Able (UK) Ltd. v Revenue & Customs

Compensation is an income receipt where it replaces profits lost through the temporary interruption of a capital asset’s use, even if later market changes make those profits permanently unrecoverable. A capital receipt is possible where payment represents the once-and-for-all realisation or exhaustion of a distinct profit source and diminishes the asset’s capital value. Classification depends on what the compensation was paid for and the nature of the receipt the trader would otherwise have earned. The court rejected a formulaic use of fixed indicia. The method used to calculate compensation does not determine its character.

Able (UK) Ltd operated a landfill tipping site. Part of the site was subject to a compulsory purchase order, and the taxpayer was excluded for just over three years. After withdrawal of the order, it received £2,185,000 under s.31(3) of the Land Compensation Act 1961. The General Commissioners treated the compensation as income, and Briggs J upheld that conclusion in [2006] EWHC 3046 (Ch). On a second appeal, the central issue was whether the payment compensated the taxpayer for an exhausted capital source or for profits lost during a temporary interruption of trading use.

Appeal dismissed unanimously. Moses LJ gave the leading reasons. Buxton LJ and Lawrence Collins LJ agreed.

1. The characterisation of compensation as capital or income depends on two questions: what the compensation was paid for, and whether the sum which the trader would otherwise have received would have been an income receipt. The issue is approached in light of all relevant circumstances, from a practical and business viewpoint, using judicial common sense. A formulaic application of fixed indicia is inappropriate, particularly outside the circumstances in which those indicia were developed, as illustrated by IRC v John Lewis Properties [2002] EWCA Civ 1869.
2. Compensation may be capital where it represents the once-and-for-all realisation of the capital value of an asset or of one distinct source of profit. This can occur even though the asset and the rights in it remain with the taxpayer, provided that the relevant profit-earning capacity has been exhausted and the value of the asset is thereby diminished. The reasoning in Glenboig Union Fireclay Co Ltd v IRC 12 TC 427, Haig’s (Earl) Trustees v IRC 22 TC 725 and McClure v Petre [1988] 1 WLR 1386 illustrated that principle.
3. Where use of a capital asset is only temporarily interrupted and its profit-earning capacity remains intact, compensation for the resulting loss of use or profits is income. The fact that a later change in market conditions means that the lost profits cannot subsequently be recovered does not convert the receipt into capital. The court applied the reasoning in London and Thames Haven Oil Wharves Ltd v Attwooll 43 TC 491, White v Davies [1979] 1 WLR 908 and Ensign Shipping Co Ltd v IRC [1928] 14 TC 1169.
4. The method by which compensation is calculated, including a comparison of discounted future income streams, does not determine whether the receipt is capital or income: Strick v Regent Oil Co Ltd [1966] AC 295.
5. As additional appellate guidance, conclusions of a specialist tribunal on this fact-and-degree issue should be approached with circumspection. Once a receipt is legally capable of being characterised as either capital or income, review should be confined to the principles in Edwards v Bairstow [1956] AC 14.
6. The temporary exclusion from the site did not exhaust any source of profit. The site remained licensed for general and special waste, and its inability to exploit the general-waste market after possession was restored resulted from changed market conditions. The compensation replaced profits lost during the interruption. The General Commissioners had made no error of law, and the appeal was dismissed.

• Court of Appeal (Civil Division): dismissed the taxpayer’s second appeal. [2007] EWCA Civ 1207.
• High Court, Chancery Division: Briggs J upheld the General Commissioners’ conclusion that the compensation was income. [2006] EWHC 3046 (Ch).
• General Commissioners: determined that the compensation was an income receipt.