Regent Oil Co Ltd v. Strick (Inspector of Taxes); Regent Oil Co Ltd v Inland Revenue Commissioners

[1965] 3 All ER 174

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Between:
And:

Court:

Judges: Lord Reid
Lord Morris of Borth-Y-Gest
Lord Pearce
Lord Upjohn
Lord Wilberforce

Subject References:
TAXATION
Deduction in computing profits
INCOME TAX
Deduction in computing profits
Capital expenditure
Premiums on grant of leases
Oil company
Tied service stations
Lease of premises to oil company for premium
Sub-lease back to proprietor at nominal rent
Covenants binding proprietor to use company's oil
Deductibility of premium in computing company's profits
PROFITS TAX
Computation of profits
Deduction
Capital expenditure
Premiums on grant of leases
Oil company
Tied service stations
Lease of premises to oil company for premium
Sub-lease back to proprietor at nominal rent
Covenants binding proprietor to use company's oil
Deductibility of premium in computing company's profits

Legislative References:
Income Tax Act, 1952 (15 & 16 Geo 6 & 1 Eliz 2. c 10) - s 137(f)

Case References:
Addie (Robert) & Sons' Collieries Ltd v Inland Revenue Comrs - [1924] SC 231; 8 Tax Cas 671; 28 Digest (Repl) 125, 348
Anglo-Persian Oil Co v Dale - [1931] All ER Rep 725; [1932] 1 KB 124; 100 LJKB 504; 145 LT 529; 16 Tax Cas 253; 28 Digest (Repl) 117, 449
Bolam (Inspector of Taxes) v Regent Oil Co Ltd - (1956) 37 Tax Cas 56; 28 Digest (Repl) 124, 479
British Insulated and Helsby Cables v Atherton - [1925] All ER Rep 623; [1926] AC 205; 95 LJKB 336; 134 LT 289; 28 Digest (Repl) 133, 499
Collins v Adamson (Joseph) & Co Adamson (Joseph) & Co v Collins - [1937] 4 All ER 236; [1938] 1 KB 477; 107 LJKB 121; 21 Tax Cas 400; 28 Digest (Repl) 120 463
Comr of Taxes v Nchanga Consolidated Copper Mines Ltd - [1964] 1 All ER 208; [1964] AC 948; [1964] 2 WLR 339
Inland Revenue Comrs v British Salmson Aero Engines Ltd, British Salmson Aero Engines v Inland Revenue Comrs - [1938] 3 All ER 283; [1938] 2 KB 482; 107 LJKB 648; 159 LT 147; 22 Tax Cas 29; 28 Digest (Repl) 120, 461
Inland Revenue Comrs v Coia - [1959] SC 89; 38 Tax Cas 334; 3rd Digest Supp
Kauri Timber Co Ltd v Taxes Comr - [1913] AC 771; 109 LT 22; 28 Digest (Repl) 114, 330
Knight (Inspector of Taxes) v Calder Grove Estates - (1954) 35 Tax Cas 447; 28 Digest (Repl) 58, 225
MacTaggart (Inspector of Taxes) v Strump - [1925] SC 599; 10 Tax Cas 17; 28 Digest (Repl) 126, 367
Hallstroms Proprietary v Federal Comr of Taxation - (1946) 72 CLR 634
Henriksen v Grafton Hotel Ltd - [1942] 1 All ER 678; [1942] 2 KB 184; 111 LJKB 497; 167 LT 39; 24 Tax Cas 453; 28 Digest (Repl) 116, 437
Hinton v Maden & Ireland Ltd - [1959] 3 All ER 356; [1959] 1 WLR 875; 38 Tax Cas 391; 52 R & IT 688
Inland Revenue Comrs v Adam - [1928] SC 738; 14 Tax Cas 34; 28 Digest (Repl) 126, 370
New State Areas v Comr for Inland Revenue - [1946] SALR 610
Ounsworth v Vickers Ltd - [1915] 3 KB 267; 84 LJKB 2036; 113 LT 865; 6 Tax Cas 671; 28 Digest (Repl) 118, 454
Rhodesia Railways v Bechuanaland Protectorate, Resident Comr & Treasurer - [1933] AC 362; 102 LJPC 62; 149 LT 1; 28 Digest (Repl) 405, 907
Roke (HJ) Ltd v Inland Revenue Comrs, Inland Revenue Comrs v Rorke (HJ) Ltd - [1960] 3 All ER 359; [1960] 1 WLR 1132; 39 Tax Cas 194
Smith (John) & Son v Moore - [1921] 2 AC 13; 90 LJPC 149; 125 LT 481; 12 Tax Cas 266; 28 Digest (Repl) 421, 1860
Stow Bardolph Gravel Co v Poole - [1954] 3 All ER 637; [1954] 1 WLR 1503; 35 Tax Cas 459; 28 Digest (Repl) 123, 476
Sun Newspapers Ltd v Federal Comr of Taxation - (1938) 61 CLR 337
United Steel Companies Ltd v Cullington (Inspector of Taxes) (No 1) - (1939) 162 LT 23; 23 Tax Cas 71; 28 Digest (Repl) 29, 129
Usher's Wiltshire Brewery Ltd v Bruce - [1915] AC 433; 84 LJKB 417; 112 LT 651; 6 Tax Cas 399; 28 Digest (Repl) 77, 293
Vallambrosa Rubber Co Ltd v Farmer (Surveyor of Taxes) - [1910] SC 519; 5 Tax Cas 529; 28 Digest (Repl) 105, 281
Van den Berghs v Clark - [1935] All ER Rep 874; [1935] AC 431; 104 LJKB 345; 153 LT 171; 19 Tax Cas 390; 28 Digest (Repl) 117, 450
Whimster & Co v Inland Revenue Comrs - [1926] SC 20; 12 Tax Cas 813; 28 Digest (Repl) 424, 944
Yarmouth v France - (1887) 19 QBD 647; 57 LJQB 7; 34 Digest (Repl) 299, 2159

Hearing date: 15, 16, 17, 21, 22 and 23 June 1965
Judgment date: 27 July 1965

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As the result of intense competition between the major oil companies in this country a system of trading had grown up since 1950, which was now customary, whereby each company offered financial inducements to garage proprietors in return for the proprietor undertaking to buy all his petrol from that particular supplier. The taxpayers, who were one of the major oil companies, at first were able to obtain such exclusive agreements with garage proprietors for the sale of their petrol by offering a small rebate on the gallonage sold by the proprietor during the period of the tie, which was usually for a year or less, or offering small payments towards improvement of the service station, but the competition between the companies placed proprietors in a strong position and they became able to insist on lump sum payments in advance for longer ties. The taxpayers always calculated the lump sum they were prepared to offer for the tie on the estimated gallonage likely to be sold by the proprietor during the period of the tie, which now varied from a few months to five or six years. In order to ensure that the lump sum payments were received as capital, so as not to attract income tax, a few garage proprietors insisted on a form of tie, known as the lease-sub-lease transaction, whereby the proprietor granted the suppliers a lease of the garage premises for the period of the tie in consideration for the payment of a lump sum, which was calculated on the gallonage likely to be sold during the period of the lease, plus a nominal rent of £1 per annum. On the same day that the lease was executed the suppliers granted a sub-lease of the premises to the proprietor for the same period as the lease less three days and for the nominal rent of £1 per annum, the sub-lease containing covenants by the proprietor to buy all his petrol requirements from the suppliers during the term of the sub-lease and providing that the suppliers could enforce the covenants by re-entry and restricting the proprietor's right to part with the garage without ensuring that the assignee was bound by the covenants. In two instances of such lease and sub-lease transactions with the taxpayers the leases granted to the taxpayers were for terms of twenty-one years, the lump sums payable on the grant of the leases being in one case £27,000 and in the other £10,416. In a third instance the lease was for a term of ten years and the lump sum payment was £5,000, and in a fourth instance the lease was for a term of five years and the lump sum payment was £2,083. The taxpayers claimed, in relation to assessments made on them for 1957-58 and 1960-61 to income tax under Sch D, and to assessments to the profits tax, that they were entitled to deduct these lump sum payments in computing their profits for the purposes of income tax and the profits tax on the ground that the payments were expenditure of a revenue and not a capital nature.

Held

The lump sum payments were expenditure of a capital and not of a revenue nature, and therefore were not deductible in computing the taxpayers' profits for the purposes of income tax and the profits tax, for the following reasons-

(i)

(per Lord Morris of Borth-Y-Gest, Lord Pearce and Lord Upjohn) the payments were made for the acquisition of interests in land which were assets of a capital nature (being, per Lord Upjohn, the acquisition of property for the purpose of carrying on a trade thereon), for the transactions of lease-sub-lease were real and not sham transactions under which in return for the lump sum payments the taxpayers obtained leases of land for a period of years at a nominal rent which were of considerable value of them as providing security for performance by the garage owner of the covenants in the sub-leases (see p 187, letters d to g, p 194, letters a and b, p 196, letters e and i, and p 197, letters f and g, post).

(ii)(a)

(pe Lord Reid) because the lump sum payments for twenty-one years' ties were capital expenditure, and would be so even if there had been no leases and sub-leses; and the lump sum payments for ten and five years were also capital expenditure, having regard to the transactions being by lease and sub-lease (see p 186, letter i, and p 187, letters a to d; cf, per Lord Upjohn at p 200, letters a to d, post).

(ii)(b)

(per per Lord Morris of Borth-Y-Gest) because the lump sum payments, regarded as payments for acquisition of exclusive rights to a dealer's custom for five, ten or twenty-one years, were of a capital, not a revenue, nature (see p 188, letter a, post).

(iii)

(per Lord Wilberforce) because

(a)

the nature of the payments had the character of capital, for they were lump sums paid to secure the emergence of an asset or advantage to be enjoyed for a period (see p 201, letter h, post);

(b)

the asset or advantage gained was a foundation for earning future profits and its character was that of fixed, not circulating, capital (see p 202, letter g, post);

(c)

the durability of the advantage acquired, which was at the least five years, established its nature as capital, for (Lord Morris of Borth-Y-Gest concurring) if an asset was rightly classified as fixed, not circulating, capital, the brevity of its life was an irrelevant consideration (see p 204, letter g, p 205, letter a, and p 192, letter a, post);

accordingly the nature of the payments, the commercial and legal nature of the advantage gained, and the use to be made of the advantage all pointed to the payments being capital expenditure and did so with sufficient clarity to prevail over such slight indication to the contrary as derived from possible recurrence of the expenditure (see p 206, letter c, post).

Principles stated by Dixon J in Sun Newspapers Ltd v Federal Comr of Taxation ((1938), 61 CLR at pp 359, 363) applied.

Per Lord Upjohn: the problem is a question of fact and degree ... and I do not believe that it is possible to lay down any principle, when dealing with trading contracts, which would be of any guidance alike to Crown and subject in future cases (see p 199, letter f, post).

Vallambrosa Rubber Co Ltd v Farmer (Surveyor of Taxes) ((1910), 5 Tax Cas 529); Smith (John) & Son v Moore ( [1921] 2 AC 13 ); Henriksen v Grafton, Hotel Ltd ( [1942] 1 All ER 678 ), and Comr of Taxes v Nchanga Consolidated Copper Mines Ltd ( [1964] 1 All ER 208 ) considered.

Bolam (Inspector of Taxes) v Regent Oil Co Ltd ((1956), 37 Tax Cas 56) distinguished.

Decision of the Court of Appeal (sub nom Strick (Inspector of Taxes) v Regent Oil Co Ltd, Inland Revenue Comrs v Regent Oil Co Ltd ( [1964] 3 All ER 23 )) affirmed.

Notes

As to capital expenditure not deductible in computing profits for income tax and the profits tax purposes, see 20 Halsbury's Laws (3rd Edn) 161-166 paras 280-285, and pp 618, 619, para 1207; and for cases on the subject, see 28 Digest (Repl) 113-124, 425-480.

For the income Tax Act, 1952, s 137(f), see 31 Halsbury's Statutes (2nd Edn) 134.

Appeals

These were consolidated appeals by taxpayers, Regent Oil Co Ltd, from two orders of the Court of Appeals (Lord Denning MR Danckwerts and Diplock LJJ) dated 8 June 1964, and reported [1964] 3 All ER 23 , dismissing appeals by the taxpayers from orders of Pennycuick J dated 17 December 1963, and reported [1964] 1 All ER 585 , whereby appeals by the Crown, the respondent, on Cases Stated by the Special Commissioners of Income Tax were allowed and the determinations of the commissioners were reversed. The first appeal related to assessments to income tax under Case I of Sch D of the Income Tax Act, 1952, made on the taxpayers for the years of assessment 1957-8 and 1960-61 as a dealer in oil in the respective sums of £16,000 and £500,000, and the second appeal to assessments to profits tax made on the taxpayers for the chargeable accounting periods 1 January to 31 March 1956, 1 April to 31 December 1956, and 1 January to 31 December 1959, in the respective sums of £100, £360 and £50,000.

The question in issue was the same in both appeals, namely, whether the taxpayers were entitled to deduct in computing their profits for income tax purposes and for profits tax purposes payments made to retailers to secure over a term of years exclusive outlets for the taxpayers' oil, as being revenue expenditure, or whether such payments were capital expenditure, the deduction of which was prohibited by s 137(f) of the Income Tax Act, 1952. The relevant facts are stated in the opinions of Lord Reid and Lord Upjohn, at p 177, letter g, to p 178, letter i, and p 194, letter d, to p 196, letter b, post.

R E Borneman QC and S T Bates for the taxpayers.

Hubert H Monroe QC and J R Phillips for the Crown.

Their Lordships took time for consideration.

27 July 1965. The following opinions were delivered.