Press Release
28 March 2007
McGrigors LLP welcomes House of Lords ruling bringing tax laws up to date with accepted accounting principles
Her Majesty’s Revenue & Customs (Respondents) v. William Grant & Sons Distillers Limited (Appellants) (Scotland)
Small (Her Majesty’s Inspector of Taxes) (Respondent) v. Mars UK Limited (Appellants)
Conjoined Appeals
Leading UK law firm McGrigors acted for William Grant & Sons Distillers Limited in a landmark ruling on taxing company profits.
Background
The House of Lords today ruled in favour of the taxpayer in the conjoined cases of William Grant and Mars. This decision will be welcomed by the many businesses that would have been taxed prematurely had the House of Lords ruled in favour of HMRC.
The cases concerned how much of a company's profit should be taxed in any given accounting period. Tax law requires that a company's taxable profits are not reduced by any deduction for capital employed in the business (relief is given in other forms, such as capital allowances). The law achieves this be treating depreciation of such capital as a non-deductible expense in calculating taxable profits, whereas such depreciation is treated as an expense in calculating the commercial profit shown in the accounts. Depreciation is "added back" on to the commercial profit to arrive at the taxable profit.
William Grant and Mars had followed the modern approach to assessing commercial profits of booking expenses for profit purposes only when stock is sold, not when the expense is incurred. Depreciation of the assets used directly in the production of stock is one of those expenses. Accordingly, the depreciation is only booked as an expense when the stock is sold, not when the asset itself depreciates. For companies holding stock for some time, this can be a significant delay and some depreciation may be booked as an expense after the asset itself has been depreciated in full.
However, HMRC sought to argue that the depreciation that needed to be added back for tax purposes was the full amount of depreciation in the period, irrespective of any depreciation which had been carried forward in this way.
The House of Lords overwhelmingly rejected this notion by 5 votes to nil, holding that, if a company had followed modern, generally accepted accounting principles in booking depreciation as an expense only when stock is sold, tax law should not ignore this and require a different figure to be added back when calculating taxable profits. The actual amount booked as an expense in the period must be used. Any other approach would result in the wrong amount of profit being brought into account.
Dennis Dixon, at McGrigors, the law firm who acted for William Grant, said,
"This decision must be right. It was illogical for HMRC to have sought to ignore the way depreciation had actually been treated in calculating the commercial profit, using generally accepted, modern accounting principles. The effect of adding back the whole the depreciation, even though an element had been carried forward, had the effect of taxing the company on that amount carried forward, and subsequently giving relief in the period when stock was eventually sold and the carried forward depreciation booked as an expense. HMRC would have collected tax prematurely."
Jason Collins, Head of Tax Litigation at McGrigors said,
"It would be a nonsense if tax law failed to keep up to date with accepted accounting principles, particularly where those principles are evolving because the profession believes the new principles more properly reflect the real profit made by a business. There was no question of those principles seeking to treat income as capital or vice versa, and tax law should remain neutral in these circumstances.
Carrying depreciation forward in this way is an internationally recognised standard. Large corporates will breathe a sigh of relief that HMRC has not been permitted to tax them prematurely if they use this standard. The House of Lords has stopped HMRC from making it less attractive for large corporates to do business in the UK."
McGrigors has a specialist tax litigation and regulation team which is fully dedicated to tax litigation, dispute resolution, compliance and regulation.
For further information please contact:
Louisa Hollins
Financial Dynamics
Telephone - +44 (0) 20 7269 7108
Email - Louisa.hollins@fd.com
Andy Peat
Financial Dynamics
Telephone - +44 (0) 20 7269 7185
Email - andy.peat@fd.com