Inland Revenue Comrs v John Lewis Properties plc

Whether a receipt is capital or income is determined by its commercial reality, assessed from all the circumstances. No fixed rule makes every lump sum for future income capital, or every payment calculated by reference to profits income. Relevant considerations include the duration and value of the right disposed of, diminution in the assignor’s interest, recurrence, whether consideration is paid once and for all, and transfer of risk. Permanent impairment is unnecessary. The majority held that a substantial lump sum for the assignment of several years’ rents was capital because it was paid for the disposal of a valuable income right and temporarily diminished the reversion. Juristic labels and the calculation of the price by reference to discounted rent were not determinative.

John Lewis Properties plc owned five investment properties let to John Lewis plc. It assigned to Rabobank the right to receive approximately six rents payable over just over five years for £25,556,762.55, supported by guarantees and related financial arrangements.

The Special Commissioner held that the proceeds were capital. Lightman J dismissed the Inland Revenue’s appeal, reported at [2002] 1 WLR 35 and [2001] STC 1118. The Revenue appealed to the Court of Appeal. The principal issue was whether the proceeds were capital or income and, if income, under which head of charge they were taxable.

1. Majority outcome. Dyson LJ and Schiemann LJ dismissed the appeal. Arden LJ dissented and would have allowed it. The respondent recovered its costs of the appeal and below, and permission to appeal to the House of Lords was refused.
2. Applicable approach. Capital and income are commercial concepts. The court must examine the practical and business reality of the whole transaction and all relevant circumstances. Juristic classifications, such as an assignment of land or a chose in action, are not decisive. The approach was supported by (1946) 72 CLR 634, [1935] AC 431, [1966] AC 295 and [2001] 2 WLR 377.
3. Relevant factors. Dyson LJ identified the duration and value of the asset assigned, any diminution in the assignor’s interest and its amount, whether consideration was a single lump sum or recurring, and any transfer of risk. No factor was conclusive. A diminution was assessed at the date of assignment and need not be permanent. A transfer of merely theoretical risk carried less weight.
4. Application. The assignment was a once-and-for-all disposal for a substantial lump sum of a valuable right to receive six years’ rents. It diminished the value of JLP’s reversionary interests and transferred, although only imperfectly, the risk of default. The majority considered the transaction materially comparable, from JLP’s commercial perspective, to receiving a premium for granting leases at nominal rents. The fact that the price represented discounted rent did not make it income. The proceeds were therefore capital.
5. Minority reasoning. Arden LJ considered that the transaction was commercially an arrangement to discount recurring rents. The assignment was short compared with JLP’s ownership, the properties’ income-producing capacity was preserved, and the transfer of risk was largely theoretical. She would have treated the proceeds as income. If income, she considered that Schedule A, or alternatively Case VI of Schedule D, would bring them into charge. Dyson LJ agreed with that conditional head-of-charge reasoning, but it was unnecessary to the majority disposition.

• Court of Appeal — Appeal dismissed by Dyson LJ and Schiemann LJ; Arden LJ dissented: [2002] EWCA Civ 1869.
• High Court, Chancery Division — Lightman J dismissed the Revenue’s appeal from the Special Commissioner: [2002] 1 WLR 35; [2001] STC 1118.
• Special Commissioner — Held on 5 September 2000 that the proceeds were a capital receipt.