SPC00579

INCOME TAX/ CORPORATION TAX  -  management expenses  -  waste disposal landfill site  -  expenses of restoring site  -  availability of deduction in computing profits -  whether ICTA s 91A authorises deduction where provision for eventual costs of restoration has been made in accounts  -  no  -  whether deduction allowed where no restoration payments have been made during the period of account   -  no  -  appeal dismissed    

THE SPECIAL COMMISSIONERS

	DISPIT LTD	Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

		

				Special Commissioner:  MICHAEL JOHNSON

Sitting in public in Manchester on 20 November 2006

David McGarry ACA of Dutton Moore, Chartered Accountants for the Appellant 

June Kennerley, HM Inspector of Taxes for the Respondents

© CROWN COPYRIGHT 2006

DECISION

Nature of the appeal

1.	This appeal concerns the interpretation of s 91A of the Income and Corporation Taxes Act 1988 (“ICTA”) and how that section might fall to be applied in arriving at the Appellant’s taxable profits for the period 1 January to 31 December 2001.

2.	The Appellant operates a tipping site at Great Gutter Lane Quarry, Willerby, East Yorkshire. Its main activity is that of landfill. Under its legal obligations entered into with the former Humberside County Council, now the East Riding of Yorkshire Council, the Appellant will one day have to “cap” the site, ie restore the surface of the filled site to a permanent high standard. The eventual expense of so doing constitutes an important element in the cost of running its business.    

3.	The issue for decision is whether the Appellant is able to take advantage of s 91A to deduct from its profits for the year ended 31 December 2001 an amount for the cost of reinstating the site, not representing expenditure incurred during the period of account, but included by way of provision as a best estimate of expenditure which the Appellant is obligated to incur at a later date. 

4.	Section 91A was inserted in ICTA by the Finance Act 1990.  As the section stood in relation to the period of account with which I am concerned, it read as follows:

91A  Waste disposal: restoration payments

(1)	This section applies where on or after 6 April 1989 a person makes a site restoration payment in the course of carrying on a trade.

(2)	Subject to subsection (3) below, for the purposes of income tax or corporation tax the payment shall be allowed as a deduction in computing the profits of the trade for the period of account in which the payment is made.

(3)	Subsection (2) above shall not apply to so much of the payment as—

(a)	represents expenditure which has been allowed as a deduction in computing the profits of the trade for any period of account preceding the period of account in which the payment is made, or

(b)	represents capital expenditure in respect of which an allowance has been, or may be, made under the enactments relating to capital allowances.

(4)	For the purposes of this section a site restoration payment is a payment made—

(a)	in connection with the restoration of a site or part of a site, and

(b)	in order to comply with any condition of a relevant licence, or any condition imposed on the grant of planning permission to use the site for the carrying out of waste disposal activities, or any relevant obligation.

(5)	For the purposes of this section waste disposal activities are the collection, treatment, conversion and final depositing of waste materials, or any of those activities.

5.	Sub-sections (6) and (7) defined the expressions “relevant licence” and “relevant obligation” as meaning licences and obligations entered into pursuant to various specified statutes relating to planning and environmental protection.  

6.	Sub-section (8) read:

(8)   For the purposes of this section a period of account is a period for           which an account is made up.

7.	The Appellant contends that the section authorises the deduction from profits of the amount of provision for land reinstatement made in its accounts.  The Respondents contend that the section has no application and that no amount is properly deductible in relation to the relevant period of account for the cost of land reinstatement.  

8.	For convenience, I shall in this decision use the expression “HMRC” to describe both the Respondents and the Commissioners of Inland Revenue in the days before they became known by their current title.    

The underlying facts

9.	There is no dispute as to the facts relating to this appeal.  Consequently I heard no evidence and I have not been required to make findings of fact.  The dispute is confined to the impact of s 91A on the facts as agreed.  

10.	I was provided with a “Joint Agreed Documents Bundle” which included an agreed Statement of Facts.  The statement is helpfully succinct.  It reads as follows:

1)	The Appellant is Dispit Ltd, a company of long standing, of registered office 262 West Ella Road, West Ella, Hull HU10 7SF.  The company describes its principal activity as offering tipping facilities.

2)	Dutton Moore of Silver Street, Hull has acted as the company’s agent since before 1980.

3)	The accounts, computations and Corporation Tax Return for the year ended 31 December 2001 were received by Her Majesty’s Revenue and Customs (then the Inland Revenue) on 7 January 2003.

4)	An enquiry into the accounts and Return for the year ended 31 December 2001 was opened by the issue of a notice dated 29 May 2003.

5)	The profit and loss account contains a deduction of £619,883 for land reinstatement.

6)	The costs are estimates based on a report prepared by AIG Consultants Ltd entitled “Great Gutter Landfill – Capping Cost Estimate” and do not include any amounts actually paid during the period of the accounts.

7)	As the parties could not agree on the interpretation of s 91A, a closure notice was issued disallowing the £619,883 in the computations, followed by a Revenue Amendment issued on 5 September 2005.

8)	The agent appealed in their letter of 7 November 2005.  That appeal is the subject of these proceedings.

11.	The “Joint Agreed Documents Bundle” before me contains copies of an Agreement between the Appellant and the former Humberside County Council, expressed to be made under inter alia s 52 of the Town and Country Planning Act 1971, providing for the tipping site to be covered on completion of tipping with subsoil and topsoil and grassed within “the earliest appropriate season” to enable the area to be used for agricultural purposes.  The copies I have seen are not copies of the sealed and dated document, but I am prepared to assume that the Appellant is legally obliged to “cap” the site in due course as described, and I shall further assume, as the parties invite me to do, that the Appellant is subject to a “relevant obligation” as defined in s 91A(7).

Grounds of appeal    

12.	As clarified by a letter written by Mr McGarry of Dutton Moore to Ms Kennerley of HMRC dated 2 May 2006, the Appellant has appealed firstly on the ground that the revenue amendment of 5 September 2005 is not in agreement with the Appellant’s accounts, computations and corporation tax return for the year ended 31 December 2001 received by HMRC on 7 January 2003, and secondly on the ground that the figure of £619,883 therein shown as a deduction for land reinstatement falls within the definition of a site restoration payment as defined in s 91A(4) and is allowable as a deduction under s 91A(3).

Case for the Appellant

13.	Mr McGarry appeared at the hearing for the Appellant.  He told the tribunal that, historically, HMRC had since 1979 permitted the Appellant to include within its annual accounts provision for landfill site restoration.  He said that, following the decision of the Court of Appeal in Rolfe (H M Inspector of Taxes) v Wimpey Waste Management Ltd (1989) 62 Tax Cases 399 (“the Rolfe case”), which characterised expenditure on landfill sites as being of a capital nature, the government had acted swiftly to enact both s 91A and s 91B of ICTA, with the object that both landfill site preparation and restoration costs should continue to be tax deductible.

14.	He said that, under s 91B, expenditure on site preparation was for tax purposes to be spread into the future, and claimed against relevant income derived from the site.  Section 91A, he said, recognised no difference between capital and revenue expenditure, and both fell to be equally treated under the section.  This was a reversal of the position reached following the Rolfe case.  

15.	Section 91A(2), Mr McGarry submitted, is subservient to s 91A(3).  He submitted that, whilst HMRC chose to give relief only in a period of account in which payments had been made, s 91A(3) allows as a deduction in computing the profits of the trade expenditure for periods of account preceding that in which payment is made.  He referred to an extract from Inland Revenue Tax Bulletin Issue 34 (superseded by HMRC Business Income Manual 67440), where it is noted that it had been suggested that the wording of s 91A(3)(a) implies that such provisions are allowable.  He said that, despite being pressed to do so, HMRC had not explained who had made that suggestion.  He submitted that HMRC themselves had drawn attention to the very point at the foundation of his client’s case.

16.	Mr McGarry drew my attention to the following paragraphs contained in the extract mentioned, which refer to the position after the decision in the Rolfe case:

“In so far as provision for restoration is for capital expenditure that provision is not allowable in computing Case I profits.  It would not be allowable under the normal rules which prohibit a provision for expenditure such as capital expenditure, which would be disallowable when incurred nor under s 91A which only permits a deduction when the (capital) expenditure is incurred.

“However, where a provision for restoration costs is for revenue expenditure, the question of s 91A does not arise.  Such a provision would be allowable as a Case I deduction, subject to the usual rules.  In the context of provisions for expenditure which will be incurred scores of years in the future the questions of accuracy and appropriate discounting may be in point.  Subject to those questions a provision for the future revenue costs of routine monitoring and treatment of gases and leachate are likely to be allowable.”  

17.	Mr McGarry submitted that, if HMRC allow provisions to be made for restoration costs of a revenue nature, it must be right that provisions can also be made for expenditure falling under s 91A.  Alternatively, under what authority can revenue expenditure be differentiated from that under s 91A?

18.	Seeing that HMRC had not disputed the quantum of the restoration costs professionally advised, and that the Appellant would be obliged to incur these costs under a “relevant obligation” as defined in s 91A, Mr McGarry submitted that the deduction should be forthcoming in this period of account.  If the Appellant is obliged to wait until the restoration payments are made before being allowed deductions, the deductions may well be attributable to periods in which the Appellant’s profits are insufficient to absorb the deductions.  The Appellant would then be left to carry back tax losses. Mr McGarry submitted that this cannot have been the intention of Parliament.

Case for HMRC

19.	Ms Kennerley, H M Inspector of Taxes, appeared for HMRC.  Referring to the Appellant’s accounts submitted for the period ended 31 December 2001, she drew attention to the derivation of the £619,883 of site restoration provision included.  This consisted of £815,000 professionally estimated by AIG Consultants Ltd as the cost of capping works at the site, less £195,117 for provision brought forward from earlier accounts. She said that in respect of previous periods, provisions had been accepted by HMRC for land restoration whose amounts had been based on the opinion of the directors of the Appellant. Such provisions had been allowed following discussion with HMRC in the 1980s.  

20.	Ms Kennerley referred to the long-established practice of making provisions for tax purposes – see Owen (H M Inspector of Taxes) v Southern Railway of Peru Ltd (1956) 36 Tax Cases 602 (“the Owen case”).  She submitted that HMRC’s approach in the 1980s with regard to allowing the provisions had been consistent with the Owen case.  She further submitted that Financial Reporting Standard 12 of the Accounting Standards Board, issued in September 1998, is not inconsistent with the Owen case as regards the use of provisions in preparing accounts.

21.	However, she submitted, provisions are only allowable in computing Schedule D, Case I profits if they:

•	are in respect of allowable revenue expenditure (see RTZ Oil & Gas Ltd v Elliss (H M Inspector of Taxes (1987) 61 Tax Cases 132); and

•	in accordance with generally accepted accounting practice (see s 42 of the Finance Act 1998); and

•	are estimated with sufficient accuracy (see the Owen case).

Ms Kennerley submitted that where actual expenditure is not allowable for tax purposes, there can be no basis for allowing a provision for such expenditure for tax purposes.

22.	She submitted that the professional report from AIG Consultants Ltd characterised the estimated expenditure of £815,000 as capital expenditure.  Prior to the decision in the Rolfe case, HMRC might have allowed provisions for such expenditure as being in the nature of revenue expenditure, but that case had established the nature of the expenditure as capital expenditure, so such provisions could no longer be made.  

23.	Consequently, she submitted, the only such expenditure that is allowable is actual expenditure within the scope of s 91A itself.  Ms Kennerley submitted that the wording of the section did not provide for provisions as Mr McGarry submitted.  She invited me to disallow the deduction in its entirety, seeing that none of it represented a payment within the period of account, and to determine the Appellant’s self-assessment to corporation tax accordingly.     

Capital or revenue expenditure?

24.	An examination of the report from AIG Consultants Ltd dated 11 October 2002 shows that the estimated site restoration costs include one item, “anchor trenches/ surface water management”, provision for which might be regarded as being in respect of revenue expenditure and which might be allowed as a deduction from profits, irrespective of the outcome of this appeal. 

25.	The Appellant was offered the opportunity of an adjournment for the purpose of quantifying the relevant expenditure, and putting forward a case that provision for such expenditure should be allowable as a deduction in this period of account.  However the opportunity was declined on the basis that the Appellant was content to advance its appeal on the footing that the entirety of the provision for site restoration costs made in its accounts should, according to the decision in the Rolfe case, be regarded as being in respect of capital expenditure.

26.	The decision in this appeal therefore proceeds on that assumption. 

Decision with reasons

27.	I begin by considering the wording of s 91A.  I note that the section is confined in its scope to payments: s 91A(1).  The section is dealing with “site restoration payments”.

28.	“Site restoration payments” are defined in s 91A(4).   That sub-section does not define the word “payment”; it merely defines which payments are to be treated as site restoration payments. These payments are payments made in particular circumstances, being those mentioned in s 91A(4)(a) and (b).  As to what is meant by a “payment”, the section assumes that there is no need to define “payment”.  The reader is left to understand that term without the help of the section, or indeed anything else in ICTA.  

29.	“Payment” is a commonplace word.  Its dictionary definition is the action, or an act, of paying.  Paying is giving someone what is due to him in discharge of a debt owed.  Section 91A(4) sheds light on the circumstances in which, to be allowable as a deduction against profits, such discharge must have taken place.  It must have been “in connection with” the restoration of a site; and so as to comply with a “relevant licence” (as defined), allowing the use of the site for waste disposal activities, or with a “relevant obligation” (as defined).

30.	So, for the section to apply, one must look for the discharge of such a debt or debts during the period of account – in this case the year ended 31 December 2001.  That is shown by the final words of s 91A(2).  In this case, s 91A(8) helps identify the relevant period of account as that covered by the accounts of the Appellant received by HMRC on 7 January 2003.

31.	It is submitted by the Appellant that s 91A(3) shows that estimated expenditure not actually paid in a given period of account is properly treated as deductible in that period.  That is not however the role of s 91A(3) according to the wording.  Like sub-section (2), s 91A(3) is dealing only with payments.  Moreover it is dealing only with a payment made in a given period of account, being that treated in s 91A(2).  Section 91A(3) explains, in its opening words, that the payment made in a particular period of account, being that referred to in s 91A(2), is not after all deductible in certain circumstances, despite the wording of s 91A(2).  

32.	In my judgment, the only role of s 91A(3) is to cut down the scope of s 91A(2).  It is clear from the opening words of s 91A(3) that it is wholly parasitical upon the preceding sub-section.  It does not operate in its own right to identify an entitlement to deduct expenditure which has not been paid within the period of account, even if provision for such expenditure is properly included in accounts drawn in respect of that period.

33.	Rather, what s 91A(3) achieves is a methodology for identifying which amounts paid in the given period are deductible and which are excluded.  In my view it is obvious that the object of the sub-section is to prevent a double allowance against profits, by excluding actual payments to the extent that they have, in effect, already been allowed.

34.	Thus, s 91A(3)(b) excludes from being deductible from profits any payments which have been, or may be, allowed as capital expenditure under the enactments relating to capital allowances.  Similarly, s 91A(3)(a) reflects the informal practice, which was apparently applied in some instances before the ruling in the Rolfe case, of allowing, as deductions against profits, expenditure in respect of site restoration of landfill sites, provision for which had been made in a given period of account according to proper accounting principles. That practice was to allow such deductions for tax purposes even where no actual site restoration payments had taken place during the period.  Following the Rolfe case, all site restoration expenditure, being of a capital nature, fell to be disallowed; in other words, the informal practice was seen to have been wrong.

35.	Because the cost of restoring a landfill site was regarded as an expense of carrying on business using the site, it was understandable that the expenditure might be treated for accounting purposes as falling to be spread over a number of years.  In that regard, a landfill site has been likened to land acquired by a property developer who builds on it and sells it on, making the land “circulating capital”: see per Dillon LJ in the Rolfe case at 62 Tax Cases page 440 A–B.   After the Rolfe case, however, there could be no argument that such expenditure was other than on capital account.  

36.	It seems to me that s 91A(3)(a) does no more than allow for the fact that there must inevitably have been cases where, if actual payments have become deductible, as s 91A(1) and (2) provided that they would with effect from 1989-90, a double allowance could result wherever there has been provision allowed in previous accounts in respect of the expenditure that those payments represent.  That would be a consequence of the change from allowing provision for future payments (disapproved in the Rolfe case) to the new regime enacted by the Finance Act 1990.  Because of the change, scope must have existed for claiming allowances in respect of amounts allowed against profits in preceding years.  It was that possibility, in my view, that lay behind the enactment of s 91A(3)(a).

37.	I therefore reject Mr McGarry’s submission that s 91A(3)(a) implies that, notwithstanding the Rolfe case, provisions for future site restoration payments are in order.  Such provisions were only ever in order, and they are only in order now, so far as relating to revenue expenditure.  Nothing in s 91A makes them in order so far as relating to capital expenditure, which is how expenditure on site restoration has been characterised by the Rolfe case.

38.	It would be odd, as Ms Kennerley submits, if s 91A had the effect of allowing such provisions to be included in accounts for expenditure which is characterised as capital expenditure. In my judgment, very clear words would be necessary to show that this is intended. Mr McGarry argues that s 91A(3)(a) amounts to statutory recognition that, notwithstanding the Rolfe case, it is perfectly proper to allow a deduction for expenditure for site restoration which is not reflected by an actual payment.  He submits that, in the wake of that case, Parliament must have intended to reverse its effect by expressly catering for the Appellant’s situation, corresponding as it does with that mentioned in the sub-section.   

39.	However I think that, following the Rolfe case, a decision fell to be made how, if at all, this class of expenditure should be deductible.  It was, as it were, “back to the drawing-board”.  Without legislation at that juncture, there would be no legal basis for making any kind of allowance in respect of the site restoration, or indeed preparation, of landfill sites.  A fresh solution was called for.

40.	Contrary to Mr McGarry’s submission, the approach adopted in the case of site preparation is not so different from that in the case of site restoration.  Site preparation is dealt with in s 91B.  According to the formula to be adopted in the case of site preparation, there needs to have been expenditure incurred in or prior to the period of account to ground the claim for relief.   Section 91B(5) contains wording equivalent, in the case of site preparation, to s 91A(3), in the case of site restoration.   

41.	Parliament’s solution to the position following the Rolfe decision was to institute a regime that was tied to actual expenditure.  Had Parliament in addition intended to institute a regime tied not to actual expenditure but to provision for future expenditure, it would have legislated for that.  But that did not happen.  The only provision that Parliament made was for allowances by reason of actual expenditure. 

42.	In my view the oblique reference to the previous practice contained in s 91A(3)(a) is legislative confirmation that this alternative regime was not intended, as to infer otherwise would be contrary to the words used.  It is an example of the maxim of statutory interpretation, expressum facit cessare tacitum, or “express enactment shuts the door to further implication”.

43.	In my judgment, therefore, there is no room for implication that s 91A contemplates an allowance in a case like this, where the Appellant has not made any payments in the relevant period of account.  I accept that the requirement to make actual payments to be entitled to an allowance under s 91A may mean that, by the period in which such payments are made, a taxpayer’s trading position may be such that the deduction then available produces a loss, but this consequence cannot affect the operation of the section, which I regard as clear according to its terms.

44.	For the above reasons I disallow any part of the amount in dispute as properly deductible and I dismiss the appeal.  As I understand that there is no other dispute between the parties as to the amount of the corporation tax chargeable, I determine this to be £58,840.60, as shown in the revenue amendment dated 2 September 2005, there being no trade losses in the period.      

MICHAEL JOHNSON
SPECIAL COMMISSIONER

RELEASE DATE: 9 January 2007

Cases referred to in decision:

Owen (H M Inspector of Taxes) v Southern Railway of Peru Ltd (1956) 36 Tax Cases 602
RTZ Oil & Gas Ltd v Elliss (H M Inspector of Taxes) (1987) 61 Tax Cases 132
Rolfe (H M Inspector of Taxes) v Wimpey Waste Management Ltd (1989) 62 Tax Cases 399

Other cases cited not referred to in decision:

Marreco v Richardson [1908] 2 KB 584
Potel v Commissioners of Inland Revenue (1970) 46 Tax Cases 658
MacNiven (H M Inspector of Taxes) v Westmoreland Investments Ltd [2001] STC 237
DTE Financial Services Ltd v Wilson (H M Inspector of Taxes) [2001] STC 777 

SC/3051/2006