Tax Cases

Question 1

Heather v PE Consulting Group Ltd

Answer 1

Though accountancy practice is given weight, the courts are not bound by it; the issue of capital and revenue is a question of law.

Question 2

Herbert Smith v Honour

Answer 2

Listed the circumstances where GAAP is not determinative for tax purposes:

• accounts based on factual analysis which is wrong in law
• factual assumptions insufficiently reliable
• factual assumptions actually inconsistent with the true facts

Question 3

Listed the circumstances where GAAP is not determinative for tax purposes:

• accounts based on factual analysis which is wrong in law
• factual assumptions insufficiently reliable
• factual assumptions actually inconsistent with the true facts

Answer 3

Herbert Smith v Honour

Question 4

Though accountancy practice is given weight, the courts are not bound by it; the issue of capital and revenue is a question of law.

Answer 4

Heather v PE Consulting Group Ltd

Question 5

John Smith and Son v Moore

Answer 5

Used the Adam Smith definitions of fixed and circulating capital

• Fixed capital - that which the owner turns to profit by keeping in his own possession
• Circulating capital - that which the owner makes a profit of by parting with it and letting it change masters

Question 6

Used the Adam Smith definitions of fixed and circulating capital

• Fixed capital - that which the owner turns to profit by keeping in his own possession
• Circulating capital - that which the owner makes a profit of by parting with it and letting it change masters

Answer 6

John Smith and Son v Moore

Question 7

JandR O’Kane v CIR

Answer 7

Gave an alternative definition of fixed and circulating capital:

• Fixed - property acquired and intended for retention and employment with a view to profit
• Circulating - property acquired or produced with a view to resale or sale at a profit

Question 8

Gave an alternative definition of fixed and circulating capital:

• Fixed - property acquired and intended for retention and employment with a view to profit
• Circulating - property acquired or produced with a view to resale or sale at a profit

Answer 8

JandR O’Kane v CIR

Question 9

Gloucester Railway Carriage and Wagon Company Ltd v CIR

Answer 9

Company manufactured, sold and hired out wagons. The ‘hire’ wagons were shown as fixed capital assets in the accounts. Upon their sale, the courts held that the profit was revenue, not capital, arising out of a single trade of making profit from wagons

Question 10

Company manufactured, sold and hired out wagons. The ‘hire’ wagons were shown as fixed capital assets in the accounts. Upon their sale, the courts held that the profit was revenue, not capital, arising out of a single trade of making profit from wagons

Answer 10

Gloucester Railway Carriage and Wagon Company Ltd v CIR

Question 11

Vodafone Cellular Ltd v Shaw

Answer 11

In the judge’s summary he noted two things are important in determining capital/revenue - the nature of the payment and the nature of the advantage obtained by the payment. If a payment is made to extinguish an obligation to make revenue payments, then it is revenue. (Unless the obligation extinguished by the modification or disposal of an identifiable capital asset)

Question 12

In the judge’s summary he noted two things are important in determining capital/revenue - the nature of the payment and the nature of the advantage obtained by the payment. If a payment is made to extinguish an obligation to make revenue payments, then it is revenue. (Unless the obligation extinguished by the modification or disposal of an identifiable capital asset)

Answer 12

Vodafone Cellular Ltd v Shaw

Question 13

Mallett v Staveley Coal and Iron Co Ltd

Answer 13

Colliery company paid to get out of 2 loss-making leases early. Claimed the costs as revenue as not asset/advantage gained, and only a revenue charge was replaced. Courts held that the expense was incurred in disposing of a capital asset (not dealing in leases) therefore the expense was capital. The company id have an advantage as they had an improved asset (no undesirable leases)

Question 14

Colliery company paid to get out of 2 loss-making leases early. Claimed the costs as revenue as not asset/advantage gained, and only a revenue charge was replaced. Courts held that the expense was incurred in disposing of a capital asset (not dealing in leases) therefore the expense was capital. The company id have an advantage as they had an improved asset (no undesirable leases)

Answer 14

Mallett v Staveley Coal and Iron Co Ltd

Question 15

Tucker v Granada Motorway Services Ltd

Answer 15

Substituted part of turnover-based rent for a lump sum payment. Claimed it was a revenue payment as it replaced a revenue obligation. Courts held it was capital as it improved the value of the asset (the lease) to the company
* KIV - Lord Wilberforce - “once and for all expenditure”

Question 16

Substituted part of turnover-based rent for a lump sum payment. Claimed it was a revenue payment as it replaced a revenue obligation. Courts held it was capital as it improved the value of the asset (the lease) to the company
* KIV - Lord Wilberforce - “once and for all expenditure”

Answer 16

Tucker v Granada Motorway Services Ltd

Question 17

Texas Land and Mortgage v Holtham

Answer 17

Raised money by issuing debentures, company argued that costs related to debentures were revenue but court found it was expenditure incidental to fixed capital (the debentures) and therefore capital.

Question 18

Raised money by issuing debentures, company argued that costs related to debentures were revenue but court found it was expenditure incidental to fixed capital (the debentures) and therefore capital.

Answer 18

Texas Land and Mortgage v Holtham

Question 19

ECC Quarries Ltd v Watkis

Answer 19

Company applied unsuccessfully for permission to extract sand and grave. Claimed the associated expense was revenue as no asset or enduring benefit was gained. Courts held it was capital; had it been successful it would have “radically and enduringly” altered the land, and so been capital. The fact that it was unsuccessful does not alter its character

Question 20

Company applied unsuccessfully for permission to extract sand and grave. Claimed the associated expense was revenue as no asset or enduring benefit was gained. Courts held it was capital; had it been successful it would have “radically and enduringly” altered the land, and so been capital. The fact that it was unsuccessful does not alter its character

Answer 20

ECC Quarries Ltd v Watkis

Question 21

Southern v Borax Consolidated Ltd

Answer 21

Incurred legal expenses defending their title to land in LA. Court agreed it was a revenue expense; it was essentially an exercise in maintenance as nothing was altered

Question 22

Incurred legal expenses defending their title to land in LA. Court agreed it was a revenue expense; it was essentially an exercise in maintenance as nothing was altered

Answer 22

Southern v Borax Consolidated Ltd

Question 23

Glenboig Union Fireclay Co Ltd v CIR

Answer 23

Company leased fireclay beds, some of which were under tracks of the Caledonian Railway. They prevented the company from using those beds, and paid compensation. Held to be a capital receipt as it was for the permanent loss of use (sterilisation) of a fixed capital asset. Fact that compensation was calculated by reference to lost profits was irrelevant

Question 24

Company leased fireclay beds, some of which were under tracks of the Caledonian Railway. They prevented the company from using those beds, and paid compensation. Held to be a capital receipt as it was for the permanent loss of use (sterilisation) of a fixed capital asset. Fact that compensation was calculated by reference to lost profits was irrelevant

Answer 24

Glenboig Union Fireclay Co Ltd v CIR

Question 25

Burmah Steam Ship Co Ltd v CIR

Answer 25

Sent a ship in for repairs, it was late being completed. Damages received to ‘fill the hole’ in their profits. Held to be revenue for that reason; no damage to a fixed capital asset, but rather to the trading opportunities it offered

Question 26

Sent a ship in for repairs, it was late being completed. Damages received to ‘fill the hole’ in their profits. Held to be revenue for that reason; no damage to a fixed capital asset, but rather to the trading opportunities it offered

Answer 26

Burmah Steam Ship Co Ltd v CIR

Question 27

London and Thames Haven Oil and Wharves v Attwooll

Answer 27

A tanker damaged one of the company’s jetties, paid compensation for the repairs and loss of use. Payment for the damage was capital, the loss of use was revenue and repair costs were not deductible in so far as they were covered by the capital compensation

• asset damaged, sold without repair - all compensation is CAPITAL
• asset damaged and repaired - EITHER a) treat all compensation as capital, and only allow deductions for repairs which cost more than the compensation received, OR b) allow all repairs but bring in same amount of compensation as a REVENUE receipt

Question 28

A tanker damaged one of the company’s jetties, paid compensation for the repairs and loss of use. Payment for the damage was capital, the loss of use was revenue and repair costs were not deductible in so far as they were covered by the capital compensation

• asset damaged, sold without repair - all compensation is CAPITAL
• asset damaged and repaired - EITHER a) treat all compensation as capital, and only allow deductions for repairs which cost more than the compensation received, OR b) allow all repairs but bring in same amount of compensation as a REVENUE receipt

Answer 28

London and Thames Haven Oil and Wharves v Attwooll

Question 29

Short Bros Ltd v CIR

Answer 29

Shipbuilders agreed to cancel 2 contracts in return for £100k compensation. Was found to be a revenue receipt and all chargeable in the receipt year as it could not be affected by the chronology of the contract which had been cancelled.

Question 30

Shipbuilders agreed to cancel 2 contracts in return for £100k compensation. Was found to be a revenue receipt and all chargeable in the receipt year as it could not be affected by the chronology of the contract which had been cancelled.

Answer 30

Short Bros Ltd v CIR

Question 31

George Thompson & Co Ltd v CIR

Answer 31

Shipping company had a contract to buy coal at fixed price, they sold this right for a premium. Court found that the premium was a revenue receipt as it was received in return for something used in its business, a circulating capital asset (the coal)

Question 32

Shipping company had a contract to buy coal at fixed price, they sold this right for a premium. Court found that the premium was a revenue receipt as it was received in return for something used in its business, a circulating capital asset (the coal)

Answer 32

George Thompson & Co Ltd v CIR

Question 33

Van den Berghs Ltd v Clark

Answer 33

Entered into a friendly alliance with a rival company involving agreements affecting the whole structure of the business. When the alliance ended, compensation received was held to be capital because it recognised a fundamental end/change to the structure of their business as they knew it - and the loss of the capital asset that was the rights under the various agreements

Question 34

Entered into a friendly alliance with a rival company involving agreements affecting the whole structure of the business. When the alliance ended, compensation received was held to be capital because it recognised a fundamental end/change to the structure of their business as they knew it - and the loss of the capital asset that was the rights under the various agreements

Answer 34

Van den Berghs Ltd v Clark

Question 35

Anglo-Persian Oil Co Ltd v Dale

Answer 35

Company cancelled contract with its Persian agents and set up their own sales organisation there. Sum paid to end the contracts, and ensure no future competition from those agents, was revenue as there was no enduring benefit to the trade, and the agreement did not form the whole framework within which the company operated.

Question 36

Company cancelled contract with its Persian agents and set up their own sales organisation there. Sum paid to end the contracts, and ensure no future competition from those agents, was revenue as there was no enduring benefit to the trade, and the agreement did not form the whole framework within which the company operated.

Answer 36

Anglo-Persian Oil Co Ltd v Dale

Question 37

Kelsall Parsons & Co v CIR

Answer 37

1 of 14 contracts terminated one year early. Compensation received found to be revenue as the cancellation didn’t affect whole structure and framework of business, and was no more of a disturbance than they might have expected in the ordinary course of their business

Question 38

1 of 14 contracts terminated one year early. Compensation received found to be revenue as the cancellation didn’t affect whole structure and framework of business, and was no more of a disturbance than they might have expected in the ordinary course of their business

Answer 38

Kelsall Parsons & Co v CIR

Question 39

Barr Crombie & Co v CIR

Answer 39

Managed ships for another company which went into liquidation. Compensation received was found to be capital as 98% of their trade had come from this company, and the whole structure of the business subsequently had to change.

Question 40

Managed ships for another company which went into liquidation. Compensation received was found to be capital as 98% of their trade had come from this company, and the whole structure of the business subsequently had to change.

Answer 40

Barr Crombie & Co v CIR