Over the years the Courts have been concerned with the time at
which profits are to be brought into charge to tax under Case I and
II of Schedule D, and a number of judge made principles have
emerged. But in recent years the Courts have become increasingly
reluctant to discern judge made tax principles which override
generally accepted commercial accounting practice.
What is, or is not, commercially acceptable accounting
treatment is a question of fact not law. Furthermore the Courts
have recognised that accounting practice evolves over time. In
principle, therefore, it is possible for a modern Court to come to
a different decision from one taken in the past on the sole grounds
that the accounting treatment has changed. This is because two
cases can be distinguished on the basis of their accountancy facts,
even though the other facts may be identical. The Courts therefore
have proceeded to ensure that the law does not become tied to out
dated accountancy practice and to decisions taken where judges were
forced to take a view of commercial practice in the absence of any
accountancy evidence at all.
In Odeon Associated Theatres Ltd v Jones [1971] 48TC257 the
courts were concerned with the accounting treatment of deferred
repairs of a property transferred from one group member to another.
Salmon L.J said at page 281B that:
“In solving this question as to what is
the true profit: “…first… the ordinary principles
of commercial accounting must, as far as practicable, be observed,
and, secondly,… the law relating to income tax must not be
violated… that is to say, by one means or another the full
amount of the profits or gains must be determined”.'
In recent years three important cases have been decided. See
Threlfall v Jones and Gallagher v Jones [1993] 66TC77, (the
judgement in the Court of Appeal) Johnston v Britannia Airways Ltd
[1994] 67TC99, and specifically on the timing of receipts, Symons v
Lord Llewellyn Davies’ Personal Representative and Others
[1982] 56TC630.
These cases were concerned, not with whether an item of
income or expenditure is ever taxable or deductible, but when. In
particular the Courts:
‘With great respect I would suggest that this might equally be described as a re-statement in a particular context of the statutory rule, in s 60 of the Act, that tax shall be charged “on the full amount of the profits or gains of the year”–no more and no less. But whatever the content of the expression “the principles of income tax law” may be I conclude as did Pennycuick J., that the law does not enable or require us to ascertain the profit of a trade on a basis divorced from the principles of commercial accountancy’.
“…the central issue is at root a
very short one. The object is to determine, as accurately as
possible, the profits or losses of the taxpayers' businesses for
the accounting periods in question. Subject to any express or
implied statutory rule, of which there is none here, the ordinary
way to ascertain the profits or losses of a business is to apply
accepted principles of commercial accountancy. That is the very
purpose for which such principles are formulated. As has often been
pointed out, such principles are not static: they may be modified,
refined and elaborated over time as circumstances change and
accounting insights sharpen. But so long as such principles remain
current and generally accepted they provide the surest answer to
the question which the legislation requires to be answered. As
Pennycuick V.-C. pointed out in Odeon Associated Theatres Ltd,
different considerations arise where there is no accounting
evidence or where there are two or more principles either or any of
which is generally accepted. But those considerations do not apply
here. The authorities do not persuade me that there is any rule of
law such as that for which the taxpayers contend and the judge
found. Indeed, given the plain language of the legislation, I find
it hard to understand how any judge-made rule could override the
application of a generally accepted rule of commercial accountancy
which (a) applied to the situation in question, (b) was not one of
two or more rules applicable to the situation in question and (c)
was not shown to be inconsistent with the true facts or otherwise
inapt to determine the true profits or losses of the
business”.
In Britannia Mr Justice Knox said at page 123E that
“The court is slow to accept that
accounts prepared in accordance with accepted principles of
commercial accountancy are not adequate for tax purposes as a true
statement of the taxpayer's profits for the relevant period. In
particular, it is slow to find that there is a judge-made rule of
law which prevents accounts prepared in accordance with the
ordinary principles of commercial accountancy from complying with
the requirements of the tax legislation”.'
The judge in the Britannia case was not implying a new
departure on issues like the capital/revenue borderline. But in the
field of timing the cases do signal a substantial increase in the
influence of accountancy.
