Expenditure that would have been capital had it been successful
does not change its character merely because in the event it is
abortive. ECC Quarries Ltd v Watkis [1975] 51TC153 was concerned
with costs incurred in an unsuccessful planning application.
If the application had succeeded the expenditure would have
been capital. In the event the application failed; no asset was
acquired or modified (and the company did not rid itself of any
disadvantageous asset).
Brightman J, in the face of unchallenged accountancy
evidence, held that the abortive expenditure was capital. At page
176A he explained that accounts prepared to the requirements of the
Companies Acts do not thereby yield the correct profit for income
tax purposes:
In the case before me there is unchallenged accountancy evidence but no finding by the Commissioners as to established accountancy practice. I do not think that it would help in the least to remit this case to the Commissioners (no one has asked me to) for a finding on this point. I am satisfied that the correct accountancy practice is a question of law to be decided, no doubt, in the light of any evidence of established accountancy practice and the reported authorities. I have formed my own view, on the basis of the decided cases, that the expenditure in issue before me was of a capital nature. The accountancy evidence in the present case is not sufficient to persuade me to alter that view. In reaching this conclusion I do not intend to say that it would be erroneous in drawing up a balance sheet for the purposes of the Companies Act, to debit the cost of the unsuccessful planning applications against revenue or to appropriate the balance of profit towards that expenditure. Accounts which are drawn up to comply with the Companies Act and to show shareholders what is the divisible profit involve a somewhat different exercise from the drawing up of accounts on strict accountancy principles, and I am not concerned with the statutory form of accounts.
You see that the judge recognises that accounts drawn up under the Companies Act provisions serve a somewhat different purpose.
