McLaymont & Anor v HM Inspector of Taxes  [2003] UKSC SPC00387 (13 October 2003)

INCOME TAX — filling station proprietors — fuel company providing funds as a “contribution towards the operating costs of your business” — part of funds used to finance purchase of business — payments made to taxpayers’ solicitors for use in purchase — whether income or capital receipt — whether undifferentiated payment — error or mistake relief  — TMA 1970 s 33 — relief refused — relevant payment found to be capital receipt — appeal allowed

THE SPECIAL COMMISSIONERS

WILLIAM McCLYMONT and ALAN McCLYMONT
 	Appellants
	
- and -

IAN JARMAN
(HM Inspector of Taxes)
Respondent

Special Commissioner : Colin Bishopp

Sitting in Manchester on 23 September 2003.
The Appellants in person
Robert Glover, HM Inspector of Taxes, for the Respondent

© CROWN COPYRIGHT 2003

DECISION

1	William McClymont and his brother Alan (“the taxpayers”) trade in partnership as filling station proprietors at “Bungalow Filling Station” in Chorley, Lancashire. The one set of trading accounts included within the bundle of documents produced for use at the hearing indicated that their respective wives were also partners, but all the other available documentation was consistent with a partnership between the brothers alone. The taxpayers acquired the filling station premises in February 1994 for the total price of £750,000, of which £580,000 was paid to the vendor on completion of the purchase while the remaining £170,000 was to be paid, in instalments, over the following few years. The purchase was funded in part by money provided by the taxpayers, in part by a loan from what was then Midland Bank (“the bank”, now HSBC) and in part by money provided by Shell UK Limited (“Shell”). The dispute in this appeal relates to the correct tax treatment of the money provided by Shell which was used in the purchase.
2	Immediately prior to the completion of the purchase, the taxpayers entered into what is described as a “sales agreement” with Shell. As one might expect, it is a lengthy document, but only a small part of it is relevant for present purposes. It provided that the taxpayers would sell only Shell fuel from the filling station for a period of five years, and restricted them in a number of other ways. In return, Shell committed itself to various obligations including, in particular, the obligation to pay to the taxpayers what is described in the agreement as an “Incentive Contribution”, consisting of four elements:
(a)	“A contribution to the operating costs of your business”					£125,000	
(b)	“A contribution to the operating costs of your business paid in 20 quarterly instalments of £11,500 …”	£230,000	
(c)	“A contribution to the operating costs of your business paid on the first anniversary of the Commencement of Supply”	
£20,000	
(d)	“A contribution towards the purchase and installation at the filling station of the Shell branded décor equipment …”	
£30,000	
3	William McClymont, who represented the taxpayers at the hearing and also gave evidence, which was not challenged and which I accept, told me that the purchase was the subject of protracted negotiations. The asking price of the filling station was at first far greater than the price eventually paid, and it was Shell which brought the parties together again when the vendor reduced his price. Even then, the taxpayers faced considerable problems in raising the purchase price since they were able to provide only a small part of it themselves—£89,000, or about 12 per cent—and it was necessary to look to the bank for a substantial loan. The bank, as the documentation available to me makes abundantly clear, was unwilling to provide the entire balance of the price, and was also concerned about the taxpayers’ ability to meet the interest payments on such amount as it was willing to lend. Eventually it was agreed that the vendor would accept part of the consideration by instalments and Shell would meet part of the purchase price by paying element (a) of the “Incentive Contribution” immediately, in order that the taxpayers could use it in part payment of the price, and would pay element (c) a year later, when the first of the deferred instalment payments was due. Element (b) was so structured that the quarterly instalments met the loan repayments due from the taxpayers to the bank for the first five years.
4	The various payments received from Shell were entered in the taxpayers’ accounts as revenue receipts but in early 2000, when their accountant, Michael Egan (who had not been involved in the acquisition of the premises), read the Revenue’s Tax Bulletin Issue 8, published in August 1993, it occurred to him that two of the payments—elements (a) and (c)—should have been treated as capital receipts, and he submitted a claim for relief from an error or mistake, pursuant to section 33 of the Taxes Management Act 1970. The passage in the Bulletin which caught Mr Egan’s eye reads:
“Exclusivity agreements are a common feature of trading arrangements in various trades. They often arise, for example, between petrol suppliers and garages or between breweries and publicans. Under these agreements the trader is tied for a number of years to one supplier of goods or services and in return receives a lump sum payment. Frequently such a sum is potentially repayable but the agreement provides for the periodic waiver of the liability to repay a proportion of the sum provided the terms of the exclusivity contract are adhered to. If the agreement runs its full course, none of the lump sum will be repayable.
Our view is that such an ‘abatable loan’ should be treated in the same way as a grant, its capital or revenue nature being determined by the purpose, in the mind of the payer, for which the trader received that sum. This requires consideration of not only the particular agreement in question but also the correspondence and discussions which supplemented the terms of the agreement.
If the supplier designates the payment for a specific capital purpose, and there is evidence that the recipient has expended it in the manner specified, then it can be accepted as a capital receipt. However, if the recipient is effectively at liberty to spend the money as he or she thinks fit, the receipt is to be regarded as an undifferentiated  payment and therefore a taxable revenue receipt ….”
5	Although Mr Egan did not refer to that passage in his letter submitting the claim, he was to tell me, and I accept, that he relied upon it. The inspector refused the claim on the grounds that the receipts were of a revenue nature, and had been correctly so recorded. It is apparent from the letter conveying the decision to refuse the claim that the factors which led the inspector to that view were the description of the payments, in the agreement between Shell and the taxpayers, as a “contribution to the operating costs of your business”, and the absence from the sales agreement of any restriction on the manner in which the payments were spent. They were, as it was put by Robert Glover, the inspector who represented the respondent at the hearing, the “undifferentiated” payments described in the Bulletin, which were necessarily of a revenue nature.
6	It is convenient at this point to examine the relevant case law to which Mr Glover referred me (and which is cited in the Bulletin as authority for the propositions set out in it) before returning to the facts.
7	In Evans v Wheatley (1958) 38 TC 216 the taxpayer, also a filling station proprietor, argued that payments made to him by a petrol company ostensibly in reimbursement of expenses incurred in sales promotion, none of which expenses he had incurred, were in fact the consideration for his agreeing to enter into restrictive covenants and were therefore of a capital nature. Unsurprisingly, Wynn-Parry J concluded that the payments could not be so regarded; they were described in the agreement between the taxpayer and the company as reimbursements of revenue expenditure, and were linked to the volume of fuel sold by the taxpayer. There was no evidence of any agreement or understanding between the company and the taxpayer that the payments were in fact to be devoted to a capital purpose, nor had the taxpayer incurred any identifiable capital expenditure. The effect of this decision is that payments of an apparently revenue character cannot be converted into capital payments merely because the purpose for which they were purportedly paid is absent.
8	That case is to be contrasted with Walter W Saunders Ltd v Dixon (1962) 40 TC 329 in which the taxpayer, again a filling station proprietor, received from the same petrol company as that in Evans v Wheatley payments also described in the principal sales agreement between the parties as reimbursements of expenses incurred in sales promotion. Here, however, the company agreed, despite the terms of the principal agreement, to pay the whole amount which the taxpayer expected to receive over the twenty-year term of the agreement in advance. The supplementary agreement was documented in exchanges of correspondence. At the taxpayer’s direction, some of the money was paid to the taxpayer’s solicitors to be used towards the purchase price of the trading premises, some was paid to contractors carrying out alterations at the premises, and the remainder was paid to the taxpayer himself, but also for meeting the costs of alteration of the premises. Wilberforce J concluded that the entire sum was of a capital nature, distinguishing Evans v Wheatley because of the clear evidence that, here, the petrol company had made the payments for capital purposes, and that the terms of the principal agreement had been varied.
9	Mr Glover referred me also to Poulter v Gayjon Processes Ltd [1985] STC 174, and Ryan v Crabtree Denims Ltd [1987] STC 402, both cases in which the payments in question were clearly undifferentiated and therefore properly to be considered of a revenue character. These two cases merely show that the Bulletin correctly reflects the law.
10	Mr Glover’s argument was that the payments with which I am concerned, too, were undifferentiated; the taxpayers had, as he accepted, used them in meeting the capital cost of their trading premises, but Shell had not imposed any condition that they should be used in that way. The description of them in the agreement between Shell and the taxpayers, as contributions to operating costs, and the absence of any limitation on the use made of them, must lead to the conclusion that they were of a revenue character and since there was no supplementary agreement overriding the principal agreement, such as that in Saunders v Dixon, there was no material on which it could be concluded that Shell required the money to be used for a capital purpose. It was not enough, he argued, that the taxpayers intended to, and did, use the money for a capital purpose; what mattered was the intention of the payer. It was not even enough that the payer knew the purpose to which the money would be put. If the recipient had a choice, the payments must be undifferentiated and therefore treated as revenue receipts.
11	Mr McClymont accepted that there was no documentary evidence that Shell required the taxpayers to use the money for capital purposes. There had been no contemporaneous exchange of correspondence; all the negotiations about the price of the filling station and its payment had been oral and, although the terms agreed between the vendor and the taxpayers had been reduced to writing, that was not the case between Shell and the taxpayers. He had tried, while the appeal was under way, to obtain confirmation from Shell that it knew and intended that the money would be used in part payment of the price, but had been able to obtain only a letter, of which a copy was in the bundle, which can at best be described as non-committal. Whether its terms were motivated by Shell’s concern about its own tax position, as Mr McClymont suggested, is not a matter on which I need speculate. 
12	However, he said, all of the other available evidence pointed clearly to the conclusion that Shell must not only have known but must also have intended that the money would be used in that fashion. The taxpayers could not fund the purchase without the loan from the bank, which would not be forthcoming without the security of the payments from Shell, and even with the loan the payment by Shell of the first £125,000 was necessary in order to make up the total sum due to the vendor on completion of the purchase. Among the documents produced to me were letters from the bank, confirming that the availability of money from Shell made the difference between its lending and not lending, and from the taxpayers’ solicitors confirming that the payment by Shell was necessary if the purchase were to be completed, and that the money was paid into the solicitors’ clients’ account by Shell. I heard also evidence from Mr Egan, now the taxpayers’ accountant, who, though not involved at the time, had examined their accounts from that period and had concluded that, without Shell’s money, the purchase could not have been made. I accept all that evidence, and am quite satisfied that the taxpayers had no real choice about the disposition of the money.
13	The essential feature of Mr Glover’s argument by which, as it seems to me, it stands or falls is that the absence of a documented supplementary agreement, such as that in Saunders v Dixon, is critical. Without such documentation, it was impossible to set aside the clear and unambiguous allocation of the payments, by the sales agreement, to a revenue purpose. Shell’s non-committal letter, moreover, pointed away from the conclusion that it had required the money to be used, instead, for a capital purpose. 
14	There is some attraction in this argument since, as I accept, what it is necessary to consider is not what the taxpayers, or the bank, intended, or even did, but what Shell intended. It is apparent from what Wilberforce J said in Saunders  v Dixon that he was influenced by the fact that the petrol company and the taxpayer were in agreement about the use to which the money was to be put. During the course of his judgment he said:
“I am invited by the Crown to treat this as a case of a diversion of what was intended to be a revenue contribution towards a capital purpose, which, of course, would not affect the tax position. I do not see why I should do so. The payment was made in close proximity in time to the agreement [that is, the supplementary agreement] and it seems to me to fit in entirely with the conception which I have already formed of the nature of that agreement—and, indeed, to confirm it—that expenditure of this kind was in the minds of both parties when the letter was written, and that the payments were made in execution of that agreement.”
15	I do not, however, think that that passage goes so far as to support Mr Glover’s argument that documentary evidence is necessary if an agreement such as the sales agreement here is to be overridden. Certainly documentary evidence of the payer’s intention would be strong, and often conclusive, evidence, and the absence of such documentation, particularly when, as here, the payer has had the opportunity of providing it, even if after the event, but has declined to do so, places a considerable burden on the recipient if he is to displace the natural meaning of the principal agreement. Nevertheless, I am persuaded that inference, if it strong enough, can be sufficient.
16	All of the available evidence shows, as I have already indicated, that the purchase could not have proceeded without Shell’s money. It seems to me to be not merely a strong inference, but inescapable, that Shell was well aware of that fact. Its paying the initial £125,000 to the taxpayers’ solicitors is consistent with its having agreed that its money should be used in part payment of the price but, alone, does not exclude other possibilities. However, the fact that it paid the money in advance of completion of the purchase (as the solicitors’ letter shows) seems to me to be consistent only with an intention that the money should be used in part payment of the price. I accept Mr McClymont’s argument that, if the purchase had not been completed, there would have been no business to whose operating costs Shell could contribute. It is impossible to believe that Shell would pay over the money at that time, upon the basis that the taxpayers were at liberty to spend it as they chose. The only possible inference must be that Shell, as well as the taxpayers, intended that it be used for the purpose of acquiring the business. I therefore determine that the payment of £125,000 was of a capital nature.
17	Mr Glover suggested during the hearing that relief had been sought only in respect of the first payment of £125,000 and not in respect of the later payment of £20,000, although he accepted that the two payments should be treated alike. As I read the correspondence, however, it appears to me that Mr Egan did ask for relief in respect of both payments, although the letter in reply, refusing the claim, mentions only the first payment. For the avoidance of doubt, and whatever may be the correct position about the claim, I am of the opinion that the second payment, which was earmarked (and, as I am satisfied, with Shell’s knowledge and agreement) to be used in paying one of the deferred instalments of the purchase price, is also to be treated as a capital receipt.
18	Since the only issue between the parties was the nature of the payments, the Revenue having accepted that the claim for relief must succeed if they were of capital, that conclusion is determinative of the appeal, which is allowed.

COLIN BISHOPP
SPECIAL COMMISSIONER