Terry v Revenue and Customs [2005] UKSPC  00482 (2 June 2005)

SPC 00482

MILK QUOTA– purchased and retained to avoid superlevy – whether capital expenditure – yes 

THE SPECIAL COMMISSIONERS

D J AND R C TERRY 	Appellant

- and -

HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

	Special Commissioner: 	DR JOHN F. AVERY JONES CBE 

Sitting in public in London on 23 May 2005

Gordon Apsion, counsel, instructed by Jacksons Hodgson & Meakin, for the Appellant

David Ewart, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	Mr D J and Mr R C Terry trading in partnership as C & J Terry & Sons appeal against refusal of an error or mistake claim for the years 1992-93 to 1997-98 made on 7 May 1998 and refused on 7 May 2000.  The Appellants were represented by Mr Gordon Apsion, and the Respondents by Mr David Ewart.
2.	The error or mistake claimed by the Appellants is that the accounts were drawn up showing the cost of milk quota as capital expenditure whereas it should have been revenue expenditure.  In short, the issue in the appeal is whether the purchase of milk quota in the circumstances of this case is a deductible expense, as the Appellant contends, or is capital expenditure, as the Revenue contends.  
3.	I heard evidence from Mr Donald Terry, one of the Appellants; Mr Alastair Cromarty, their accountant; Mr Christopher Windle, a specialist in milk quota; and expert evidence from Miss Jane Pike ACA Assistant Advisory Accountant to the Respondent.
4.	There was an agreed statement of facts as follows:
(1)	In April 1984 the Appellants joined C. Terry and J. Terry in C & J Terry & Sons (“the Partnership”).  C. Terry and J. Terry resigned from the Partnership on 31 May 1990 leaving the Appellants as the only partners.
(2)	The partnership trade consisted at all material times and still consists of the keeping and maintaining of a herd of cows for the production and sale of milk.  At all material times, the Partnership accounts were and continue to be prepared to 31 December each year.
(3)	The Partnership spent the amounts set out below on milk quota in the years indicated:
Accounting year	Total amount spent on milk quota during the entire accounting year	Amount spent on buying additional milk quota during the period December-March	
1991	£43,500	£43,500	
1992	£26,500	Nil	
1993	£8,550	£8,550	
1994	£64,000	£64,000	
1995	£46,032	£27,275	
1996	£64,000	£42,560	
1997	£95,540	£56,140	

In each set of accounts, the amount spent on milk quota was added to fixed assets in the balance sheets.  For the years of assessment 1992-93 to 1997-98 inclusive, the Partnership drew up its accounts, made its tax returns and paid income tax on the basis that the amount spent on milk quota was capital expenditure.
(4)	On 7 May 1998, the Appellants submitted an error or mistake claim under s 33 of the Taxes Management Act 1970, for the years 1992-93 to 1997-98.  The basis of the claim was that the amount spent on milk quota was revenue expenditure for tax purposes.  On 7 April 2000, the Respondent refused the Appellants’ claim for the years 1992-93 to 1995-96 inclusive.  The Appellants appealed against that refusal to the Special Commissioners.
5.	The issue to be decided is agreed as whether the amounts which the Appellants spent on buying additional milk quota as set out in paragraph 3(3) above were deductible in computing the profits of the Appellants’ trade for the purposes of income tax.
6.	I also find that the Appellant bought quota in order to avoid superlevy.  National milk production figures were available only in December or January by which time leasing was not an alternative.  Quota is more expensive in January to March.  The quota was retained in order to continue to avoid superlevy.  A decision was made each year whether to retain it.  It was not purchased or retained in order to make a gain on it; indeed the value had fallen recently.
7.	I accept Miss Pike’s evidence of the accounting treatment, which was also accepted as a matter of accounting by Mr Cromarty who had 20 years experience of farm accounting.  Because the Appellant is a partnership the only hard guidance on accounting standards applicable to it is that contained in the Institute of Chartered Accountants in England and Wales statement number 3.907 paragraph 8 (and, as she clarified to me through the Solicitors’ Office, its predecessor issued in July 1973, Reports on accounts of sole traders and partnerships, paragraph 7) that:
“As far as is practicable in the absence of an audit, accountants should ensure that the accounts which they compile conform to UK generally accepted accounting principles.”
Her conclusion was:
(1)	The accounting treatment adopted in the Appellants’ accounts capitalised the cost of quota in the balance sheet as a non-depreciating fixed asset.  This treatment was acceptable, in accordance with generally accepted accounting practice and principles, and did give a true and fair view of the Appellants’ particular circumstances.  No charge was made to the trading profit and loss account in any of the years subject to this review.
(2)	Although there was no specific accounting standard that dealt with milk quota during the periods subject to this appeal, the treatment adopted did accord with generally accepted accounting practice and principles at the time.  These included the general accounting concepts of SSAP [Statement of Standard Accounting Practice] 2 (disclosure of accounting policies), reporting the commercial substance of the transactions in FRS [Financial Reporting Standard] 5 (reporting the substance of transactions), and capitalising the quota as a fixed asset as required by SSAP 22 (accounting for goodwill).
(3)	Capitalising the cost of quota as additions to fixed assets in the balance sheet was the only way to show a true and fair view of the business for accounting purposes.  Not depreciating the quota was the most appropriate treatment at the time, and it subsequently became the only treatment to gave a true and fair view by the issue of FRED [Financial Reporting Exposure Draft] 12 and subsequently FRS 10
(4)	Although alternative accounting treatment could be adopted in different circumstances, such as if quota was leased or traded or held for short-term use, these circumstances did not apply to the business of the Appellants.  Consequently, the alternative accounting treatments would not give a true and fair view of the specific facts and circumstances of the Appellants’ business and so were not appropriate in this case.
8.	The legislative provisions relating to milk quotas are set out in Cottle v Coldicott [1995] STC (SCD) 239 and there is no need for me to repeat them.  Mild quota allows a farmer to produce a certain amount of milk before becoming liable to pay a levy.
9.	Mr Apsion, for the Appellant, contends that:
(1)	The accounting evidence is irrelevant.
(2)	The only reason for the purchase was to avoid the payment of superlevy, leasing of quota not being possible from January to March.
(3)	The quota was not bought as an investment; indeed its value had fallen heavily.
10.	Mr Ewart, for the Revenue, contends that:
(1)	Profits for tax purposes are based on the principles of commercial accountancy as adjusted by any express tax provisions.
(2)	The Appellants’ accounts correctly showed the quota as a capital asset and there is no tax provision that would allow its deduction.
11.	Mr Apsion’s approach depends on the purpose of the taxpayer, which was to avoid paying superlevy.  Mr Ewart’s approach depended on what the Appellant did, which was to acquire an asset, as demonstrated by the accounting treatment.
12.	I agree with Mr Ewart.  This is an extremely straightforward case.  The Appellant purchased and retained an asset which gives an enduring benefit to the trade in the form of avoiding payment of superlevy, and that is the end of it.  It is good to know that accountants regard the expenditure as additions to fixed assets in the balance sheet but I would have had no difficulty in coming to that conclusion on my own.  Clearly it was capital expenditure.
13.	To deal with the contentions of the parties, as is clear from Gallagher v Jones [1993] STC 537 the starting point are the generally accepted principles of commercial accountancy.  As Sir Thomas Bingham said at p.555g:
“The object is to determine, as accurately as possible, the profits or losses of the taxpayer’s business for the accounting periods in question.  Subject to any express or implied statutory, of which here is none here, the ordinary was to ascertain the profits or losses of a business is to apply accepted principles of commercial accountancy.  That is the very purpose for which such principles are formulated…”
Naturally accounting must take into account why a taxpayer does something as part of determining what he does.  As Miss Pike pointed out, quota might be traded or held for short-term use, but here it is clear that quota was purchased and retained and so benefited the Appellants by enabling them to avoid superlevy in the future.  As Miss Pike concludes the only possible accounting treatment was as an addition to fixed assets in the balance sheet.  Mr Apsion’s contention focuses solely on the purpose of the acquisition.  But as Lord Goff said in Lawson v Johnson Matthey plc [1992] STC 466 at 475h:
“It is important to observe that the payment does not become a revenue payment simply because the taxpayer company paid the money with the purpose of preserving its platinum trade from collapse.  That was the approach of the General Commissioners, which I do not feel able to accept.  The question is rather whether, on a true analysis of the transaction, the payment is to be characterised as a payment of a capital nature.  That characterisation does not depend on the motive or purpose of the taxpayer….”
The first sentence is essentially Mr Apsion’s contention here: the payment is a revenue payment because the Appellant had the purpose of avoiding a revenue payment, superlevy.  But I must ask how is the payment to be characterised here.  It is simply the purchase of a capital asset.  To say that the quota was purchased to avoid a (deductible) liability is no different from saying that the purpose of any other capital expenditure was to increase profits, which is the purpose of all business capital expenditure.  I accept that the quota was not bought as an investment, but that is irrelevant.  In that respect it is no different from the purchase of agricultural machinery, which, unlike quota, is sure to depreciate.
14.	Accordingly, there was no error or mistake in the Appellants’ return and I dismiss the appeal and confirm the refusal of the claim.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER

RELEASE DATE: 2 June 2005

SC 3117/03

Authorities referred to in skeletons and not referred to in the decision:
Atherton v British Insulated and Helsby Cables Ltd (1926) 10 TC 155
Scene Estates Ltd v Amos [1957] 2 QB 205
John Smith & Sons v Moore 12 TC 266
W T Ramsay Ltd v IRC [1982] AC 300
Ryall v Hoare 8 TC 521
Field v Leeds City Council CA 8 December 1999 (unreported)