum period of endurance for a capital asset or a maximum permissible period for an item of stock or circulating capital, though obviously the more closely the period of endurance is related to an accounting period the easier it is to argue for a revenue character, but no doubt there is a penumbra the width of which may vary according to the nature of the trade.”
In that case a premium paid for a short-term lease, based on the amount of oil expected to be sold at a garage or service station, was held to be capital expenditure.
28.	In ECC Quarries, Brightman J referred to Strick v Regent Oil Co Ltd, and to the corresponding Privy Council decision in BP Australia Ltd v Commissioner of Taxation [1966] AC 224, and to Megarry J’s interpretation of those cases in Pitt v Castle Hill Warehousing Co Ltd [1974] 1 WLR 1624 at p 1629:
“It seems to me that these authorities establish that in determining whether expenditure is incurred on revenue account or on capital account one must consider three elements.  First, what is the nature of the payment?  Is there a single non-recurrent lump sum, paid once-for-all, on the one hand, or are there to be current payments, made, for example, for periods commensurate with those payments?  Second, what is to be obtained by the payment?  Is it some asset with lasting or enduring qualities, or is it merely ephemeral, or indeed, something which cannot be described as an asset, whether tangible or intangible?  Third, in what manner is what is obtained to be used, relied upon or enjoyed?  Will it have a quality of recurrence which will point to an income nature, as by providing a flow of orders for goods, or will it bear a static aspect which points to a capital nature?  In considering all these elements, and in looking at the case as a whole, it is the practical and business point of view that counts for more than the juristic classification of the legal rights employed or exhausted in the process.  As Lord Upjohn said in Strick v Regent Oil Co Ltd (43 TC 1 at p 53) … ‘It is a question of fact and degree and above all judicial common sense in all the circumstances of the case.’  In other judgments there are references to ‘common sense’ simpliciter, but the adjective ‘judicial’ may be useful as indicating that the kind of common sense needed is one that is not at large, but is guided and tutored by the authorities.”
29.	Dr Hutton also referred us to Knight v Calder Grove Estates 35 TC 447.  In that case freehold land was purchased for the purpose of mining operations, with an undertaking from the vendor to repurchase the land after the mining operations were completed.  The taxpayer argued that the expenditure was transitory and should be regarded as the expense of getting and winning the coal.  That, it was argued, was not for the enduring benefit of the trade.  In rejecting that submission, Upjohn J said (at p 453):
“The case seems to me a perfectly plain one. The parties, being minded to get and win coal from this particular area by open-cast methods, purchased the land. They could have done it by some other means, but that is the means they chose - that of purchasing the land. That adventure in the nature of things is not likely to continue for more than two or three years, and they prudently arranged for the sale of this land when the adventure in relation to it comes to an end. No one suggests that the purchase of this, land is circulating capital or stock-in-trade or anything of that sort. It is, a purchase of land for the adventure, and so, on ordinary principles, the transaction must be regarded as a capital expenditure, just as when you buy land and put a factory on it, or buy land and sink a shaft. In my judgement, the fact that the adventure is not likely to continue for many years is quite irrelevant.”
30.	What these cases show, in our view, is that it is the enduring quality of the asset that is important, and not the length of time that it is likely to be held in the business.  Dr Hutton submitted, and we agree, that it is not possible for the Appellant to rely on the short length of time the property was held by the Appellant to change the nature of the asset.
31.	Dr Hutton placed considerable reliance upon Owen and Gadsdon v Brock 32 TC 206.  In that case the Appellants were partners in a firm of solicitors.  One of the partners was anxious to ensure the continued service with the firm of a particular employee.  The firm arranged to have a bungalow built for occupation by the employee, and it also bought a house for occupation by the employee until the bungalow was completed.  The partners agreed that the purchase should be a partnership venture.  The house was sold at a loss when, after about 18 months, the employee moved into the bungalow.  In the High Court Wynn-Parry J held as follows (at pp 209-10):
“In my judgment there is a short answer to this appeal. It is true there is a finding that the expenditure on the acquisition of the house in question - that is the semi-detached house - was incurred solely for the purpose of retaining the services of Mr. Sheldon, and that it was necessary to make the purchase of the house for that purpose. That finding of course is not of itself sufficient to entitle the Appellants to succeed. The question remains-is that expenditure to be treated as a capital expenditure or as a revenue expenditure? Prima facie the expenditure, being made in the purchase of a house which was intended to be let to the clerk, Mr. Sheldon, has the character of a capital expenditure. It is not for one moment contended that the expenditure on the bungalow could be regarded as otherwise than that of a capital nature but it is said that the expenditure on the house assumes a revenue character because it was only intended that the house should be held for a very short time, namely, until the bungalow was completed. That does not appear to me to be sufficient to displace the prima facie capital character of the expenditure. The partners retained a complete volition in the matter. If the bungalow for some reason had not been completed, then no doubt, to achieve the purpose for which they bought the house, they would have continued to hold the house. Indeed, even if the bungalow had been completed they might still have decided to retain the house and to sell the bungalow.  Therefore it appears to me that, in short, this is clearly a case of a change of capital investment.”
Dr Hutton pointed out that, like the land in Calder Grove Estates and in common with the property in this case, the facts of Owen and Gadsdon showed that the holding of the house was intended to be temporary only, as it was intended that the house be re-sold once the bungalow was ready for occupation.
32.	Mr James argued that Owen and Gadsdon was distinguishable on its facts.  In that case the asset in question was intended to be let to the employee, and there was no intention, as in this case, that it be transferred to the employee by way of bonus.  Mr James referred us to the findings of the General Commissioners from whom the appeal had in that case been made, that the expenditure was to secure an enduring benefit to the taxpayer’s business.  He said the position was different here in that there was in no sense a purpose to tie-in Mr Lion for the future; the purpose was to pay a bonus.
Summary of conclusions
33.	From a consideration of the facts of this case in the light of the authorities we have reached the conclusion that the write-downs of the value of the property in this case were on capital and not revenue account, and accordingly are non-deductible.
34.	We have approached our decision by adopting “judicial common sense in all the circumstances of the case” as Lord Upjohn said in the much-approved passage of Strick v Regent Oil Co Ltd to which we have referred.  We have also borne in mind, as Lord Wilberforce said in Granada Motorway Services Ltd, that indicia may point in different ways and that what may be required is to determine where the balance lies.
35.	Applying these tests we start by considering the nature of the deduction that is sought by the Appellant.  It relates not to an expense as such but to the writing down of the value of an asset, which is admittedly not trading stock of the Appellant.  The asset itself is a freehold property and so has an inherent enduring quality of the nature described by Megarry J in Castle Hill Warehousing Co Ltd.  This leads to the starting assumption, as Lord Wilberforce said in Granada Motorway Services Ltd, that in a case where the Appellant’s trade does not include dealing in land, expenditure on the acquisition and improvement of the property is capital expenditure. 
36.	The Appellant argues that there are factors that point to an opposite conclusion.  It relies upon the fact that the purpose of the whole operation was, within a short period, to remunerate Mr Lion by making a discretionary bonus of the property in kind.  However, neither of these factors in our judgment can alter the capital character of the loss or write down in this case on the asset in question.  The fact that the asset was owned for a short period only, and was intended from the outset to be held temporarily, cannot change the character of an asset held on capital account to one on revenue account (see Strick v Regent Oil Co Ltd, ECC Quarries and Calder Grove Estates).  Nor, on the authorities, can the purpose of the transaction be determinative, although we regard purpose as one element, not the sole or principal element, that should be taken into account (see per Lord Edmund-Davies in Granada Motorway Services Ltd).  To the extent that a balancing exercise of the nature described by Lord Wilberforce in Granada Motorway Services Ltd is required, we consider that in essence the loss or write down on the property was on capital account and that, according to the authorities, that is not outweighed either by the short time the property was held by the Appellant or the purpose for which the Appellant incurred expenditure on acquiring and improving the property.  The purpose was to pay a bonus to Mr Lion.  The bonus that was paid, by means of the transfer in specie of the property, was on revenue account to the extent of the value transferred.  The means adopted for the payment of the bonus was the acquisition and improvement of an identifiable asset of enduring quality.  That expenditure, and the loss or write down in value, was accordingly on capital account.
37.	We do not regard ourselves as bound by Owen and Gadsdon, as the facts of that case are in our view not sufficiently close to those in this to determine the outcome of this appeal.  We reach this conclusion notwithstanding that Mr and Mrs Lion did in fact occupy the property rent-free for a short time whilst it was in the ownership of the Appellant.  Each case depends on its own facts, although the decided cases do enable helpful analogies to be drawn.  In relation to Owen and Gadsdon, although not decisive, we do consider it material that the purchase of the house in that case was regarded by the learned judge as prima facie involving capital expenditure (in accordance with Lord Wilberforce’s starting assumption), and that the short-term ownership by the taxpayers was not a sufficient factor to displace its capital character.
38.	Mr James argued that the acquisition of the property did not bring into existence an asset for the enduring benefit of the trade so as to fall within the well-known statement of the position of Viscount Cave in British Insulated and Helsby Cables Ltd, but that the expenditure was more akin to a gift or bonus.  In our view it is no answer to a prima facie assumption that the acquisition and improvement of an identified asset is on capital account to say that the asset is not for the enduring benefit of the trade.  As is clear from what Megarry J said in Castle Hill Warehousing Co Ltd, it is the quality of the asset that is relevant here.  If an asset is neither trading stock nor for the enduring benefit of the trade it does not for this reason fall into revenue account.  Its status must be determined by its own particular characteristics.  Nor do we accept that the loss or write down incurred was itself in the nature of a gift or bonus.  The bonus here, for which a deduction has been obtained, was of the value of the property.  It was not of the loss or write down itself.  That was related to the holding of the property as a capital asset.
39.	We do not consider that our conclusion that the loss or write down in the value of the property was on capital account is affected by the accounting treatment of the property as a current asset.  In our view, the criteria that apply for accounting purposes and which would result in an asset being treated as a current asset are not the same as, and do not reflect, the distinction as a matter of law between capital and revenue.  The relevant accounting criteria in this case concerned the early realisation of the property.  As a matter of law, such criteria cannot change the nature of the asset or be determinative of the capital/revenue question, and so in this case the accounting treatment can have no effect on our conclusion.  
Section 74(1)(e) TA
40.	HMRC argued that a deduction in this case is precluded by s 74(1)(e) TA, which at the material time provided:
“(1) Subject to the provisions of the Tax Acts, in computing the amount of the profits to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of—
…
(e)	any loss not connected with or arising out of the trade, profession or vocation”
41.	HMRC’s argument on s 74(1)(e) was to the effect that the loss was not a trading loss, but a capital loss on disposal of a capital asset, and that therefore the loss fell within s 74(1)(e).  We do not consider that, once it is concluded that the loss is a capital loss, s 74(1)(e) remains relevant.  The loss is not deductible as a trading expense because it is on capital account, and it is not necessary to have recourse to s 74 at all.  That the question whether expenditure or a loss is on capital account and the application of s 74(1)(e) are distinct can be seen from Robinson v Scott Bader Co Ltd 54 TC 757.  In that case certain expenditure was denied as a deduction on various grounds, including under what became s 74(1)(e) and, as separate matter, whether the expenditure was a capital sum.  Those questions were determined as separate and independent issues by the Court.
42.	Accordingly, although Mr James referred us to McKnight v Sheppard [1996] STC 627 (ChD); [1999] STC 669 (HL), and in particular to the comments of Lightman J and Lord Hoffman as to the scope and effect of s 74(1)(e), we do not consider that this provision is material to the outcome of this appeal, and accordingly we make no finding in that respect.
Decision
43.	For the reasons we have given, we dismiss this appeal.

The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

 
ROGER BERNER

TRIBUNAL JUDGE
RELEASE DATE: 9 December 2009