Stoke-on-Trent City Council v Wood Mitchell & Co Ltd

Compensation for compulsory acquisition–Disturbance compensation–Appeal from Lands Tribunal–Temporary loss of income–Whether compensation should be reduced to take account of corporation tax which would have been payable–Applicability of ‘West Suffolk County Council v W Rought Ltd’–Principle of ‘Rought’ case to be applied only if absolutely clear that compensation would not be taxable–Effect of Finance Act 1969, Schedule 19, para 11–Apportionment of compensation to distinguish income from capital element–Compensation for temporary loss of profits can, as a result, be treated as trading receipt–Council to pay full sum, leaving claimants to account for any tax–Appeal dismissed This was an appeal by Stoke-on-Trent City Council from a decision of the Lands Tribunal (V G Wellings QC) (1977) 241 EG 856, [1977] 1 EGLR 156 concerning the amount of compensation payable to Wood Mitchell & Co Ltd in respect of the compulsory acquisition of certain office and warehouse premises at 5, 7 and 9 Lindop Street, Stoke-on-Trent. The point at issue was the amount payable for disturbance under the heading of temporary loss of profits while the respondents’ offices and warehouse were being re-established, and the specific question was whether this amount should be adjusted to take account of corporation tax. R Bramwell (instructed by S W Titchener, Town Hall, Stoke-on-Trent) appeared on behalf of the appellant council; D A Shirley (instructed by Breton, Deacon & Co, of Stoke-on-Trent) represented the respondents. Giving the judgment of the court at the invitation of Stephenson LJ, ROSKILL LJ said: This is an appeal by way of case stated by the Lands Tribunal dated October 3 1977. The decision was that of Mr V G Wellings QC as a member of that tribunal which he gave in writing on February 8 1977 and arose out of a reference to it of a dispute between the claimants, Wood Mitchell & Co Ltd (the respondents in this court) and the Stoke-on-Trent City Council (the appellants in this court) concerning the quantum of compensation payable by the appellants to the respondents in respect of the compulsory acquisition by the appellants of certain property belonging to the respondents at Stoke-on-Trent. The facts which gave rise to the dispute are stated with admirable clarity by the member in his decision [(1977) 241 EG at 856] and we gratefully borrow that statement verbatim: By an agreement in writing dated March 13 1969 the claimants agreed to sell and the acquiring authority to buy the above-mentioned land and premises at the price of £6,000. In the same agreement the acquiring authority agreed to sell and the claimants to buy back part of the land and premises acquired by the acquiring authority and and at the price of £3,000. All the land retained by the acquiring authority after March 13 1969 was in its possession by November 1968. The transaction action provided for in the agreement dated March 13 1969 was completed on July 21 1970, when conveyances putting the agreement into effect were executed. The purpose of the claimants buying back part of the land and premises was to enable them to re-establish their offices and warehouse. Their claim to compensation under rule (6) relates to the temporary losses which they suffered in the years 1969 to 1971 while their offices and warehouse were being re-established. In the agreement dated March 13 1969 it was acknowledged by the acquiring authority that the property acquired by it under the agreement did not take into account any compensation for disturbance consequent upon the making of the compulsory purchase order; it was thus agreed that the acquiring authority should pay to the claimants such sum as might be agreed in respect of compensation for disturbance, together with any interest properly payable thereon and in default of agreement such sum as might be fixed in respect thereof by the Lands Tribunal. This reference is therefore to be regarded as a reference by consent. No evidence was called at the hearing because all the facts had been agreed. Indeed the parties were in agreement as to the gross amount of compensation under rule (6) to which the claimants are22 entitled. It was agreed that that gross amount is £12,633.77. It was further agreed that of that sum items totalling £405.50 are of a capital nature, leaving a balance of £12,228.27. The only question which the tribunal was asked to resolve is whether, and if so to what extent, that balance should be adjusted to take account of corporation tax. Thus the member had to determine whether the respondents should receive £12,228.27 in addition to the £6,000 and the £405.50 or only some lesser sum arrived at in accordance with the decision of the House of Lords in West Suffolk County Council v W Rought Ltd [1957] AC 403, applying the principles previously laid down by the House in British Transport Commission v Gourley [1956] AC 185 to payments of compensation under the Acquisition of Land (Assessment of Compensation) Act 1919, the statutory precursor of the Land Compensation Act 1961, under which the respondents’ present entitlement to compensation arises. It is not, and indeed could not be, suggested that there was any relevant difference between section 5(2) and (6) of the latter statute and section 2(2) and (6) of the former statute. The argument for the appellants which the member rejected and which was repeated in this court with conspicuous ability by Mr Bramwell ran thus: 1. Ever since the decisions of the House of Lords in IRC v Glasgow & South Western Railway (1887) 12 App Cas 315 and of this court in Horn v Sunderland Corporation [1941] 2 KB 26 it has been the relevant law that compensation for disturbance in connection with the compulsory acquisition of land is to be treated as part of the price payable for the land compulsorily taken. See especially the judgment of Scott LJ in the latter case at pp 43-45. 2. Even though that compensation for disturbance might reflect loss of profits which, had they been earned in the ordinary course of business in the absence of that disturbance caused by the compulsory acquisition, would have been chargeable to income tax, nonetheless that compensation being part of the price payable for the compulsory acquisition is not liable to such tax in the hands of the recipient. 3. In Rought’s case the Inland Revenue wrote a letter–see p 407 of the report–stating that they did not regard such compensation as liable to taxation for income tax purposes. Though the Inland Revenue were not parties to that dispute, Lord Morton of Henryton, who delivered the leading speech in the House of Lords at p 412 of the report, said: ‘My Lords, the question whether any sum awarded to the respondents under heading 3B is or is not liable to income tax is not before the House, but I see no reason to doubt that the view of the Board of Inland Revenue as expressed in the letter of February 16 1954 was correct and I have formed the opinion which I am about to express upon the footing that this is so.’  The House accordingly held unanimously that the Lands Tribunal ought to have estimated to the best of their ability the amount of additional taxation which the claimants in that case would have had to bear if they had actually earned during the period in question the sum awarded to them as compensation for disturbance and then should have reduced the award by that amount–see the speech of Lord Morton at p 413. 4. That principle still applied today to reduce the figure of £12,228.27 by a sum equal to the amount of corporation income tax calculated at the rate of 42.5 per cent which the respondents would have had to pay on that sum had that sum been earned by them as profits during the period in question. It is convenient to interpose at this point that, for ease of reference in this judgment, we shall use the phrase ‘corporation income tax’ and ‘corporation capital gains tax’ in the same sense as did the member in his decision. 5. This would result in the figure payable for compensation being reduced to £7,031.26. 6. The position established by Rought’s case remained unaffected by the introduction in 1965 of capital gains tax and by the introduction in 1970 of corporation tax. There was still no liability on the part of the respondents to pay corporation income tax on this sum, and so far as corporation capital gains tax was concerned paragraph 11 of Schedule 19 to the Finance Act 1969 exempted this sum from liability to corporation capital gains tax in the hands of the respondents. It was for this reason that the respondents’ alternative argument that if they were liable to suffer any corporation capital gains tax on this sum at the rate of 30 per cent then the figure of £7,031.26 should be grossed up by a multiplier of 10/7 to produce a figure of £10,044.65 was erroneous, since there was no liability for corporation capital gains tax and therefore no need to introduce such compensatory grossing up. The respondents contended (perhaps unusually for a taxpayer) that they were liable for either or both corporation income tax or corporation capital gains tax on this sum and that accordingly the principle laid down in Rought’s case was no longer applicable to payments for compensation for disturbance. The position in relation to liability to tax upon compensation of this kind was now akin to the position established by this court in London and Thames Haven Oil Wharves Ltd v Attwooll [1967] 1 Ch 772, where it was held that so much of the damages received by jetty owners as related to loss of earnings of, as distinct from compensation for physical damage to, a jetty was a taxable revenue receipt. See the judgment of Diplock LJ (as he then was) at pp 815 and 816 of the report. Though in our view in the ultimate analysis our decision turns upon the true construction of paragraph 11 of Schedule 19 to the Finance Act 1969, it is necessary to examine certain other legislative provisions dealing with the imposition first of capital gains tax and then of corporation tax in order that the somewhat obscurely worded paragraph may be interpreted in its proper setting, but before we do so, we think it necessary to draw attention to one important distinction between Rought’s case and the present. In Rought’s case, as already pointed out, the Inland Revenue had made plain that in their view no income tax was chargeable on the compensation in question and the House of Lords proceeded upon the assumption that that view was correct. In the present case the Inland Revenue have written no such letter nor given any such assurance. On the contrary, an exchange of letters between the respondents and one department of the Inland Revenue suggested that the Inland Revenue would, or at least might, seek to contend that corporation capital gains tax was payable. The appellants’ counsel read a letter from the Solicitor to the Board of Inland Revenue written to their solicitors after the decision of the member declining to take any part in these proceedings, though invited to consider doing so. At one point we considered inviting the Inland Revenue to instruct counsel to appear before us as amicus curiae in order to give us the benefit of the board’s views on the issue we have to decide, since we were reluctant to give our decision without it. But having read that letter, we appreciate his reasons for not wishing to take part in a dispute with which his department is not directly concerned and we therefore did not further press the initial suggestion. We regard the position of the Inland Revenue in this case as of importance. If hereafter an attempt is made by the Inland Revenue to levy tax in one form or another upon that sum in the hands of the respondents and that attempt ultimately succeeded, after we in this court had held, reversing the Lands Tribunal, that some lesser sum were payable by the appellants because of the application of Rought’s case, a grave injustice would have been done to the respondents. They would have received a lesser amount from the appellants on the basis that that which they received would not be taxable in their hands, and yet they would or might thereafter have to pay tax at the instance of the Inland Revenue on that lesser amount. Since the purpose of decisions such as those in Gourley and Rought was to secure that a successful plaintiff or claimant did not get more by way of damages or compensation than would have been received by him in the absence of his injuries or of the compulsory acquisition in question, as the case might be, it23 seems somewhat strange that the principle underlying those decisions should be able to be invoked by the appellants in order to produce the result that the respondents, in the absence of any assurance from the Inland Revenue that no attempt would be made to levy tax upon this sum, stood in peril of receiving considerably less than that which they would have received had their capacity to earn continued unaffected by compulsory acquisition. In such circumstances the more natural course, which would avoid any risk of injustice, would be for the respondents to receive the full sum, leaving the question of liability to tax, if any, to be adjusted thereafter between the respondents and the Inland Revenue. We take the view that the principles laid down in Rought’s case can only be applied if after examination of the relevant statutory provisions it is clear beyond peradventure that the sum in question would not be taxable in the hands of the respondents. If that is clear, then it would be wrong to require the appellants to compensate the respondents beyond the amount of the loss which the respondents would in truth suffer. But if it is not, then it seems to us unjust that in a doubtful situation the appellants can get the benefit of a reduced payment while leaving the respondents exposed to the risks we have mentioned. Consideration of abstract justice might be thought to suggest that the respondents should receive the full sum and then in due course account to the Inland Revenue for any tax properly chargeable upon that amount. It is against that background that we turn to consider the relevant statutory provisions. We think it preferable to deal with these in chronological rather than perhaps strictly logical order. We start with the relevant provisions of the Finance Act 1965. We turn first to Part III, which bears the main rubric ‘Capital Gains’ and section 19 bears the title ‘General’. Subsection (1) provides thus: Tax shall be charged in accordance with this Act in respect of capital gains, that is to say chargeable gains computed in accordance with this Act and accruing to a person on the disposal of assets. Section 22(1) provides: All forms of property shall be assets for the purposes of this Part of this Act, whether situated in the United Kingdom or not, including . . . (c) any form of property created by the person disposing of it, or otherwise coming to be owned without being acquired. (3) Subject to subsection (6) of this section, and to the exceptions in this Part of this Act, there is for the purposes of this Part of this Act a disposal of assets by their owner where any capital sum is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum, and this subsection applies in particular to–(a) capital sums received by way of compensation for any kind of damage or injury to assets or for the loss, destruction or dissipation of assets, or for any depreciation or risk of depreciation of an asset. Subsection (9) provides: The amount of the gains accruing on the disposal of assets shall be computed in accordance with Part I of Schedule 6 to this Act, and subject to the further provisions in Schedules 7 and 8 to this Act, and in this section ‘capital sum’ means any money or money’s worth which is not excluded from the consideration taken into account in the computation under the said Part I of Schedule 6 to this Act. We turn next to Schedule 6. Paragraph 1 of Part I of this Schedule provides: The provisions of this Schedule shall have effect for computing for the purposes of this Part of this Act the amount of a gain accruing on the disposal of an asset. Paragraph 2 provides: There shall be excluded from the consideration for a disposal of assets taken into account in the computation under this Schedule of the gain accruing on that disposal any money or money’s worth charged to income tax as income of . . . the person making the disposal for the purposes of the Income Tax Acts. Paragraph 21(4) provides: For the purposes of any computation under this Schedule any necessary apportionment shall be made of any consideration or of any expenditure and the method of apportionment adopted shall, subject to the express provisions of this Schedule, be such method as appears to the inspector or on appeal the Commissioners concerned to be just and reasonable. Next the Finance Act 1969. Section 42 of that Act provides: Schedule 19 to this Act (which makes further provision for amending the enactments relating to long-term and short-term capital gains) shall have effect. We turn next to paragraph 11(1) of Schedule 19, which is the all-important provision for the purposes of the present appeal. Where land or an interest in or a right over land is acquired after April 29 1969 and the acquisition is, or could have been, made under compulsory powers, then in considering whether, under paragraph 21(4) of Schedule 6 to the Finance Act 1965, the purchase price or compensation or other consideration for the acquisition should be apportioned and treated in part as a capital sum within section 22(3) (a) of the said Act, whether as compensation for loss of good will or for disturbance or otherwise, or should be apportioned in any other way, the fact that the acquisition is or could have been made compulsorily, and any statutory provision treating the purchase price or compensation or other consideration as exclusively paid in respect of the land itself, shall be disregarded. Finally, the Income and Corporation Taxes Act 1970. We start with section 238(1), which provides that corporation tax shall be charged upon the profits of companies. Subsection (4) of the same section defines ‘profits’ as ‘income and chargeable gains’. Section 250 provides that subject to certain exceptions the amount of any income of a corporation shall for the purpose of corporation tax be computed in accordance with income tax principles. Section 265, which opens Chapter II of Part XI of this statute with the rubric ‘Companies’ Capital Gains,’ provides that the amount to be included in respect of chargeable gains in a company’s total profits for any accounting period shall be the total amount of chargeable gains accruing to the company in the accounting period after deducting allowable losses. Subsection (2) provides (inter alia) that the total amount of such chargeable gains shall for the purposes of corporation tax be computed in accordance with the principles applying to capital gains tax. Thus corporation tax is comprised of the two elements, income tax and capital gains tax, the relevant statutory provisions applicable to the calculation of each being applied to the calculation of those two elements in corporation tax. We think that consideration of the present problem must start from the fact that the decided cases clearly show that compensation payable for compulsory acquisition, whatever its component parts, constitutes a single payment which, at least before the Finance Acts 1965 and 1969, was not chargeable to income tax in the hands of the recipient. We understood Mr Bramwell to accept that, but for paragraph 11 of Schedule 19 to the 1969 Act, the whole of that single payment would have been liable to capital gains tax under section 22 of the Finance Act 1965. His argument was that paragraph 11 was directed to permitting a breakdown of this single payment into its component parts and then to exempting that part which related to capital from capital gains tax while leaving the existing freedom from liability to income tax unaffected. He contended that any other view involved that paragraph 11, appearing as it does in legislation dealing only with capital gains tax, would have to be construed as imposing a charge to income tax where such liability had not previously existed, a result he contended was unsupported at least by the express language of that paragraph. That argument undoubtedly has force, but before it can be accepted paragraph 11 must be subjected to closer analysis. The paragraph is clearly directed to the possibility of and the manner of apportionment for the purpose of capital gains tax legislation of ‘the purchase price or compensation or other consideration for the acquisition’ in accordance with paragraph 21(4) of Schedule 6 to the Finance Act 1965. The paragraph further clearly contemplates that that apportionment may result in part only of the compensation being treated as a capital sum within section 22(3)(a) of that Act (which, as already pointed out, refers to capital sums received by way of compensation for any kind of damage or injury to assets) ‘whether as compensation for loss of goodwill or for disturbance or otherwise’. It also provides that that need not be the only manner of apportion-24 ment but contemplates that apportionment may be made ‘in any other way.’  Then if and when any such apportionment is made the fact of compulsory acquisition and any statutory provision (a phrase which we think, as the member did, must extend to cover any judicial interpretation of any statutory provision) shall be disregarded. Paragraph 21 of Schedule 6 to the Finance Act 1965–as already stated–provides that, subject to the provisions of that schedule, the method of apportionment shall be such as appears to the inspector or on appeal to the Commissioners concerned to be just and reasonable. Construing this paragraph against the background of the judicial decisions we have mentioned, section 22 and in particular section 22(3)(a) of the Finance Act 1965, and the reference to the computation of the amount of a gain accruing on the disposal of an asset in Schedule 6 to that Act, and in particular to paragraphs 1, 2(1) and 21(4) of that schedule, we think it impossible to avoid the conclusion that this legislation is directed, first, to imposing a liability for capital gains tax on compensation for compulsory acquisition upon the footing that such compensation is a capital sum received upon the disposal of an asset; secondly, and notwithstanding the antecedent judicial decisions, to permitting a breakdown of that compensation into its component parts so as to enable what may be called the capital element and the income element to be separated by apportionment in such manner as the inspector, or on appeal the Commissioners, may think just and reasonable; thirdly, to exclude from the computation of the capital gain accruing from such disposal any money charged to income tax as the income of the person making the disposal; fourthly, to ensure that any such apportionment is arrived at without regard to the antecedent judicial decisions that such compensation is to be treated as exclusively, ie as a single indivisible sum, paid in respect of the land itself, so as to abolish the distinction which certainly since the decision in the London and Thames Haven case and perhaps earlier would seem to have existed–somewhat illogically–between compensation arising from the negligence of a tortfeasor which could be broken down into its capital and income elements, so that income tax was chargeable on the latter but not on the former, and compensation for compulsory acquisition where seemingly before 1969 such breakdown was not permissible. Then when corporation tax was introduced in 1970 the existing income tax and capital gains tax codes, including provisions of the Finance Acts 1965 and 1969 already discussed, were applied in their entirety to bodies corporate such as the respondents. Like the member we have arrived at this conclusion as a matter of the construction of the relevant legislation, which in deference to Mr Bramwell’s argument we have analysed at some length. But we might have contented ourselves with expressing our complete agreement with the succinct single sentence in which the member expressed his conclusion at p 7 of the decision. ‘The effect of an apportionment to which paragraph 11 refers, though it be made for the purposes of a computation of capital gain, is to free the compensation for temporary loss of profits of its capital nature and enable it to be treated for what it in truth is, namely a trading receipt.’ We would add that we were referred by counsel to a number of other decisions. We do not refer to them, for we do not think they in any way help to solve this question of statutory construction. So far then from it being clear, as it was in Rought’s case, that no part of the sum in question is liable to tax, we think the Inland Revenue are entitled to make an apportionment of the compensation as a consequence, of which, subject to any decision of the commissioners on appeal, some part of the compensation, being compensation for disturbance, may become liable in the hands of the respondents to corporation income tax. Rought’s case is therefore clearly distinguishable. We think it clear, therefore, that the appellants should pay the full sum to the respondents, leaving the respondents to account to the Inland Revenue for such sum, if any, as may subsequently be shown to be due from them to the Inland Revenue by way of corporation income tax or maybe corporation capital gains tax. Our conclusion makes it unnecessary to consider the alternative argument about grossing up. The appeal fails and must be dismissed. The appeal was dismissed with costs. Leave to appeal to the House of Lords was refused.