A special commissioner decided that a company was not entitled to take advantage of ICTA 1988, s. 91A to deduct from its profits an amount for the cost of reinstating its tipping site, which did not represent expenditure incurred during the period of account, but included by way of provision a best estimate of expenditure which the taxpayer would be obliged to incur at a later date.

Facts

The taxpayer operated a tipping site. Under its legal obligations entered into with the council, the taxpayer had to ‘cap’ the site, i.e. restore the surface of the filled site to a permanent high standard sometime in the future. The eventual expense of so doing constituted an important element in the cost of running its business.

Secion 91A (inserted by the Finance Act 1990) provided that where on or after 6 April 1989 a person made a site restoration payment in the course of carrying on a trade for the purposes of income tax or corporation tax the payment should be allowed as a deduction in computing the profits of the trade for the period of account in which the payment was made.

Section 91A(3) provided for an exception in respect of so much of the payment as represented expenditure which had 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 was made; or represented capital expenditure in respect of which an allowance had been, or might be, made under the enactments relating to capital allowances.

For the purposes of s. 91A, a site restoration payment was a payment made in connection with the restoration of a site or part of a site, and 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. Waste disposal activities were the collection, treatment, conversion and final depositing of waste materials, or any of those activities.

An enquiry into the taxpayer's accounts and return for the year ended 31 December 2001 was opened by the issue of a notice dated 29 May 2003.The profit and loss account contained a deduction of £619,883 for land reinstatement which did not include any amounts actually paid during the period of the accounts. As the parties could not agree on the interpretation of s. 91A, closure notice was issued disallowing the £619,883 in the computations, followed by a Revenue amendment issued on 5 September 2005.

The taxpayer appealed, contending that the section authorised the deduction from profits of the amount of provision for land reinstatement made in its accounts.

The Revenue contended that the section had no application and that no amount was properly deductible in relation to the relevant period of account for the cost of land reinstatement.

Issue

Whether the taxpayer was able to take advantage of ICTA 1988, s. 91A.

Decision

The special commissioner (Michael Johnson) dismissing the appeal) said that s. 91A was confined in its scope to ‘site restoration payments’ defined in 91A(4). That sub-section did not define the word ‘payment’ but merely which payments were to be treated as site restoration payments. ‘Payment’ was a commonplace word. Its dictionary definition was the action, or an act, of paying. Paying was giving someone what was due to him in discharge of a debt owed. Section 91A(4) shed 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’, allowing the use of the site for waste disposal activities, or with a ‘relevant obligation’. So, for the section to apply, one had to look for the discharge of such a debt or debts during the period of account, in this case the year ended 31 December 2001.

The taxpayer had submitted that s. 91A(3) showed that estimated expenditure not actually paid in a given period of account was properly treated as deductible in that period. However, the only role of s. 91A(3) was to cut down the scope of s. 91A(2). It did not operate in its own right to identify an entitlement to deduct expenditure which had not been paid within the period of account, even if provision for such expenditure was properly included in accounts drawn in respect of that period. Rather, s. 91A(3) achieved a methodology for identifying which amounts paid in the given period were deductible and which were excluded. The object of the sub-section was to prevent a double allowance against profits, by excluding actual payments to the extent that they had, in effect, already been allowed.

Thus, s. 91A(3)(b) excluded from being deductible from profits any payments which had been, or might be, allowed as capital expenditure under the enactments relating to capital allowances. Similarly, s. 91A(3)(a) reflected the informal practice, which was apparently applied in some instances before the ruling in Rolfe (HMIT) v Wimpey Waste Management Ltd [1989] BTC 191, 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.

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 had been likened to land acquired by a property developer who built on it and sold it on, making the land ‘circulating capital’. After the Rolfe case, however, there could be no argument that such expenditure was other than on capital account.

Accordingly, s. 91A(3)(a) did no more than allow for the fact that there must inevitably have been cases where, if actual payments had become deductible, as s. 91A(1) and (2) provided that they would with effect from 1989–90, a double allowance could result wherever there had been provision allowed in previous accounts in respect of the expenditure that those payments represented. It would be odd if s. 91A had the effect of allowing such provisions to be included in accounts for expenditure which was characterised as capital expenditure. Very clear words would be necessary to show that that was intended.

Following the Rolfe case, a decision fell to be made how, if at all, that class of expenditure should be deductible. 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. Parliament's solution 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.

Therefore, there was no room for any implication that s. 91A contemplated an allowance in a case where the taxpayer had not made any payments in the relevant period of account. The requirement to make actual payments to be entitled to an allowance under s. 91A might mean that, by the period in which such payments were made, a taxpayer's trading position might be such that the deduction then available produced a loss, but that consequence could not affect the operation of the section, which was clear according to its terms.

(2007) SpC 579.
Decision released 9 January 2007.