Market South West (Holdings) Ltd v Revenue & Customs [2010] UKFTT 121 (TC) (17 March 2010)

DECISION

1. Market South West (Holdings) Limited (“the Taxpayer”) is appealing against HMRC’s amendment to its self-assessment for the tax year ended 31 March 2004 made on 1 November 2006.

2. The basis of the appeal concerns the correct tax treatment of legal and professional fees of £179,071 incurred by the Taxpayer in connection with a planning dispute (the “Wednesday Market Appeal”). In particular whether those fees should be treated as an allowable revenue cost or as non- allowable capital expenditure.

Agreed Facts:

3. The Taxpayer’s principal activity was the promotion of open air markets and associated activities.

4. The Taxpayer operates Cornish Market World, an indoor market comprising 300 stalls let to stallholders in St Austell.

5. Outline planning permission (the “OPP”) was granted by Restormel Council (“the Council”) to the Taxpayer on 21 June 1991 for an 85,000 sq ft building for non food retail. The OPP contained no conditions limiting the days on which the market could operate.

6. The building was constructed in accordance with the OPP and a Reserved Matters Planning Approval (the “RMA”) was granted on 9 September 1991. This did contain restrictions on the days on which the market could operate; trading could only occur on Saturdays and Sundays.

7. Trading commenced at the site in November 1991.

8. In October 1994 a further planning application was made and permission was given for an extension to “square off” the original building. This permission also restricted trading days to Saturdays and Sundays. (The “1994 Extension”)

9. The market operated on other weekdays and by 1996 it was operating on Bank Holidays and for three days leading up to Christmas.

10. The Council considered that there had been a breach of the original planning permission due to the weekday opening and invited a further planning application from the Taxpayer to regularise trading on 11 October 1996.

11. On 6 February 1997 planning permission was granted to allow the Taxpayer to trade at the site on Saturdays, Sundays and any additional 10 days in the year. ( the “1997 Planning Permission”)

12. During the summer of 2001 the market traded on 18 Wednesdays. It also opened on every Wednesday from 3 April 2002.

13. The Council issued an enforcement notice (the “Enforcement Notice”) on 29 January 2003 and the Taxpayer appealed against it.

14. The appeal was heard by the planning inspector and dismissed in a decision on 24 October 2004.

15. The Taxpayer appealed the decision to the High Court which was dismissed on 4 August 2004. An application for leave to appeal to the Court of Appeal was rejected.

16. The fees which are the subject of this hearing were incurred in taking these legal actions with an intention to benefit the trade of the Taxpayer.

The Arguments:

17. The point at issue between the parties can be stated briefly: were the fees capital expenditure incurred in order to enhance and modify an intangible capital asset or were they revenue expenses incurred to clarify and defend the existence of an original right to trade, in order to earn more profits for the Taxpayer?

18. Mr Baldry for the Taxpayer based his argument on four main points; First, that the legal proceedings undertaken by the Taxpayer were part of a campaign to carry out its trading activities, suggesting that they were revenue payments.

19. Second, that from a “practical and business point of view” the Taxpayer had incurred the fees to preserve what it believed to be its pre- existing right to trade on the site in accordance with the terms of the original OPP in 1991.

20. Third, that the recurring nature of the fee payments which were incurred on a regular basis during the four year course of the litigation, meant that they could not be treated as a “one off, lump sum” payment.

21. Finally, that the expenditure was essentially directed at preserving the Taxpayer’s entitlement to trade on weekdays and was thus a classic revenue expense. Mr Baldry relied for this conclusion particularly on the authority of the cases of Southern v Borax Consolidated Ltd (23 TC 597) and CIR v Carron Company (45 TC 18). In Borax Lawrence J referred to expenditure as revenue which was expenditure on legal fees which did not create a new asset, but were incurred in “maintaining the assets of the company in the ordinary course of business”.

22. Mr Baldry sought to differentiate the Taxpayer’s position from the decision in the EEC Quarries case, EEC Quarries Ltd v Watkis (51 TC 153), a case concerning expenditure on the extension of quarrying rights, on the basis that the planning appeals in this instance were not intending to alter or extend the Taxpayer’s rights in respect of the site in St Austell, but to preserve its rights as originally set out in the 1991 OPP.

23. In contrast, HMRC argued that the expenditure in question was capital in nature since it was expenditure on a capital asset which was retained and used in the Taxpayer’s business, that asset being the rights contained in the 1997 Planning Permission.

24. HMRC argued that it was not correct to characterise the fees paid as recurring payments. The fees were a one-off payment made on a once and for all basis in respect of a single legal action to enhance the Taxpayer’s capital asset.

25. The Taxpayer was not incurring these fees to defend an existing right but in relation to the rights granted as part of the 1997 Planning Permission which, in granting an extra 42 days of trading each year had created an asset which was for the enduring benefit of the Taxpayer’s trade.

26. The fees spent on the High Court litigation were spent on the acquisition of a capital asset. HMRC relied in this regard on the statements made by Lord Wilberforce in Tucker v Granada Motorway Services Ltd (53 TC 92) and by Viscount Cave in Atherton, (Atherton (H M Inspector of Taxes) v British Insulated & Helsby Cables Limited (10 TC 155)).

27. According to HMRC, there was no evidence that the Taxpayer was defending rights which had existed since the OPP in 1991. In the later planning applications these purported rights had never been claimed or legally tested. Indeed if those rights had existed since 1991, arguably the later planning applications were not necessary.

28. As was made clear by the statements of Brightman J in the EEC Quarries case, the fact that the rights relating to the 1997 Planning Permission did not appear as an asset in the Taxpayer’s balance sheet was not critical to this analysis.

29. The Taxpayer’s legal action was not defending existing rights, but modifying or enhancing his right to trade and this was capital expenditure.

The Planning Appeal.

30. It is helpful at this stage to give some details of the process and decisions in the planning appeals to which these professional and legal fees relate.

31. The Tribunal was provided with a copy of the judgment of the High Court in this matter [2004] EWCH 1917.

32. The Taxpayer’s argument before the High Court in the planning appeal was that the trading day restrictions contained in the 1991 RMA were illegal, because it is not possible to include in an RMA restrictions which are more limiting than the terms of the original OPP.

33. The High Court agreed with this and confirmed that the trading day restrictions in the RMA were illegal. This applied to the original building on the site in 1991.

34. In contrast, the High Court held that the 1994 trading day restrictions in respect of the 1994 Extension were legal and valid.

35. The High Court also held that the 1997 Planning Permission was valid, including the trading day restrictions which it contained.

36. It is therefore only in respect of the original building, and for the period from the original OPP until the 1997 Planning Application was decided that the Taxpayer had the right to trade on any day of the week at the St Austell market site.

37. No further litigation is contemplated in respect of the 1997 Planning Application.

The evidence of Mr Gorvin.

38. Mr Gorvin appeared as a witness for the Taxpayer company and provided some helpful evidence about the commercial background in which the Taxpayer was operating and the circumstances surrounding the various planning appeals. Mr Gorvin was a clear and confident witness and the Tribunal had no reason to call into question any of the evidence which he gave.

39. Mr Gorvin said that he had been involved in the markets business since 1976 and had been involved with the Taxpayer Company for all of the relevant period, including at the time of the original OPP in October 1991. He is currently the sole director of the Taxpayer company.

40. Mr Gorvin made it clear that it was and always had been his belief that the Taxpayer had an unrestricted right to trade on any day of the week at the site on the basis of the 1991 OPP.

41. He told the Tribunal that he had been informed by his lawyers, Bond Pearce at the time (September 1991) that the later restrictions on the OPP were illegal and not enforceable.

42. Mr Gorvin explained that as a result of commercial and economic pressures, the right to trade at the site on unrestricted days had not been exercised. Mr Gorvin knew that it would not have been profitable to try and trade at the site other than at weekends and on a few other days of the year (bank holidays and the pre- Christmas period). It was not commercially viable for the market to be open for more days of the week. He would not have been able to persuade stallholders to come to the market other than at weekends.

43. It was only in 2002, as market conditions improved, that Mr Gorvin thought it would be worth keeping the site open for extra days, especially during the busy summer tourist period.

44. It was only when there was a commercial incentive to trade on extra days that Mr Gorvin considered it worthwhile defending the rights which he believed had always existed to trade on any day of the week.

45. When asked why he had not raised these pre-existing rights with the Council as part of the previous planning applications (for example as part of the 1994 Extension process), Mr Gorvin said that at that stage he was only interested in opening at the weekends and he did not want to create unnecessary strife with the Council.

46. Mr Gorvin could not point specifically to any board minutes or similar documents of the Taxpayer in which the question of the legality or otherwise of the trading day restrictions in the 1991 RMA had been discussed.

The Decision:

47. The Tribunal were grateful for the clear and detailed arguments put forward by both parties and for the additional evidence provided by Mr Gorvin.

48. The question of whether an item of expenditure is of a revenue or capital nature is one of the most basic legal distinctions made by the tax code. It is also one of the distinctions which has proved the most difficult to define. There are a large number of cases in this area, some of which were referred to by the parties to this appeal.

49. Despite this large body of case law, there remains no definitive view of what constitutes a revenue rather than a capital payment, in fact the case law strongly suggests that all cases need to be decided on their own facts; see for example the statements of Viscount Cave in Atherton, referred to above. The area remains, as it was described by Templeman J in Tucker v Granada, an intellectual minefield in which principles are elusive.

50. The Tribunal is certainly of the view that there is no one case which has sufficiently analogous facts to those considered here to provide a definitive conclusion. Mr Baldry for the Taxpayer relied heavily on the statement of Lawrence J in Borax to the effect that if no alteration is made to a fixed capital assets by a payment, it is properly attributable to revenue, being in substance a matter of maintenance, and similar statements of Reid LJ in Carron; payments made for removing antiquated restrictions from the taxpayer’s constitution created no new asset, but facilitated the company’s trading and so were revenue in nature.

51. HMRC based their arguments on Tucker v Granada and Atherton on the basis that this was expenditure on the creation of a capital asset for the enduring benefit of the Taxpayer’s trade and so should be treated as capital in nature.

52. The Tribunal’s view is that this is a case which falls very much on the line between revenue and capital payments and has, for that reason, not found it a very easy case to consider.

53. There is no doubt that these fees were paid in relation to a right which would procure an advantage for the taxpayer’s trade, the significant advantage of being free to trade for an additional 42 days each year.

54. However as is made clear by authorities such as Carron, it is perfectly possible for such a payment to be treated as revenue expenditure if its true purpose is to facilitate trading and allow the company to be more profitable.

55. If however the expenditure procures that significant advantage by making a fundamental change in the framework of the way in which a business is carried on, this is more likely to be capital expenditure.

56. This is a difficult distinction to draw, but the relevant authorities suggest that expenditure can be more readily characterised as revenue if no new asset is created or if no alteration is made to an existing asset of the business. In the Carron and Cooper v Ryhmney Breweries Limited (42 TC 509), cases on which the Taxpayer relies, the decisions turned in part on the fact that no new asset had been created or could be identified.

57. On the other hand, if a payment can be linked to capital asset, or to the alteration in a capital asset, that payment is more likely to be treated as a capital payment. Both parties have referred in their arguments to the definition of Wilberforce LJ in Tucker v Granada that payments made to enhance or extend a capital asset are themselves capital while payments made to maintain or defend an existing asset are revenue.

58. The existence or otherwise of a capital asset is not in the Tribunal’s view critical to the argument that the payment is itself of a capital nature. The passage often referred to from Atherton refers not just to payment for a capital asset, but also to the creation of “an enduring advantage for the trade or business”. However, the identification of a capital asset to which a payment can be related has often been used as a useful indicator of capital expenditure.

59. We do not think that it entirely straightforward to characterise the “rights” which arise as the result of a planning application as a capital asset. Previous authorities refer to cases dealing with licences and planning as falling into a particularly difficult category for that reason, (see for example Brightman J in EEC Quarries), but do tend to accept that such rights should be viewed as capital assets.

60. HMRC referred to the fact that the 1997 Planning Permission did not appear as a capital asset in the Taxpayer’s balance sheet but argued that this was not critical to the analysis here. No further accounting evidence was raised by the parties. The Tribunal agree with HMRC’s approach on the basis of the EEC Quarries authority that in this instance the accounting treatment of the 1997 Planning Permission is not critical to the correct legal analysis of the expenditure.

61. Overall it is the Tribunal’s view that the planning permission rights under consideration here should be viewed as part of the basic framework of the Taxpayer’s trade and so as capital assets. The authority of Pyrah v Annis & Co Ltd (37 TC 163), which was not referred to by the parties, further supports this approach. In that case payments made to extend rights under a public carrier’s licence from four to seven vehicles were held to be a payment to improve the taxpayer’s capital position.

62. The mere fact that these payments can be related to a capital asset is not fatal to the Taxpayer’s contentions. It is only payments which are made for the creation or alteration of capital assets which are themselves capital. Payments for the maintenance or defence of an existing asset are revenue.

63. It is crucial as far as the Taxpayer’s arguments are concerned that there are rights existing in relation to the 1991 OPP and that these rights represent a capital asset which has been in existence since that time and which therefore only needed to be “maintained” as part of the 1997 Planning Permission and later appeals.

64. In contrast, HMRC argue that the only capital asset in question is what they consider be the Taxpayer’s new rights arising under the 1997 Planning Permission. The fees in question were incurred to create these rights. There are no rights relating to the 1991 OPP and therefore no asset is being “maintained”.

65. It is therefore important to be clear what, if any rights can be said to have existed prior to the 1997 Planning Permission.

66. Mr Gorvin’s evidence suggested that he clearly believed that he had always had the right to trade freely, on any day of the week, in accordance with the 1991 OPP.

67. However, several aspects of Mr Gorvin’s evidence suggested to the Tribunal that if he did believe that those rights subsisted, they were rights which he was happy to leave dormant for a lengthy period of time. It was not until 2001 that Mr Gorvin made any attempt to utilize this asset, or in any way turn in to account for the purposes of his trade.

68. There were a number of occasions during the intervening period when Mr Gorvin might have “activated” this asset, including on the date when he was originally informed by his lawyers that any restrictions on these rights were illegal (in September 1991), again at the time of the 1994 Extension and finally at the time of the 1997 Planning Application when, as HMRC point out, he could have decided to contest the legality of the earlier planning restrictions rather than applying for a new permission.

69. There is also the evidence which HMRC pointed out to us at (page 63 of the Agreed Documents) where a handwritten note, which Mr Gorvin accepted was his handwriting, had been added at the end of a copy of the High Court judgment stating

“we have been substantially prejudiced in as much as we have acted and made all our decisions and planning applications on the assumption that the conditions of the RMA were valid, which they were not.”

This suggests that even Mr Gorvin realised that there was some significant doubt about the existence of any rights on the basis of the 1991 OPP.

70. For these reasons the Tribunal has found it difficult to accept that the 1997 litigation can be viewed as merely the maintenance or defence of an existing right. If such a right did exist, it had not been legally tested, nor, more significantly, had it been put to any use for the purposes of the business.

71. If expenditure was required in respect of any rights arising under the 1991 OPP, by 2003 what was required was something more akin to resuscitation than maintenance, of a right which had been ignored and allowed to lie dormant for many years.

72. It is particularly hard to treat something as a revenue payment when that payment is being made in respect of a business asset which has not been used to generate profits for the business for a substantial part of the period in question.

73. In our view the idea that a payment is a deductible revenue payment because, as is suggested in cases such as Carron, it relates to the profit generating framework of the business is harder to apply when the business has not regularly and consistently generated profits from the item to which the expenditure is applied.

74. Mr Baldry attempted to persuade us that we should take a “practical and business point of view”, a suggested by Templeman LJ Lawson v Johnson Matthey PLC (65 TC 39). From such a perspective, this expenditure was to maintain or improve the Taxpayer’s trading potential. Mr Baldry also said that it was necessary to consider the effect which the expenditure is intended to achieve, referring to the approach of the New Zealand courts in CIR v Wattie & Lawrence (72 TC 639).

75. Had this been expenditure which was regularly made on the asset in question since it was first created in 1991 and had that asset been used as part of the Taxpayer’s trade throughout the relevant period, the Tribunal would have found Mr Baldry’s arguments more persuasive.

76. In this regard we think the reference in the Borax case to maintenance incurred in the ordinary course of the Taxpayer’s business is instructive. We think that maintenance suggests an element of regularity of both use end expenditure which is absent from the Taxpayer’s behaviour here.

77. HMRC argued that the Taxpayer’s lack of use and lack of attempt to defend their rights under the 1991 OPP meant that no capital asset existed prior to the rights conferred by the 1997 Planning Permission.

78. The Tribunal would not go quite as far as to say that no asset existed prior to that date, but would agree with HMRC’s proposition that the expenditure in question went beyond the mere maintenance of an existing asset.

79. If not creating a new asset, the 1997 Planning Permission was certainly an attempt to alter the state of the existing asset, by bringing back to life and regularising rights which had not been legally tested prior to that point. This represented a significant enhancement in terms of the quality of that asset.

80. On the basis of the authorities referred to by both parties, the enhancement or alteration of an existing asset should properly be treated as a capital payment. That is what we believe was being done here.

81. That brings us to the question, specifically raised by the Taxpayer before the Tribunal, whether the outcome of the High Court decision has any impact on the tax characterisation of the fees paid to get to the High Court. The implication here is that had the application been successful the expenditure would more readily have been viewed as revenue expenditure made in respect of a subsisting right.

82. In principle we do not think that it is the outcome of the litigation which is relevant here. The relevant question is not whether the expenditure actually achieved the outcome for which the Taxpayer hoped but whether, in the words of Lord Goff of Chieveley in Johnson Matthey “on a true analysis of the transaction the payment can be characterised as a payment of a capital nature”.

83. In any event, while the 1997 Planning Permission was upheld despite the Taxpayer’s appeal, it was accepted that the 1991 RMA was unlawful and invalid and to that extent at least the Taxpayer’s position was supported by the High Court.

84. To deal finally with Mr Baldry’s contention that the fees in question were revenue in nature because they were paid as a series of payments, this can be done very shortly.

85. Mr Baldry rightly referred to Atherton and Heather v P-E Consulting (48 TC 293), to suggest that the character of the payments is an important factor in determining their nature, with recurring payments being more readily treated as revenue deductions.

86. The Tribunal is not convinced that it is correct to treat the fees in question as a series of revenue payments. Our view is that they were paid on a “recurring basis” only as a way of spreading what were essentially one-off fees for single pieces of professional advice. Their “recurring” nature reflects only the method of payment, common to the way in which all professional fees get paid for significant cases extended over long periods, and not their true legal nature, which is a payment under a single bargain.

87. Second, the nature of the payment in question is only one of the factors to be considered and in this instance, even if we thought that the payments could properly be seen as recurring in nature, the Tribunal would not have considered this, on its own, to be sufficient to overcome the weight of the other factors considered above.

88. This has not been an easy case to decide, but looking at the full commercial picture, the Tribunal’s view is that the £179,071 of professional fees spent as part of what became known as the “Wednesday Market Appeal” are most properly treated as expenditure of a capital nature.

89. On this basis we are dismissing the Taxpayer’s appeal.

90. The Appellants have a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL JUDGE

RELEASE DATE: 17 March 2010

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