HM Inspector of Taxes v Mars UK Ltd

Taxable trading profits are first computed using accepted principles of commercial accountancy, subject to statutory adjustment. Section 74(1)(f) of the Income and Corporation Taxes Act 1988 imposes a general prohibition on deducting depreciation of capital assets in a Case I computation. That prohibition applies even where part of the depreciation is included in the cost of unsold stock and carried forward. Accounting treatment cannot alter the statutory character of the amount or prevent it being added back. Current accounting principles determine whether stock is carried forward at cost rather than value, and whether opening or closing stock is notionally bought or sold. The appeal was therefore allowed.

The Revenue appealed from the Special Commissioners’ decision allowing Mars UK Ltd’s appeal against an assessment of corporation tax. Mars manufactured food products and included a share of manufacturing depreciation in the carrying amount of unsold stock. In its tax computation it added back gross depreciation but deducted the cumulative depreciation included in closing stock.

The central issue was whether section 74(1)(f) of the Income and Corporation Taxes Act 1988 required the stock element of depreciation to be added back in the year in which it was included in stock, or whether it could remain embedded in the stock figure until sale. Related issues concerned the proper accounting treatment of stock and the relevance of earlier authorities.

1. Appeal allowed. The amount required to be added back was the full depreciation charge, including the £3,039,000 included in the valuation of unsold stock.
2. For tax purposes, trading profits are computed according to accepted principles of commercial accountancy unless the Tax Acts require adjustment. Current accounting principles establish that unsold stock is carried forward at cost, or cost if lower than net realisable value. They do not require a notional sale of closing stock or purchase of opening stock.
3. Section 74(1)(f) of the Income and Corporation Taxes Act 1988 prohibits any deduction or allowance for depreciation of capital assets in computing Case I taxable profits. The prohibition is general and overrides an accounting treatment which capitalises depreciation in unsold stock.
4. Mars’s accounts charged the full depreciation as an expense. The subsequent credit and inclusion of part of the amount in stock reflected accepted accounting practice, but did not change the character of that amount as depreciation or disapply section 74(1)(f).
5. The alternative reasoning of the Special Commissioners was rejected. The evidence established the effect of the credit, not that accounting practice meant only net depreciation had been deducted. There was no need to offset the stock element to prevent it becoming taxable income: by choosing to include the depreciation in closing stock, Mars had turned that amount into income in effect.
6. The observations in Secan v CIR were of limited assistance. The court also applied the purposive statutory approach stated in Barclays Mercantile Business Finance Ltd v Mawson.

The appeal was brought to the High Court from a decision of the Special Commissioners released on 8 March 2004. The Commissioners had allowed Mars’s appeal against the corporation tax assessment. The High Court allowed the Revenue’s appeal.