Although the numbers are large in the recent First-tier Tribunal case of West Burton Property Ltd v HMRC [2021] UKFTT 160 (TC), the principle is straightforward and the decision is interesting. We predict that it will go to appeal.
West Burton Property Ltd (‘WBPL’) owned a power station which it let to its parent company. It routinely incurred expenditure of a revenue nature on maintaining it. But instead of deducting the expenditure in the year in which it was incurred, its accounting policy (confirmed to be fully compliant with UK Generally Accepted Accounting Practice) had long been to carry it forward as ‘deferred revenue expenditure’ (‘DRE’) and amortise it over the following four years, over which period it was (presumably) allowed for tax purposes against rental income. So far, so uncontroversial: the company was following the basic principle of matching expenditure against income.
In 2011, WBPL sold the power station to its parent company, which continued to operate it. The transfer was at ‘book value’ meaning that the parent was charged an amount equal to the aggregate value in WBPL’s books of (a) the depreciated cost of the power station (some £179m) plus (b) the DRE (some £65m).
WBPL claimed that it was entitled to deduct the £65m in computing its rental income for 2011. At first blush, this is a surprising claim given that nothing was charged in the profit and loss account – the benefit of the DRE had (in effect) been sold to the parent along with the power station and logic might therefore suggest that if anyone was to get relief for the DRE it would be the parent, in future accounting periods.
But logic, as readers will appreciate, is sometimes a stranger to tax. The company persuaded itself (and, more importantly, the Tribunal) that – contrary to all appearances – the £65m DRE was in reality recognised or accounted for in the profit and loss account, as was the £65m received. The DRE was, as revenue expenditure, a proper deduction in computing rental profit for the year; the £65m received was a capital receipt (being part of the capital proceeds for the sale of the power station) and was not (again, contrary to appearances) a taxable reimbursement of the DRE.
Hence the expenditure, which would in the normal way of things have been relieved over four years, became a tax-allowable deduction in full in the year in which the power station moved from the subsidiary to the parent.
Hmm. We wonder whether the Upper Tribunal will see it that way?
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