The Court of Appeal upheld a decision of the High Court that a sum paid to the taxpayer company as compensation for the temporary interruption of the use of its land as a landfill site was to be treated as income rather than capital for tax purposes.

Facts

The taxpayer company owned land intended for use as landfill. A sewerage undertaker made a compulsory purchase order (CPO) in respect of part of the land for the construction of sewerage treatment works and took possession of the land. After three years the CPO was withdrawn. In that period the market for household/ general waste had reduced significantly. Consequently, by the time that the CPO site was back within the taxpayer's possession, the only real significant waste disposal market open to the taxpayer was hazardous/ contaminated waste. The taxpayer was awarded the sum of £2,185,000 as compensation under s. 31(3) of the Land Compensation Act 1961 for its loss of the use of the land for the relevant period and treated that sum as a capital receipt.

The Revenue and Customs Commissioners disagreed, taking the view that it was income and (following an enquiry) issued a notice of amendment against which the taxpayer appealed unsuccessfully to the general commissioners. The general commissioners found that the taxpayer had suffered no permanent loss but merely the interruption of its use of the land and that its claim had been for loss of profits. The High Court upheld that decision on the basis that there had been only a temporary interference with the taxpayer's use of its fixed asset. The taxpayer appealed to the Court of Appeal arguing that the temporary disruption to use of the landfill site had the consequence of a permanent exhaustion of the opportunity to use the site for general waste, thereby diminishing its value. The compensation was paid to make good the permanent loss of that particular opportunity, diminishing the capital value of the site and not to replace the profits which would otherwise have been earned by using the site for general waste.

Issue

Whether the compensation paid to the taxpayer was income or capital.

Decision

Moses LJ (Buxton and Lawrence Collins LJJ agreeing) (dismissing the appeal) said that consideration received for the once and for all realisation of the capital value of an asset was capable of being a capital receipt, notwithstanding that the asset remained in existence and was the property of the recipient. That principle might be applied to cases where an asset had the capacity to provide a number of distinct sources of income and the capital value of the asset reflected each of those sources. If one particular source was exhausted or realised, then consideration or compensation paid therefor might constitute a capital receipt if the value of the asset, which had hitherto reflected all those sources of profit to be derived from that asset, was diminished. It was only where compensation was paid for the destruction or exhaustion of a source of profit that it was capable of constituting capital and not income (Glenboig Union Fireclay Co Ltd v IR Commrs (1922) 12 TC 427, Earl Haig's Trustees v IR Commrs (1939) 22 TC 725 and McClure (HMIT) v Petre [1988] BTC 377 considered). The flaw in the taxpayer's argument was that it was not possible to identify any source of income, derived from the landfill site, which was exhausted or realised. The value of the land depended upon its capacity, as a landfill site, to produce profits from the deposit of waste. That capacity was temporarily interrupted by the service of the CPO. But its capacity was not in any way exhausted. The landfill site continued to be licensed for the deposit of both general and special waste. Once the temporary interruption to its use ceased, the site remained unaffected as a potential source of profit from the deposit of general waste. But its potential could not be fulfilled because of the change in the market. The cause of the taxpayer's inability to use it for the deposit of general waste was, as the general commissioners found, that alteration in market conditions. The temporary interruption to the use of the site had no permanent impact on the site as source of profit from the deposit of general waste. The present case could not be distinguished from other cases in which compensation paid for temporary loss of use of a capital asset had been recognised as an income receipt (London and Thames Haven Oil Wharves Ltd (HMIT) v Attwooll (1966) 43 TC 491, White v Davies [1979] 1 WLR 908 and Ensign Shipping Co Ltd v IR Commrs (1928) 12 TC 1169 considered). There was no error of law in the general commissioners’ approach, nor in their conclusion. Court of Appeal (Civil Division).

Court of Appeal (Civil Division)
Judgment delivered 21 November 2007.