England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT CHANCERY DIVISION
Mr Justice Briggs
[2006] EWHC 3046 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		22 November 2007

Lord Justice Moses :

Introduction

1. Able (UK) Limited (the taxpayer) used its land as a landfill tipping site. Following service of a Compulsory Purchase Order in respect of part of the site, the taxpayer was kept out of possession of that part for just over three years, between August 1992 and November 1995, when withdrawal of the Order was confirmed.
2. The taxpayer was paid compensation in the sum of £2,185,000 following its claim under s.31.(3) of the Land Compensation Act 1961. It took the view that that sum was capital.
3. The Revenue disagreed and on appeal against its Notice of Amendment the General Commissioners concluded that the sum of compensation should be treated as income. On appeal to the High Court, Briggs J upheld the General Commissioners' determination. Despite the fact that this is a second appeal, permission to appeal was given by this court.

The General Commissioners' Case Stated

4. The taxpayer did not pursue his challenge to the General Commissioners' findings of fact, which he had advanced before Briggs J. The effect of the period during which the taxpayer was deprived of possession of the site was described by the General Commissioners as follows:-

"The local landfill market changed considerably between 1992 and 1996, due to external factors beyond the taxpayer's control, in particular the market for household/general waste reduced significantly. Consequently, by the time that the CPO site was back within the taxpayer's possession, the only real significant waste disposal market open to the taxpayer was hazardous/contaminated waste. The local and national landfill markets have since changed further, but such changes are not relevant to the issue before us."

5. There was no dispute between taxpayer and Revenue as to the essential questions which the General Commissioners had to answer. The correct characterisation of the compensation depends upon the answers to two questions. Firstly, what was the compensation paid for? Secondly, would the sum which the trader ought to have received have been credited as an income receipt of the trade? (see Diplock LJ in London and Thames Haven Oil Wharves Ltd v Attwooll 43 TC 491 at 515).
6. The General Commissioners answered those two questions as follows:-

"the interruption to the taxpayer's business…had a consequential effect on the taxpayer's business as a whole, in that it was unable to fully exploit (sic) the landfill market as it had intended. This was a loss for which compensation was paid.

The contemporaneous documentation, in particular the detail of claims submitted to the Lands Tribunal, indicated that the taxpayer and its professional advisers regarded the compensation claim to the Lands Tribunal to be for loss of profits.

Applying the five indicia as to whether receipts are of a capital or income nature, we did not accept the taxpayer's contentions that four were applicable. The only one that was clearly applicable was that the compensation was a lump sum payment rather than recurrent and we would not expect compensation by way of a Lands Tribunal award to be any other way."

7. Briggs J upheld that conclusion:-

"There has plainly been no permanent or complete sterilisation of the use of the land for landfill, still less the deprivation of one of Able's fixed assets, but only a temporary restriction on Able's trading opportunities, albeit unfortunately during a short-lived market boom caused by a shortage of landfill capacity elsewhere in the region."

Legal Principles

8. The instant appeal demonstrates, like so many similar cases before it, that there is no one map which will guide to a particular destination those who travel over such well-trodden territory. A formulaic approach should be avoided. Although the General Commissioners referred to "the five indicia" identified by Dyson LJ in IRC v John Lewis Properties [2002] EWCA Civ 1869, [2003] Ch 513 at paragraph 80, he himself acknowledged that those indicia might have little application to circumstances which differed from the lump sum pre-payment of rent, representing the discounted value of future rents with which the court was concerned in that appeal. The most reliable judicial Baedeker is surely Templeman J:-

"The forensic field of conflict involved in this appeal is an intellectual minefield in which the principles are elusive…analogies are treacherous…precedents appear to be vague signposts pointing in different directions…and the direction-finder is said to be 'judicial common sense'…the practice of judicial common sense is difficult in Revenue cases." (Tucker v Granada Motorway Services Limited 53 TC 92 at 97)

9. The profit-earning capacity of a capital asset is reflected in its value. The archetype of compensation classified as a capital receipt is a lump sum paid for destruction of the profit-earning capacity of a capital asset, thereby diminishing its value. In Glenboig Union Fireclay Co Ltd v IRC 12 TC 427 Lord Buckmaster described the effect of the interdict against the working of fireclay underneath a railway as the sterilisation or destruction of a capital asset, compensation for which was a capital sum (see page 463-464). But in that case, as in Haig's (Earl) Trustees v IRC TC 22 TC 725 the capital asset itself was not destroyed, it was only its capacity as a source of profit which was exhausted. In Haig's (Earl) Trustees the capital value of the war diaries was realised once the Trustees permitted Mr Duff Cooper access to those diaries for the purposes of his biography, in return for royalties and other payments from the sale of the book. The diaries remained the property of the Trustees but their capacity to earn profits was exhausted.
10. The principle to be derived from such cases as Glenboig and Haig's (Earl) Trustees is that consideration received for the once and for all realisation of the capital value of an asset is capable of being a capital receipt, notwithstanding that the asset remains in existence and is the property of the recipient (see the proposition enunciated by Sir Nicolas Browne-Wilkinson V-C in McClure v Petre [1988] 1 WLR 1386 at 1393A). That principle may be applied to cases where an asset has the capacity to provide a number of distinct sources of income and the capital value of the asset reflects each of those sources. If one particular source is exhausted or realised, then consideration or compensation paid therefor may constitute a capital receipt if the value of the asset, which had hitherto reflected all those sources of profit to be derived from that asset, is diminished.
11. That principle explains the decision in McClure v Petre. In McClure the taxpayer retained his interest in his land, part of which was adjacent to a motorway. He continued to receive rent from his agricultural tenant. But once sub-soil from the construction of the motorway had been deposited on the land, it could not be used again for dumping. One of the sources of income derived from the land had been exhausted, although it was still a source of agricultural rent. Compensation could be characterised as a once and for all realisation of that proportion of the capital value of the land which reflected the source of profit from dumping waste: it was a capital receipt.
12. The Vice-Chancellor put it this way :

"In my judgment (Haig's (Earl) Trustees) is authority for the proposition that where the value of an asset is attributable to a number of different characteristics the consideration received for a transaction which realises once and for all the Capital value of one of those characteristics (thereby diminishing the remaining value of the whole asset) is capable of constituting capital, not income, and that is so, notwithstanding that the asset itself and all the rights in it remain throughout the property of the taxpayer." (WLR 1393)

I have attributed the value of such an asset to a number of distinct sources of profit so as to emphasise, for the purposes of this appeal, that it is only where compensation is paid for the destruction or exhaustion of a source of profit that it is capable of constituting capital and not income.

13. Mr Vallat, on behalf of the taxpayer, founds his argument on that principle I have identified in paragraph 10. He contends that the temporary disruption to use of the landfill site had the consequence of a permanent exhaustion of the opportunity to use the site for general waste, thereby diminishing its value. The compensation was paid to make good the permanent loss of that particular opportunity, diminishing the capital value of the site and not to replace the profits which would otherwise have been earned by using the site for general waste.
14. The flaw in the taxpayer's argument is that it is not possible to identify any source of income, derived from the landfill site, which was exhausted or realised. The value of the land depended upon its capacity, as a landfill site, to produce profits from the deposit of waste. That capacity was temporarily interrupted by the service of the CPO. But its capacity was not in any way exhausted. The landfill site continued to be licensed for the deposit of both general and special waste. Once the temporary interruption to its use ceased, the site remained unaffected as a potential source of profit from the deposit of general waste. But its potential could not be fulfilled because of the change in the market. The cause of the taxpayer's inability to use it for the deposit of general waste was, as the General Commissioners found, that alteration in market conditions. The temporary interruption to the use of the site had no permanent impact on the site as source of profit from the deposit of general waste.
15. This case cannot be distinguished from other cases in which compensation paid for temporary loss of use of a capital asset has been recognised as an income receipt. In London and Thames Haven Oil Wharves Limited the jetty was out of use for 380 days; compensation was an income receipt since it was paid for loss of use of the jetty (see Wilmer LJ 510D). Similarly, in White v Davies [1979] 1 WLR 908 the source of profit, described by Browne-Wilkinson J as "the profit-making structure", was retained; the effect of the four-year undertaking to stop milk production was that the taxpayer had to use the land in a different way (page 914F-G). Similarly, in Ensign Shipping Co Limited v IRC [1928] 14 TC 1169 compensation for the temporary embargo on two ships during the 1920 coal strike was paid in lieu of the income that the ships would otherwise have earned during the temporary interruption.
16. White v Davies and Ensign Shipping Co Ltd v IRC demonstrate the impermissible attempts of taxpayers to commandeer the language of one judgment in an attempt to draw an analogy. Tired fiscal metaphors are dragged from one type of case to another. In Ensign Shipping Co Ltd v IRC and White v Davies the taxpayer sought to describe temporary interruption to use of an asset as partial sterilisation. But it does not matter what expression is used, the profit-earning capacity of the assets in those cases was in no way consumed or exhausted.
17. Mr Vallat drew attention to the fact that, in the long term, more profits would be generated by use of the site for the deposit of special, rather than general, waste. Compensation was, accordingly, calculated, not by valuing lost income, but by comparing the net present value of income to be derived from general waste with that to be derived from the deposit of special waste; that sum was then discounted to allow for the use of that compensation in the business. But, as Mr Vallat recognises, the correct classification of compensation is not to be confused with the method by which it is calculated (see Strick v Regent Oil Co Ltd [1966] AC 295 at 349).
18. No new principle is to be derived from the instant appeal. It merely affords another example of temporary loss of use of a capital asset; compensation was paid to replace the loss of profit which would otherwise have been earned. It does not avail the taxpayer to establish that after the interruption to use of the site, it could no longer earn profits from the deposit of general waste on the site. That was not attributable to the exhaustion of any profit-earning capacity, but rather to a change in the market. I can identify no error of law in the General Commissioners' approach, nor in their conclusion. In those circumstances this appeal fails.

Lord Justice Lawrence Collins:

19. I agree that the appeal should be dismissed for the reasons given by Moses and Buxton LJJ.
20. I also agree with what Buxton LJ says about appeals in cases of this kind. It has been frequently said at the highest level that the question whether receipts or expenditure are of a capital or income nature is, once the facts are found, a question of law: see Inland Revenue Commissioners v Rolls-Royce Ltd [1962] 1 WLR 425, 426-7 (Viscount Simonds), 429 (Lord Reid), 437 (Lord Guest); Regent Oil Co. Ltd. v Strick [1966] AC 295, 313 (Lord Reid), 347 (Lord Wilberforce); Inland Revenue Commissioners v Carron Co. (1968) 45 TC 18, 73 (Lord Wilberforce); Tucker v Granada Motorway Services Ltd [1979] 1 WLR 683, 688 (Lord Wilberforce); Beauchamp (Inspector of Taxes) v F.W. Woolworth plc [1990] 1 AC 478, 492 (Lord Templeman).
21. But as Lord Reid said in Regent Oil Co. Ltd. v Strick (Inspector of Taxes) [1966] AC 295, at 313, 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. Lord Upjohn said (at 345) that it was a question of fact and degree and above all judicial common sense in all the circumstances of the case.
22. There is much to be said for the view, expressed in a different context, that where the answer to a question is a matter of degree, taking account of all the circumstances, then an appellate court should show some circumspection before interfering with the decision at first instance: Dr Beynon and Partners v Customs and Excise Commissioners [2004] UKHL 53, [2005] 1 WLR 86, para 27. In particular, once as a matter of law a receipt or an expenditure is capable of being regarded as capital or income (as the case may be), then the Commissioners' decision should be capable of review only on Edwards v Bairstow [1956] AC 14 principles.

Lord Justice Buxton :

23. I respectfully and entirely agree.
24. In an attempt to force the case into the field of once and for all loss that is explained by my Lord in his §10, the appellant, at least before us, based his argument largely on an ambiguity in paragraph 9.3 of the stated Case. That is set out in §6 above, but I repeat it for ease of reference:

The interruption of the Taxpayer's business caused by Northumbrian Water Ltd's actions in respect of the CPO Land had a consequential effect on the Taxpayer's business as a whole, in that it was unable to fully exploit the landfill market as it had intended. That was a loss for which compensation was paid.

To that, the appellant added what was said by the judge at paragraph 23 of his judgment:

It seems to me inevitably to follow that the enduring loss caused to Able by the giving and withdrawal of the notice to treat, was not a diminution in the value of its land, other than purely temporarily during the period of interruption, but a permanent loss of the opportunity to put its land to its most beneficial use during uniquely favourable market conditions which are unlikely ever to return. In short, the decline in the value of the land was caused by the adverse turn in the market; the giving and withdrawal of the notice prevented Able from exploiting its land as beneficially as it wished to do while that favourable market lasted.

25. Able argued that the proper construction of paragraph 9.3 of the Case was, and the judge had held in terms, that its business had suffered a permanent loss of opportunity. Those were findings of fact, that the CPO had permanently damaged a feature of or asset of the appellant's business; and therefore the loss, and the payment to compensate for that loss, was in the nature of capital rather than income.
26. This argument conveniently ignores that in the next paragraph of the case, paragraph 9.4, also set out in §6 above, the Commissioners had immediately gone on to find (very justifiably) that the case presented to the Lands Tribunal indicated that at that stage Able regarded its claim to be for loss of profits; and that, as the above extract from his judgment shows, the judge in a part of the extract omitted when it was quoted in the appellant's skeleton held in terms that there had been no permanent diminution in the value of the land.
27. There are, however, substantial as well as forensic reasons why this argument was misconceived. The loss to Able was only "permanent" because the market conditions that it could have exploited during the period when it lost the use of its land did not survive the withdrawal of the notice to treat. Able's business was damaged during that period, but it was damaged because it could not recover the income that it would otherwise have expected. That income could not thereafter be recouped: not because an asset, or the business itself, had been in some way permanently damaged, but because the market had gone. It was for that loss (recoverable in full because the effect of the CPO was that Able lost the income for ever, and not merely that the recovery of the income was delayed to subsequent years) that compensation was claimed and granted. That is what the Case was recording in its paragraph 9.3. The Case read as a whole demonstrates that the Commissioners were miles away from making any finding that the loss had been of a capital nature.
28. We were assured on all sides that the present issue is one of law. So be it; but it is an issue of law of a rather special sort, not least because (as again both sides urged, relying inter alia on the judgment of Dyson LJ in IRC v John Lewis [2003] Ch 513) the distinction between capital and income has to be determined from a practical and business point of view. Despite this pragmatic approach, the parties put nineteen authorities before the Commissioners, and if left to their own devices would have read 23 cases to this court. For my part, and whatever the technical jurisprudential position, I would think that the time has now come to leave these practical and business issues principally in the hands of the specialist tribunal that has been constituted to decide them. Parties should in future hesitate long before contending that a view taken by that specialist tribunal is apt for reconsideration by the High Court, and much less by this court. And anyone embarking on that course will need to explain at an early stage how the Commissioners have failed to respect the explanation of the authorities that is to be found in the judgment of Moses LJ in this case.