REVENUE - Corporation tax - Assessment - Depreciation - Unsold stock - Cost of production treated separately in profit and loss account and carried forward in tax computation - Whether net or gross amount of depreciation to be added back - Income and Corporation Taxes Act 1988, s 74(1)(f)

Revenue and Customs Commissioners v William Grant & Sons Distillers Ltd; Small (Inspector of Taxes) v Mars UK Ltd [2007] UKHL 15

HL(Sc) and (E): Lord Hoffmann, Lord Hope of Craighead, Lord Walker of Gestingthorpe, Lord Mance and Lord Neuberger of Abbotsbury: 28 March 2007

Where the taxpayer companies carried forward in their tax computations the element of depreciation in fixed assets that related to production of unsold stock as part of the cost of unsold stocks they did not infringe the prohibition of deductions for the depreciation of capital assets in s 74(1)(f) of the Income and Corporation Taxes Act 1988 (as renumbered by s 144(2) of the Finance Act 1994).

The House of Lords so held in allowing conjoined appeals by William Grant & Sons Distillers Ltd and Mars UK Ltd from an Extra Division of the Court of Session (Lord Penrose and Lord Osborne, Lord Reed dissenting) 2005 SLT 888 and Lightman J [2005] STC 958, who had allowed appeals by the revenue from decisions of special commissioners in favour of the taxpayer companies.

LORD HOFFMANN said that the companies had prepared their accounts in accordance with the relevant standards laid down pursuant to the Companies Act 1989. They had divided depreciation occurring during the year or carried in the opening stock figure into two parts, depreciation in fixed assets relating to production of goods sold during the year or in assets not used for production and depreciation in fixed assets relating to production of unsold stocks. They had deducted the first element from the year’s revenue and carried the second element forward as part of the cost of unsold stocks. The accountants on both sides agreed that that gave a true and fair view of the profits and losses in the relevant periods. The revenue, however, submitted that deduction of anything less than the entire depreciation in the year was contrary to some fundamental principle of accounting or to the requirements of the Companies Act 1985 and infringed the prohibition of deductions for the depreciation of capital assets in s 74(1)(f) of the 1988 Act. In his Lordship’s view (with reference to Comr of Inland Revenue v Secan Ltd (2000) 74 TC 1), it was important not to confuse the role of stock in a balance sheet, which was a statement of assets and liabilities on a given date and where it was an asset, with its role in a profit and loss account, which was concerned with revenue and costs and where it represented a cost. Statement of Standard Accounting Practice 9 (1975) permitted the cost of unsold stock (incuding relevant depreciation) to be carried over into future years and set against future sales. There was nothing in the provisions of the 1985 Act that prevented depreciation, or any other cost, being deducted if that was calculated to give a true and fair view of the profits.

LORD HOPE delivered an opinion agreeing with Lord Hoffmann.

LORD WALKER, LORD MANCE and LORD NEUBERGER agreed with Lord Hoffmann.
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Appearances: Colin Tyre QC (of the Scots Bar) and Graham Aaronson QC (of the English Bar) (Dorsey & Whitney for McGrigors, Edinburgh) for William Grant; Graham Aaronson QC (Dorsey & Whitney) for Mars; Colin Campbell QC (of the Scots Bar), Jane Paterson (of the Scots Bar) and Rupert Baldry (of the English Bar) (Solicitor, HM Revenue and Customs, Edinburgh) for the revenue in William Grant’s case; David Milne QC (of the English Bar) and Rupert Baldry (HM Revenue and Customs) for the revenue in Mars’ case.

Reported by: Michael Gardner, barrister