Regent Oil Co Ltd v. Strick (Inspector of Taxes); Regent Oil Co Ltd v Inland Revenue Commissioners
[1965] 3 All ER 174(Judgment by: Lord Reid)
Between:
And:
Judges:
Lord ReidLord 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
Judgment date: 27 July 1965
Judgment by:
Lord Reid
LORD REID. My Lords, two consolidated appeals are before your lordships. It is admitted by all parties that any decision in the first must necessarily govern the second, so I do not propose to say anything about the second appeal. The first arises out of assessments to income tax for the years 1957-58 and 1960-61. The appellant taxpayers import and refine oil and sell petrol and other oil products to garages and service stations for resale to motorists. During those years they made arrangements of various kinds with those retailers under which they paid substantial lump sums to them. This case is only concerned with one such arrangement in the former year under which £5,000 was paid and with three in the latter year under which a total of £195,699 was paid. The question to be decided is whether these payments can be taken into account so as to diminish the taxpayers' profits for income tax purposes. The Special Commissioners held that they could, but their decision was reversed by Pennycuick J and the Court of Appeal dismissed the taxpayers' appeal.
It is necessary not only to consider the circumstances in which the these payments were made but also to have regard to the manner in which the taxpayers had been and were conducting their business. It appears that for some time past almost the whole of the petrol sold in this country has been the product of three oil companies, and the taxpayers' share of the market has generally been in the neighbourhood of thirteen or fourteen per cent. During the last war petrol was not sole under brand names, but after 1945 the three companies began to prepare for resumption of selling under the well-known brand names. It had been the custom for most garages to have pumps from which they supplied the petrol of more than one of these companies; but in 1950 one of the other companies stated what has been called the exclusivity war. The taxpayers did not want to join in it, but they were forced to because within a few months a large proportion of garages had accepted a tie of some kind. There was intense competition between the oil companies, each trying to induce each garage or service station to sell its own products exclusively. At first they were able to obtain such ties at comparatively small cost; but soon garage owners found themselves in a strong position, so that they were able as time went on to obtain better and better terms for accepting ties. At first the taxpayers were able to obtain agreements of that character by offering a rebate of as little as 1/4d per gallon or offering to make small payments towards improvements of the service station, and the ties were then generally for a year or less; but soon garage owners were able to insist on lump sum payments in advance for longer ties-if one company would not pay another would. The taxpayers attach importance to the fact that they always calculated the lump sum which they were prepared to offer by estimating the gallonage likely to be sold during the period of the tie and multiplying by their current rate of rebate; but that rate continued to increase and had soon passed 1d per gallon. The earlier history is set out in the Case Stated in Bolam (Inspector of Taxes) v Regent Oil Co Ltd and by agreement the relevant parts of that stated Case are incorporated in the Case Stated in the present case. By the time that Bolam's case raised the ties then current varied in duration from a few months to five or six years.
Having succeeded in obtaining rather large lump sums for granting ties, garage owners naturally wished to ensure, if they could, that the lump sums were received by them as capital receipts so as not to attract income tax, and someone appears to have devised the form of tie which appears in the four instances in the present case. The taxpayers were unwilling to adopt it, but they had to yield because otherwise they would have lost these outlets for the sale of their petrol: some other oil company would have accepted the garage owners' demands, or at least so they feared.
The essence of this new form of tie is that the garage owner grants to the oil company a lease of his premises (or at least of that part containing the petrol pumps and storage tanks) for the agreed period of the tie. The consideration for this lease is the agreed lump sum payment plus a nominal rent of £1 per annum. On the same day the oil company then grants to the garage owner a sub-lease of the same premises for the same period less three days, the consideration for the sub-lease being the same nominal rent of £1; but the sub-lease contains covenants or conditions whereby the garage owner is bound to buy the petrol which he needs for resale for that oil company and from no one else. The net result is that no money passes except the agreed lump sum and the oil company gets its tie; but this machinery is not a sham. There is no difference from the old form of a tie by agreement so long as all goes well: but if the garage owner defaults this new form of tie gives the oil company a better way of enforcing its rights by bringing the sub-lease to an end and standing on its rights under the lease. I should add that in two of these four cases the lump sums are expressly stated to be premiums while in the other two they are not, but I do not think that this makes any difference.
Whether a particular outlay by a trader can be set against income or must be regarded as a capital outley has proved to be a difficult question. It may be possible to reconcile all the decisions, but it is certainly not possible toreconcile all the reasons given for them. I think that much of the difficulty has arisen from taking too literally general statements made in earlier cases and seeking to apply them to a different kind of case which their authors almost certainly did have in mind-in seeking to treat expressions of judicial opinion as they were words in an Act of Parliament. Moreover a further source of difficulty has been a tendency in some cases to treat some one criterion as paramount and to press it to its logical conclusion without proper regard to other factors in the case. The true view appears to me to be that stated by Lord Macmillan in Van den Berghs Ltd v Clark ([1935] All ER Rep 874 at p 886; [1935] AC 431 at p 438):
"While each case is found to turn on its own facts, and no infallible criterion emerges, nevertheless the decisions are useful as illustrations and as affording indications of the kind of considerations which may relevantly be borne in mind in approaching the problem."
One must, I think, always keep in mind the essential nature of the question. The Income Tax Act, 1952 [F1] requires the balance of profits and gains to be found. So a profit and loss account must be prepared setting on one side income receipts and on the other expenses properly chargeable against them. In so far as the Act [F2] prohibits a particular kind of deduction it must receive effect. Beyond that no one has to my knowledge questioned the opinion of the Lord President (Lord Clyde) in Whimster & Co v Inland Revenue Comrs where, after stating that profit is the difference between receipts and expenditure, he said (1926 SC at p 25)
"... the account of profit and loss to be made up for the purpose of ascertaining that difference must be framed consistently with the ordinary principles of commercial accounting, so far as applicable ... "
So it is not surprising that no one test or principle or rule of thumb is paramount. The question 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 a strict application of any single legal principle.
The purpose of any commercial account must be to give as far and accurate a picture as possible of the trader's financial position; but the provisions of the Act of 1952, as they have been interpreted, make that difficult where a wasting asset has been acquired. As explained in Kauri Timber Co Ltd v Taxes Comr ( [1913] AC 771 at p 777; 109 LT 22 at p 24), it had long been settled that if capital has been expended in acquiring or producing a wasting asset, it is not permissible to bring into the profit and loss account for tax purposes a part of that capital corresponding to the wasting or depreciation of the asset during the year; no part of the expenditure can be set against income in any year. These old cases were dealing with expenditure made to acquire or improve tangible assets and as regards a great many of them, such as machinery, plant, buildings and mines, the severity of this rule has been relaxed by statutory provision for annual and other allowances; but the rule still stands as regards matters not particularly dealt with by the Act. If a trader acquires a rapidly wasting asset not covered by these statutory provisions, he would not generally strike his balance of profits and gains without taking account of the annual wasting or diminution of value of that asset; but if his expenditure in acquiring it has to be regarded as capital expenditure he cannot do that for income tax purposes.
When one is dealing with tangible assets it is generally not very difficult to reach a decision. Things which the trader uses in his business to produce what he has to sell are part of his fixed capital and their cost is a capital outlay although their useful life may be short as in Hinton v Maden & Irleand Ltd. Things which he turns over in the course of his trade are circulating capital and their cost is a revenue expense. The things in respect of which the Act of 1952 permits allowances are fixed capital. Difficulties can arise when a capital asset is improved, eg, in distinguishing between repairs which are a revenue expense and renovation which is not, but I do not think that much assistance can be got in this case from cases dealing with tangible assets and I need only mention two. In Vallambrosa Rubber Co Ltd v Farmer (Surveyor of Taxes) the expense of maintaining a rubber plantation was allowed as a revenue expense although the trees would yield no rubber for some years to come. The Lord President (Lord Dunedin) said ((1910), 5 Tax Cas at p 536):
"... in a rough way I think it is not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year."
Again in Ounsworth v Vickers Ltd Rowlatt J held that the expense of making what was in effect a new means of access was capital expenditure. With regard to the passage in Lord Dunedin's opinion which I have just quoted, he said ([1915] 3 KB at p 273):
"I take it, and indeed both sides agree, that no stress is there laid upon the words 'every year': the real test is between expenditure which is made to meet a continuous demand, as opposed to an expenditure which is made once for all."
When one comes to intangible assets there is much more difficulty. To help the conduct of his business a trader obtains a right to do something on someone else's property or an obligation by someone to do or refrain from doing something or makes a contract which affects the way in which he conducts his business; and the right or obligation or the effect of the contract may endure for a short or a long period of years. The question then arises whether the sum which he has paid for that advantage is a capital or revenue expense. As long ago as 1914 it was settled in Usher's Wiltshire Brewery Ltd v Bruce that in determining profit a deduction
"... is to be made or not to be made according as it is or is not, on the facts of the case, a proper debit item to be charged against incomings of the trade when computing the balance of profits of it"
(per Lord Sumner ([1915] AC at p 468)).
Where the wasting asset is a right to some benefit for a period of years and the consideration given for it is the payment of an annual sum during the continuance of the right there is generally no difficulty. Rent payable under a lease or under an agreement for the hire of a machine is treated as a proper debit against incomings and the same must I think apply to an annual (or quarterly or monthly) payment for a tie. The difficulty begins to arise when a lump sum is paid to cover several years. If that is so then it is not so much the nature of the right acquired as the nature of the payment made for it that matters. It was argued that a rent and a premium paid under a lease are paid for different things-that the premium is paid for the right but that the rent is paid for the use of the subjects during the year. I must confess that I have been unable to understand that argument. Payment of a premium gives just as much right to use the subjects as payment of a rent and an obligation to pay rent gives just as much right to the whole term of years as payment of a premium. A lessee who only pays rent has the same right to assign the rest of the term-perhaps for a large capital sum if values have gone up-as has the lessee who has paid a premium. His right to assign, however, is less valuable in so far as the amount of the rent to be paid in future is greater than it would be in a case where a premium has been paid. Both lessees are liable to have their rights terminated if they do not fulfil their obligations under the lease-but not otherwise.
One reason at least for refusing to allow a lump sum payment as a debit against incomings and therefore treating it as a capital outlay is that to allow it as a debit would distort the profit and loss account. Counsel agreed that a taxpayer is always permitted to bring the whole of any item of revenue expenditure in to the profit and loss account of the year in which the money was spent. Counsel for the Crown suggested that the taxpayer might be permitted to spread it over more than one year, but certainly the Revenue cannot insist on that. So, if the whole of a payment made to cover several years is brought into one year's account, the profit for that year will be unduly diminished. The effect of that, however, will be rather different according to the length of time covered by the lump sum payment. Suppose that in order to achieve a continuing advantage like a tie, the taxpayer makes a series of agreements each for three years and each for a lump sum. Then, if the lump sum payments are allowed as revenue expenses, the effect will be that in the first year of each agreement the profit will be too small, but in the next two years it will be rather too large and so on. So over each period of three years there will be a fair result. Suppose on the other hand that the taxpayer makes an agreement for a tie for twenty years or more, then the lump sum will presumably be much larger, and the distortion in the first year much greater if the payment is allowed as a revenue expense; and, even if one could assume fairly constant conditions for so long a period it would be only after twenty years that a fair result would be reached. That would seem to justify refusing to treat a payment covering so long a period as a revenue expense; and on more general grounds I must say that I would have great difficulty in regarding a payment to cover twenty years as anything other than a capital outlay. Ever since the Vallambrosa case in 1910 recurrence as against a payment once and for all has been accepted as one of the criteria in a question of capital or income. I would regard a payment which has to be made every three years to retain an advantage as a recurrent payment, whereas for practical purposes I would not think that the fact that another payment will have to be made after twenty years if the situation does not change in that time would prevent the first payment from being regarded as made once and for all.
If the asset which is acquired is in its intrinsic nature a capital asset, then any sum paid to acquire it must surely be capital outlay; and I do not see how it could matter that the payment was made by sums paid annually. It appears to me, however, that an asset which is nothing more than a right to enjoy a certain advantage over a period is intrinsically of a different character from a thing which a person buys and can immediately use or consume in any way he chooses. If it were not so, I can see no reasonable ground for allowing annual payments for such a right as revenue expenses.
I must now turn to the authorities. In Comr of Taxes v Nchanga Consolidated Copper Mines Ltd ( [1964] 1 All ER 208 at p 212; [1964] AC 948 at p 960), Viscount Radcliffe said
"... courts have stressed the importance of observing a demarcation between the cost of creating, acquiring or enlarging the permanent (which does not mean perpetual) structure of which the income is to be the product or fruit and the cost of earning that income itself or performing the income earning operations. Probably this is as illuminating a line of distinction as the law by itself is likely to achieve ..."
Perhaps it is, but the illumination is very dim, and as Lord Radcliffe goes on to say ([1964] 1 All ER at p 213; [1964] AC at p 960) it "leads to distinctions of some subtlety between profit that is made 'out of' assets and profit that is made 'upon' assets or 'with' assets". I must say that I distrust as a guide any criterion which leads to verbal distinctions of that kind, but fortunately it is not the only guide.
The "structure" of the profit-making apparatus was dealt with in Van den Bergh's case, but the facts there were very strong as explained by Lord MacMilian. This company and a Dutch company had long before bound themselves to "work in friendly alliance" by an elaborate scheme and on the cancellation of their agreement Van den Bergh's received a sum of £450,000. This was held to be a capital receipt because ([1935] All ER Rep at p 888; [1935] AC at p 442),
"The three agreements which the appellants consented to cancel were not ordinary commercial contracts made in the course of carrying on their trade; they were not contracts for the disposal of their products or for the engagement of agents or other employees necessary for the conduct of their business; nor were they merely agreements as to how their trading profits when earned, should be distributed as between the contracting parties. On the contrary, the cancelled agreements related to the whole structure of the appellants' profit-making apparatus. They regulated the appellants' activities, defined what they might and what they might not do, and affected the whole conduct of their business."
I would think that the two most important of these considerations were that the contracts were not ordinary commercial contracts made in the course of carrying on the trade, and that, by defining what the company might do and might not do, they affected the whole conduct of the business. I think that in some later cases the metaphor of structure has been used with far less justification.
Van den Bergh's case can be contrasted with Anglo-Persian Oil Co Ltd v Dale where the company paid a large sum to cancel an agency contract for a very wide area with the result that they were thereafter able to deal directly with their customers in that area. This certainly entailed an extensive change in the organisation of their business; but the payment was held to be a revenue expense, because the cancellation of the agreement "merely effected a change in its business methods and internal organisation, leaving its fixed capital untouched" (per Lawrence LJ ([1931] All ER Rep at p 733; [1932] 1 KB at p 141)).
It was argued that these ties had become part of the profit-earning structure of the taxpayers. I do not think so. Let me take the matter stage by stage-almost as it in fact arose. First an oil company promises a rebate so long as the garage orders all its petrol from that company. Clearly there is no change in structure however many garages accept that arrangement. It is just an ordinary commercial contract; and there can be no difference if the arrangement is that £100 will be paid at the end of each quarter if the garage owner has bought all his petrol during that quarter from the company. Then suppose the parties agree to such a tie being binding for one year. That does not seem to make any relevant difference. Then suppose they agree to a three year tie. As regards the profit earning or capital structure of the company I do not see how it can matter how the tie is paid for-whether by lump sum or by periodical payments or by rebates. Either the tie is itself an addition to the capital structure or it is not; and I do not see how it can matter whether the company entered into such arrangements because it had to do so to keep its customers, or because it hoped thereby to attract new customers, or merely because the ties made distribution more economical. When we reach the stage that the greater part of the company's business is done with garages under long term ties, it could be said that the company has altered its business methods perhaps with some internal reorganisation, but that is not the same thing as altering its profit making or capital structure. Nevertheless lump sum payments for these long term ties may have to be treated as capital and not revenue expenses.
Reverting to the distinction to which Lord Radcliffe referred [F3] between profits made out of or upon or with the asset, that distinction is to my mind meaningless when applied to these ties. It was argued that when there is a tie the profits are not made out of the tie but out of orders given by reason of the existence of the tie, that the tie is used as part of the capital structure of the company in order to get the orders. I do not think that that is right. When A is under a contractual obligation to B to do or refrain from doing a certain thing-here to give all his orders to B and give none to anyone else-B does not "use" his right under the contract when A does or refrains from doing that thing: he simply waits for A to fulfil his obligation. He might be said to use his right if A fails to fulfil his obligation and he then sues for damages or seeks and injunction, but that is another matter. There may be many kinds of contract under which the company has taken an obligation that the other party shall do something or a series of things in a future year, but that is no reason for saying that the company's chose in action is an addition to its capital structure. The distinction between a right and something done under it or in exercise of it no doubt exists in other kinds of case and it may be of importance, but it does not seem to me to exist in cases like the present case.
The case which is generally cited and relied on, often by both sides, is British Insulated and Helsby Cables v Atherton. In order to understand the passage in Viscount Cave LC's speech which is always quoted it is essential to have the facts in mind. The company laid out a sum to assist in the setting up of a pension fund for its staff. It was intended that the fund would endure for the whole life of the company, and it was not expected that the company would have to lay out any further sum for this purpose. So when Viscount Cave referred ([1925] All ER Rep at p 629; [1926] AC at p 213) to expenditure "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", he was dealing with a case where the payment was made literally once and for all and where the asset or advantage was to last as long as the company lasted. I can find nothing in his speech to indicate that he had in mind or intended to deal with a case where the asset or advantage would only last for a short period of years, after which further money would have to be spent if a further corresponding asset or advantage was sought; and when in Vallambrosa ((1910), 5 Tax Cas at p 536) Lord Dunedin contrasted a thing going to be spent once and for all with a thing going to recur every year, I do not think that he had such a case in mind either.
So much has been built on Lord Cave's words, however, that I must try to see how they could be applied to a case like the present. In the first place what is the meaning of once and for all? Suppose that an advantage has been achieved by acquiring an asset which will only last for three years so that it will be necessary at the end of that time to acquire another similar asset if the advantage is to be retained. I would not think that a lump sum paid for that asset is paid once and for all, and I see nothing to indicate that either Lord Cave or Lord Dunedin would have thought so. If once and for all is merely to be related to the fact that only one payment, a lump sum, is made for the particular short lived asset, then the only contrast is between paying a lump sum for it and making a periodical payment for it. Surely that cannot have been all that was meant. If a further payment to retain the advantage, in this case the outlet for sale of oil resulting from the tie of a particular garage, is necessary in the near future I would hold that the first payment was not once and for all.
There is a good deal of authority on the question of what kind of asset or advantage Lord Cave's words will cover. Broadly it seems to have been accepted that they will not extend to cover a payment to get rid of a handicap or disadvantage; but I do not think it necessary to explore this matter, because I am satisfied that the words must cover a tie such as we are concerned with whether it is constituted by a simple obligation or by covenants in a sub-lease.
Lastly what is meant by "enduring"? I think that Lord Cave intended to link that with once and for all. He was thinking of a single payment for an advantage which would last for an indefinite time. I do not think that he had in mind an advantage of limited duration, and I think that any decision about such an advantage must be reached without reference to or reliance on what Lord Cave said.
It was argued that "enduring" has come to be interpreted so as to include any benefit which lasts for more than one year and that this was recognised in the Nchanga case. If this is an interpretation of Lord Cave's words where "once and for all" is coupled with "enduring" then the supposed rule must be that any lump sum paid for a benefit enduring for more than one year must be treated as a capital outlay-not that any asset conferring an enduring benefit is intrinsically a capital asset. For if it were intrinsically a capital asset then any payment for it whether by a lump sum or by a series of periodic payments must be a capital outlay, and so far as I know it has not been suggested that, say, monthly payments for any asset the benefit of which endures for more than a year must all be treated as capital outlays. Certainly that could not be spelled out from Lord Cave's words. I have searched in vain for any rational explanation of this supposed rule, so apparently it must just be an arbitrary rule; but, as I have already explained, arbitrary rules are quite out of place in this matter of capital or income.
One argument has been put forward to justify the rule. When a trader's accounts come to be made up at the end of his financial year and the trader is then found to own an asset other than circulating capital or stock in trade, it is said, if I understand the argument, that that asset must go into the balance sheet as a capital asset and the price paid for it must therefore have been a capital outlay. Even if correct, that argument would not support this alleged rule. Let me suppose that in the first month of his financial year the trader acquired an asset conferring a benefit lasting for fifteen months and that in the last month of that year he acquired a precisely similar asset conferring a benefit lasting for six months. Then at the end of the financial year he has two similar assets, the first of which will last for a further four months and the second of which will last for a further five months. Why should they then be treated differently? If, however, this supposed rule exists they must be treated differently. The first being "enduring"-bringing a benefit lasting more than a year-must go in the balance sheet; but the second, not being "enduring", need not and the price paid for it can be treated as a revenue expense. A variant of this argument is that a right which comes to an end during the financial year current when it is acquired is not enduring, but that any right which persists into the next financial year must be regarded as enduring. That would mean, however, that a right lasting for ten months would not be enduring if it was acquired during the first month of the financial year; whereas a similar right lasting for only three months must be held to be enduring if it was acquired in the last month of the financial year-that would be absurd. These arguments, far from justifying the rule, merely go to show how arbitrary it is. I am satisfied that no such rule exists or could be supported.
In the Nchanga case their lordships sought to distinguish John Smith & Son v Moore, and some of Lord Radcliffe's observations are said to support the supposed rule. I do not think that they do. Smith's case was not relied on by the respondent in this appeal, but I must try to show why it does not affect this matter. A son bought the whole assets of his father's business at a valuation and continued to carry on business as a coal merchant. Those assets included contracts by which he was entitled to buy coal in future at a fixed price. As the price of coal had risen since the contracts were made the rights under the contracts had become very valuable-they were valued at £30,000. The trader claimed that this sum had been spent to acquire stock in trade, but that claim failed. Lord Cave held that there was a continuing business and his reasons are not material in this connexion. Viscount Haldane and Lord Sumner, however, appear to have regarded the son as setting up a new business. Their reasoning is not always easy to follow, but on that basis the essence of the matter appears to me to be this. What a person spends to set up a business must be capital; there cannot be a revenue expense until trading commences, and the son did not claim this sum as a revenue expense; but the prospective merchant buys two things, stock in trade which he intends to sell-circulating capital-and other property or assets which must be regarded as fixed capital. The sum he spends on buying stock in trade goes into his first profit and loss account as the value of stock in trade at the beginning of his first year. The rest can only go into his balance sheet. So the former sum is taken into account in determining his first year's profit but the latter is not. All that the case decided was that, if a new trader acquires goods which he intends to resell, those goods are stock in trade; but if he acquires rights to buy such goods those rights cannot be treated as part of the stock in trade with which he begins trading.
That seems to me to be perfectly sound.
In my view the decision in Smith's case has no application to what a trader does once he has started trading. Suppose that a merchant, instead of buying goods direct from the manufacturer, takes from another merchant an assignment of his contract to buy such goods. The goods may be for delivery next week (or next year). It would be ridiculous to say that the sum which he pays to the other merchant is a capital outlay and not a revenue expense, and I can find nothing in the speeches in Smith's case to indicate that anyone thought otherwise. Lord Sumner indeed indicated that it would be different for a going business. He said ([1921] 2 AC at p 39), dealing with an earlier similar case: [F4]
"The court held that this sum was paid with the rest of the aggregate price to acquire the business and thereafter profits were made in the business; the sum was not paid as an outlay in a business already acquired, in order to carry it on and earn a profit out of this expense as an expense of carrying it on."
It must be observed that the contracts purchased by the son in Smith's case were all very short term contracts. As Viscount Finlay said ([1921] 2 AC at p 27): "The contracts purchased all expired by the end of the current year." So Smith's case is no authority for drawing a distinction between assets which last less than a year or which come to an end during the current accounting period and assets which last longer. On the contrary if Smith's case had any application to the acquisition of short lived assets by a going business it would require us to hold that even the cost of acquiring assets which cease to exist before the end of the current year is a capital outlay.
I do not think it necessary to survey all the cases cited in argument. Many deal with matters in no respect analogous to this case. There is for example the group of cases where payments to obviate competition were held to be capital outlays. If you buy a business either to operate it or to close it down, if you pay a competitor to close down, or if you buy off a potential competitor the cost may well be a capital outlay. And so may certain preliminary expenses which you must incur before you can begin trading. In these and other cases cited I can find no established doctrine contradicting the observations which I have already made; but there are some cases on which I must comment.
Both sides in this case argued that Bolam (Inspector of Taxes) v Regent Oil Co Ltd was rightly decided, but they drew entirely different conclusions from it. The taxpayers used it to support an argument that any payment for any tie, however long, is a revenue payment. The Crown argued from it that any payment for a tie in the form of rebate-even a lump sum paid in advance for a long period of years-is a revenue payment, but that any other kind of lump sum payment must be a capital payment even if only paid for a tie for two or three years. I cannot agree with either argument. The Crown's argument appears to me to lead to an irrational result. It is true that form as well as substance is often important, but I cannot think that the way in which the price paid for an asset is calculated can make so much difference as their argument requires. The taxpayers' argument totally ignores the practical differences between allowing as a revenue expense a lump sum to cover the next two years and a lump sum to cover the next twenty.
The longest ties in Bolam's case were for five or six years. A business cannot simply be managed on a day-to-day basis. There must be arrangements for future supplies and sales, and it may not be unreasonable to look five or six years ahead-one hears of five-year plans in various connexions. So I would think that making arrangements for the next five or six years could generally be regarded as an ordinary incident of marketing, and that the cost of making such arrangements would therefore be part of the ordinary running expenses of the business. Moreover a payment which will have to be repeated after five years to retain the tie can I think be regarded as a recurring payment; and there is no serious distortion of the profit and loss account for that period if payment for a five-year advantage is made in a lump sum instead of being spread over the period. For these reasons I think that the decision in Bolam's case was right.
It was argued that Henriksen v Grafton Hotel Ltd was authority for the proposition that a payment, which is made for an asset lasting three years and which will then have to be repeated to acquire a new asset for the same purpose is not a recurring payment and must be treated as a capital outlay; but Lord Greene MR laid stress on the special features of that case and I need not consider whether they were sufficient to justify the decision. If and in so far as the ratio decidendi was based on any such general proposition, I would not agree with it.
There was reference in the judgments below to H J Rorke Ltd v Inland Revenue Comrs and earlier similar cases; but, as counsel did not found on them before your lordships, I shall say only this. I think that the decision of my noble and learned friend Lord Upjohn in Knight (Inspector of Taxes) v Calder Grove Estates was right, because there land was purchased. There are, however, expressions of opinion in other cases which appear to conflict to some extent with what I have already said. Again I need not consider whether the decisions were right.
In two of the four arrangements with which the present case is concerned (including much the largest transaction) the ties were for twenty-one years: in one the tie was for ten years; and in the fourth it was for five years. I would have no doubt that the lump sums paid for the twenty-one year ties could not be treated as revenue outgoings, even if there were no lease and sub-lease. These ties were not obtained in order to facilitate planned marketing or because the taxpayers thought it desirable to have them. The lump sums paid for them were paid only because garage owners were in a strong bargaining position: they wanted and were able to get large sums paid immediately, and they were willing to grant long ties in return.
With regard to the other two cases, however, I must consider what difference it makes that the transaction took the form of a lease and sub-lease. This is not a mere matter of form, because this form of transaction gave to the taxpayers much better security for the performance by the garage owner of his obligation, and it gave to them interest in land which afforded that security. So the quality of their asset is different from what it is under the older form of tie. I have already said that all relevant factors must be considered in each particular case, and I regard this as a highly relevant factor. Premiums paid for leases have always been regarded as capital, but we were not referred to any case where a premium had been paid for a very short lease-say two or three years-and I do not wish to decide whether even in such a case a premium would necessarily be treated as a capital outlay. I am satisfied that the weight of this factor in the present cases is sufficient to turn the scale if otherwise there were doubt, and I would therefore hold that in each of the four cases the lump sums paid by the taxpayers cannot be allowed as revenue outgoings. It follows that these appeals must be dismissed.