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	United Kingdom Special Commissioners of Income Tax Decisions
You are here: BAILII >> Databases >> United Kingdom Special Commissioners of Income Tax Decisions >> Mars UK Ltd & Anor v Inspector of Taxes & Anor [2004] UKSC SPC00408 (08 March 2004) URL: http://www.bailii.org/uk/cases/UKSPC/2004/SPC00408.html Cite as: [2004] UKSC SPC00408, [2004] UKSC SPC408

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CORPORATION TAX - treatment of depreciation in stock - in preparing the financial statements gross depreciation was shown and then reduced by the amount of depreciation in stock leaving net depreciation - net depreciation was deducted in arriving at the accounting profits and depreciation in stock was capitalised - when adjusting the accounting profits for tax purposes only net depreciation was added back; the depreciation in stock was carried forward and deducted from profits in the year in which the stock was sold - the Inland Revenue argued that in each year the gross depreciation should be added back for tax purposes - whether, in making the tax adjustments to the accounting profits, gross depreciation should be added back - no - or whether net depreciation should be added back with the depreciation in stock being added back in the year in which the stock was sold - yes - appeal allowed - TA 1988 s 74(1)(f)

THE SPECIAL COMMISSIONERS

MARS UK LIMITED Appellant

- and -

TREVOR WILLIAM SMALL

(H M INSPECTOR OF TAXES)

Respondent

WILLIAM GRANT & SONS DISTILLERS LIMITED

Appellant

- and -

THE COMMISSIONERS OF INLAND REVENUE

Respondents

SPECIAL COMMISSIONERS: DR NUALA BRICE

JOHN WALTERS QC

Sitting in public in London on 15, 16 and 17 December 2003

Graham Aaronson QC, instructed by Messrs Dorsey & Whitney Solicitors, for both Appellants

David Milne QC and Rupert Baldry, instructed by the Solicitor of Inland Revenue, for both Respondents

© CROWN COPYRIGHT 2004


 


DECISION

The appeal

1. Mars UK Limited (Mars) appeals against part of an assessment for the year ended 28 December 1996. The disputed amount is £1,969,335.76 and was assessed because the Inland Revenue were of the view that cumulative depreciation in stock up to 31 December 1996 should be brought within the charge to tax for that year.
2. William Grant & Sons Distillers Limited (William Grant) refers a question to the Special Commissioners for determination in connection with the subject matter of an enquiry into their return for the year ended 28 December 2002. The question is whether, for the purposes of corporation tax, the gross amount of depreciation is required to be added back in arriving at taxable profits or whether only the net amount (after adjusting for depreciation included in opening and closing stock) is to be disallowed.
3. We were informed that these appeals were in the nature of test cases and that there were thirteen other companies with similar issues.

The legislation

4. Section 74 of the Income and Corporation Taxes Act 1988 (the 1988 Act) provides:

"74 General rules as to deductions not allowable

(1) Subject to the provisions of the Tax Acts, in computing the amount of the profits to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of- …

(f) … any sum employed or intended to be employed as capital in, the trade …. ."

5. As from 6 April 1999 section 42 of the Finance Act 1998 (the 1998 Act) provided:

"42 Computation of profits of trade, profession or vocation

(1) For the purposes of Case I or Case II of Schedule D the profits of a trade … must be computed in accordance with generally accepted accountancy practice, subject to any adjustment required or authorised by law in computing profits for those purposes. …

(3) This section applies to periods of account beginning after 6 April 1999."

6. For completeness we set out the charging provision relative to Case I of Schedule D (part of section 18 of the 1988 Act):

"18 Schedule D

(1) The Schedule referred to as Schedule D is as follows–

SCHEDULE D

Tax under this Schedule shall be charged in respect of –

(a) the annual profits or gains arising or accruing–

(i)to any person residing in the United Kingdom from any kind of property whatever …

(2)Tax under Schedule D shall be charged under the Cases set out in subsection (3) below, and subject to and in accordance with the provisions of the Tax Acts applicable to those Cases respectively.

(3)The Cases are–

Case I: tax in respect of any trade carried on in the United Kingdom or elsewhere …"

The issue

7. We have adopted three definitions agreed by the expert witnesses. "Gross depreciation" is the gross amount of the charge for depreciation calculated for the year on fixed assets. "Depreciation in stock" is that element of depreciation on fixed assets that is included in the carrying amount (or value) of unsold trading stock in a company's balance sheet at the end of the year. "Net depreciation" is the gross depreciation charge after adjustment for depreciation in stock.
8. In preparing their financial statements both Appellants included in the cost of unsold trading stock the overhead costs incurred in producing the trading stock. At the end of the year depreciation on manufacturing fixed assets was treated as an overhead cost, capitalised and included in the carrying value (i.e. the balance sheet value) of closing stock and carried forward to the next year. The gross depreciation was debited in the profit and loss account followed by a simultaneous credit to the profit and loss account to adjust for the capitalisation of the depreciation in stock. The other side of the double entry dealing with this adjustment was a debit to the carrying value of closing stock (thereby increasing that carrying value by the amount of depreciation in stock). The amount of the final accounting profits was calculated by deducting net depreciation and not gross depreciation.
9. Because section 74(1)(f) of the 1988 Act prohibits, for tax purposes, the deduction of sums employed as capital in the trade, and because depreciation in respect of fixed assets is a deduction in respect of capital, the accounting profits shown in any trader's profit and loss account (although they are computed in accordance with generally accepted accounting practice) have to be adjusted for tax purposes by cancelling the deduction for depreciation. This cancelling is known as "adding back". In preparing their tax computations the Appellants added back the amount of net depreciation but did not add back the amount of depreciation in stock; depreciation in stock was carried forward and effectively added back in the year when the stock was sold.
10. The Inland Revenue accepted that both Mars and William Grant had computed their accounting profits in accordance with generally accepted accounting practice. However, they argued that gross depreciation, including depreciation in stock, had been deducted in the accounting period and so should be added back in the accounting period. The Appellants argued that the depreciation in stock had not been deducted from the accounting profits and so it was wrong to require it to be added back to the accounting profits for tax purposes.
11. Thus the issue for determination in the appeals was whether the amount representing depreciation in stock should be added back in the accounting period.

The evidence

12. Oral evidence was given on behalf of Mars by Mr Richard Collier-Keywood, the Head of Tax at PricewaterhouseCoopers LLP (PricewaterhouseCoopers) who advised Mars. A witness statement by Ms Linda Bacon, a Financial Controller and later Finance Director of Mars, containing evidence on behalf of Mars, was not objected to by the Respondents and so was admitted in evidence at the hearing. Oral evidence was given on behalf of William Grant by Mr Ewan Henderson, the Group Tax and Finance Manager of William Grant.
13. Expert evidence on behalf of both Appellants was given by Mr Peter Holgate. Mr Holgate is a Fellow of the Institute of Chartered Accountants; a member of the Accounting Standards Board's Urgent Issues Task Force; a member of the Financial Reporting Committee and Research Board of the Institute of Chartered Accountants of England and Wales; and a member of the International Accounting Committee of the Consultative Committee of Accountancy Bodies. Between 1984 and 1986 he was the Secretary of the United Kingdom Accounting Standards Committee which set accounting standards including SSAP 9 and SSAP 12. Mr Holgate heads the United Kingdom Technical Department at PricewaterhouseCoopers which department is principally concerned with advising the firm and its clients on technical accounting matters.
14. Expert evidence on behalf of the Inland Revenue was given by Mr Thomas Charles Carne, the Advisory Accountant to the Board of Inland Revenue. Mr Carne is a Chartered Accountant and spent nine years in private practice and industry before joining the Inland Revenue in 1978. He then spent seven years as an Accountancy Advisor/Investigator in Enquiry Branch after which he took up the position of Accountancy Advisor to International Division. He spent six years there before taking up his present position.
15. After both experts had prepared their reports they met on 20 November 2003 to discuss their areas of agreement and disagreement. They then produced a joint report dated 4 December 2003 which was also before us.

The facts

16. From the evidence before us we find the following facts.

Mars

17. Mars is a subsidiary of Mars Incorporated (Mars Inc), a United States company. Mars Inc determines the worldwide policy for group activities and local management implements those policies. Mars manufactures and sells food for human consumption (especially confectionery) and pet food. The internal structure of Mars consists of a number of units which operate independently of each other although all activities are reported as a single business for statutory reporting purposes.

Mars - financial reporting

18. The financial reporting procedures followed by each unit are described in the Mars Finance Manual (the Manual) which all units in all territories must follow. The Manual recognises that Mars Inc is privately owned but nonetheless requires that United States Generally Accepted Accounting Procedures (US GAAP) are followed. All levels of the organisation must conduct their financial activities according to properly approved and written policies and procedures. At least since 1994 the Manual has provided:

"Manufacturing units will be expected … to value inventories at the lower of actual cost or market value." (Chapter 11, section C, subject 03, paragraph 1); and

"Finished goods represents the total costs of producing the finished product. The general principle is to record inventory each period at actual, fully absorbed cost in accordance with the requirement of generally accepted accounting principles. Therefore, conversion costs must be applied to inventory at every period through either the inventory valuation adjustment or the overhead in inventory adjustment. …

D Overhead in Inventory

Other manufacturing costs are to be included in the calculation of overhead in inventory every period. Example of such costs include: …

Manufacturing historic book depreciation … ." (Chapter 11, section C, subject 03, paragraph IV).

19. Thus the cost of closing stock included the cost of the overheads used in its production, including the depreciation on fixed assets used in the manufacturing process. The actual calculation of depreciation in stock was made in accordance with written instructions. These stated that, in order to reflect the relationship of costs incurred to production of inventory, certain manufacturing costs were included in the valuation of finished goods held as stock at the end of the year in accordance with SSAP 9. Examples of such manufacturing costs included manufacturing depreciation. In order to make the calculation one had to take the total overheads figure (including depreciation) for the year and divide it by the total production of goods during the year and then multiply it by the stock level at the end of the year.
20. The statutory accounts for the year 1996 indicated that the gross amount of depreciation was shown as a charge in the profit and loss account and the amount for depreciation in stock was then credited to the profit and loss account. Thus the net effect was that it was only net depreciation which was charged as an expense (deducted from profits) in the year. The approach adopted by Mars is consistent with UK GAAP and with SSAP 9.

Mars - tax computations

21. Thus Mars prepared their statutory accounts on the basis that part of the annual depreciation charge was included in the cost of unsold stock on hand at the year end. However, until 1996, when adding back depreciation for corporation tax purposes, Mars used to add back, to the accounting profits, gross depreciation, namely the whole of the year's depreciation charge, including depreciation in stock.
22. Prior to the signature of the 1996 accounts PricewaterhouseCoopers became aware that depreciation in stock may have been treated incorrectly for tax purposes. They noted that other manufacturers also debited gross depreciation to the profit and loss account and then credited to the profit and loss account the amount of depreciation in stock; however, for tax purposes they added back the amount of the gross depreciation. Messrs PricewaterhouseCoopers formed the view that this meant that taxable profits were being over-stated by the amount of depreciation in stock. They realised that, as far as Mars was concerned, the cumulative total of the overstatement of profits for tax purposes would be equal to the total depreciation held in closing stock on 28 December 1996. They realised that, technically, computations for each relevant year should be amended but proposed to the Inland Revenue that a single adjustment should be made to taxable profits for depreciation in stock as at 28 December 1996.
23. The single adjustment proposed by PricewaterhouseCoopers for 1996 was to reduce the depreciation added back in that year by the cumulative amount of depreciation in stock. This reduced taxable profits by £3,039,000. Also, in 1996 the disclosure in Mars' statutory accounts was expanded to show depreciation in stock. A new sentence was added to note 10 to the accounts (Stocks) which read: "At 28 December 1996 depreciation of £3,039,000 had been included in the stock valuation." There was no change in accounting policy for statutory reporting purposes; there was merely a change in disclosure to make the treatment of depreciation in stock more visible.
24. Mars' corporation tax returns were therefore filed on that basis. Meetings between PricewaterhouseCoopers and the Inland Revenue were held on 12 June 1997 and on 11 August 1997 when the Inland Revenue appeared to be willing to accept Mars' proposal. Later the Inland Revenue refused to accept the computations and it is the reduction of taxable profits by £3,039,000 in 1996 which is the subject of Mars' appeal.
25. From 1996 the tax computations were made on the basis that the amount of depreciation to be added back to the accounting profits did not include depreciation in stock and a note similar to note 10 to the 1996 accounts was included in subsequent years. Mars also made an adjustment for the movement in the amount of depreciation in stock. The impact of the adjustment on the accounting profits for 1997 and subsequent years could be either an increase or a decrease depending upon the movement in the value of the depreciation in stock. The movement in depreciation in stock has resulted in both positive and negative adjustments to profits since 1996.

William Grant

26. William Grant is one of the largest independent Scotch whisky companies in the United Kingdom. It is both a distiller and blender and produces "Glenfiddich" a Scotch malt whisky, "Grant's Family Reserve" a blended Scotch whisky, and "The Balvenie" a leading Scotch whisky. It is a family controlled company and has a number of wholly owned subsidiary companies of which William Grant is one. William Grant distils and matures bulk whisky and also bottles whisky at its bottling plants. Although the term "Scotch Whisky" means whisky that has been matured in an excise warehouse in Scotland for a period of not less than three years, many companies (including William Grant) will mature whisky for periods significantly longer than this. William Grant's main brands are matured for periods ranging from four years to eighteen years (for Glenfiddich Ancient Reserve).

William Grant - financial reporting

27. Depreciation of manufacturing fixed assets is included in the standard cost of stock as part of the general allocation of overheads (including depreciation) to stock. This occurs in two contexts - first in the cost of make and secondly in the cost of holding the spirit until it becomes whisky. As part of its internal costing system William Grant calculates the cost of making each litre of whisky. "Cost of make" depreciation is included within fixed costs. Next the cost of holding the spirit until it becomes whisky is added to each year's "cost of make". This is usually the cost involved in running the warehouses and also cask and pallet depreciation and warehouse depreciation. (William Grant capitalises warehousing costs into stock for three years and such costs are thereafter written off directly to the profit and loss account.)
28. At least since 1994 William Grant have prepared their financial accounts on the basis that part of the annual depreciation charge was included in the cost of unsold stock. William Grant's accounting policy for stock was recorded in its statutory accounts for the year ended December 2002 as:

"Stocks are stated at the lower of cost or net realisable value. Cost consists of the expenditure in purchasing or producing stock and bringing it to its present location and condition as follows … Work in progress and finished goods - cost of direct materials, labour, and attributable overheads based on a normal level of activity."

29. In the 2002 statutory accounts the profit and loss account showed operating profit of £31,705,000 and referred to Note 4. Note 4 stated

"4. Operating profit

This is stated after charging (crediting)

Depreciation

- owned assets 5,852,000

- leased assets 853,000

- included within stock (1,695,000)"

30. Note 7 to the 2002 statutory accounts (Tangible fixed assets) showed depreciation for freehold land and buildings as £1,585,000 and for plant, vehicles and casks of £5,120,000 making a total of £6,705,000. Thus Note 4 makes it clear that of total depreciation of £6,705,000 the amount of £1,695,000 was the amount of depreciation in stock. The remaining £5,010,000 was charged (deducted) in the profit and loss account. Thus the operating profit for 2002 was stated after deducting the net amount of depreciation which did not include depreciation in stock.

William Grant - tax computations

31. For many years and at least since 1992 William Grant has prepared its tax computations on the basis that the amount of depreciation to be added back to the accounting profits did not include that amount of the charge for depreciation represented by depreciation in stock. When the closing stock became the opening stock of the next year, and was sold in the next year, the cost of the stock (including the depreciation in stock) was deducted from the profit and loss account and the amount for depreciation in stock was added back in that year. If the opening stock was not sold in that year it was again carried forward to the next year on the same basis.
32. William Grant's tax treatment of depreciation in stock was discussed with the Inland Revenue in 1995 and in 1996. In 1995 the Inland Revenue were prepared to accept that only the net depreciation need be added back for tax purposes so long as accurate records were kept of the amount of depreciation in stock to ensure that future adjustments were made. William Grant suggested that the adjustments could be made by reference to movements in stock during the course of the year. For example, if in year one 20% of depreciation was taken to stock and not added back in that year, and if in year three 20% of the year one stock was sold, then 20% of the depreciation in stock in year one would be added back in year three. As William Grant's records were extensive the Inland Revenue accepted the proposal and it was agreed that the amount of depreciation that should be added back for tax purposes should be the net amount debited to the profit and loss account, which did not include the amount for depreciation in stock. Later it was agreed that there would be a cut off point so that all stock not actually sold would be adjusted after twelve years for malt stocks and five years for grain stocks.
33. In 2002 the Inland Revenue informed William Grant that computation adjustments in respect of depreciation in stock were contrary to the rules of Case I of Schedule D and that companies who had followed the practice had to change their tax adjustment basis. The Inland Revenue now require that the amount of depreciation added back should include depreciation in stock. William Grant's corporation tax computation for the year 2002 does not incorporate the change of practice proposed by the Inland Revenue. A cumulative amount of £9,567,271, which represents the amount of depreciation in stock, has not been added back in the year in which it was incurred. It is that amount which is the subject of the appeal of William Grant.

The statutory and accounting principles

34. Before recording the opinions of the expert witnesses we set out the relevant provisions of the Companies Act 1985, and the relevant accounting principles, which were referred to by the expert witnesses.

The Companies Act 1985

35. Section 226 of the Companies Act 1985 provides that the directors of every company shall prepare for each financial year a balance sheet and a profit and loss account. As to their form and content these shall comply with the provisions of Schedule 4. Section A of Part I of Schedule 4 contains general rules and Section B contains required formats. For balance sheets there are two formats (formats 1 and 2) and for profit and loss accounts there are four formats (formats 1, 2, 3 and 4). Both Mars and William Grant used format 1 and the expert witnesses agreed that most companies in the United Kingdom use format 1.
36. Format 1 mentions twenty items including cost of sales and profit or loss for the financial year. Mr Carne agreed that the profit or loss would take into account the net depreciation. Format 1 does not deal with types of expenditure and so it is not possible to see in the profit and loss account what the charge for depreciation is. Note 14 on the profit and loss accounts formats states that cost of sales shall be stated after taking into account any necessary provisions for depreciation. Note 17 states that, where the profit and loss account is prepared by reference to format 1, the amount of any provision for depreciation shall be disclosed in a note to the accounts.
37. Part II of Schedule 4 contains accounting principles and rules. Part VII contains provisions about the interpretation of the Schedule and paragraph 88 provides:

"88(1) References to provisions for depreciation or diminution in value of assets are to any amount written off by way of providing for depreciation or diminution in value of assets.

(2) Any reference in the profit and loss account formats set out in Part I of this Schedule to the depreciation of, or amounts written off, assets of any description is to any provision for depreciation or diminution in value of assets of that description."

The accounting principles

38. Statement of Standard Accounting Practice 9 (Stocks and long-term contracts) (SSAP 9) was originally issued in 1975 and revised in 1988. It applied to both Appellants in all relevant years. Explanatory Note 1 read:

"The determination of profit for an accounting year requires the matching of costs with related revenues. The cost of unsold or unconsumed stocks will have been incurred in the expectation of future revenue, and when this will not arise until a later year it is appropriate to carry forward this cost to be matched with the revenue when it arises; the applicable concept is the matching of cost and revenue in the year in which the revenue arises rather than in the year in which the cost is incurred. If there is no reasonable expectation of sufficient future revenue to cover cost incurred (e.g., as a result of deterioration, obsolescence or a change in demand) the irrecoverable cost should be charged to revenue in the year under review. Thus stocks normally need to be stated at cost , or, if lower, at net realisable value."

39. Paragraphs 17, 19 and 20 provide:

"17 Cost is defined in relation to the different categories of stocks as being the expenditure which has been incurred in the normal course of business in bringing the product or service to its present location and condition. The expenditure should include, in addition to cost of purchase … such cost of conversion (as defined in paragraph 19) as are appropriate to that location and condition."

"19. Cost of conversion comprises:

(a) costs which are specifically attributable to units of production, e.g. direct labour, direct expenses and sub-contracted work;

(b) production over heads (as defined in paragraph 20);

(c) other overheads, if any, attributable to the particular circumstances of the business to bringing the product or service to its present location and condition.

20 Production overheads: Overheads incurred in respect of materials, labour or services for production, based on the normal level of activity, taking one year with another. For this purpose each overhead should be classified according to function (e.g. production, selling or administration) so as to ensure the inclusion, in the cost of conversion, of those overheads (including deprecation) which relate to production notwithstanding that these may accrue wholly or partly on a time basis."

40. Thus SSAP 9 requires that companies include within stock valuation not only the cost of purchasing raw materials but also "costs of conversion" which includes production overheads which in turn include depreciation.
41. Statement of Standard Accounting Practice 12 (Accounting for depreciation) (SSAP 12) was first issued in 1977. Paragraph 2 of the explanatory notes states:

"Virtually all fixed assets have finite useful economic lives. In order for the financial statements to reflect properly all the costs of the enterprise it is necessary for there to be a charge against income in respect of the use of such assets. This charge is referred to as depreciation (or amortisation in the case of leasehold property)."

42. Paragraph 16 states:

"The accounting treatment in the profit and loss account should be consistent with that used in the balance sheet, Hence, the depreciation charge in the profit and loss account for the period should be based on the carrying amount of the asset in the balance sheet, whether historical cost or revalued amount. The whole of the depreciation charge should be reflected in the profit and loss account. No part of the depreciation charge should be set directly against reserves."

43. SSAP 12 was in force in 1996 (the relevant year so far as Mars is concerned). In February 1999 SSAP 12 was replaced by Financial Reporting Standard 15 (Tangible fixed assets) (FRS 15). This applied for accounting periods ending on or after 23 March 2000 and so applies to the relevant year for William Grant. Paragraph 77 read:

"The depreciable amount of a tangible fixed asset should be allocated on a systematic basis over its useful economic life. The depreciation method used should reflect as fairly as possible the pattern in which the asset's economic benefits are consumed by the entity. The depreciation charge for each period should be recognised as an expense in the profit and loss account unless it is permitted to be included in the carrying amount of another asset."

44. We anticipate our general discussion of the expert evidence to record that there was some disagreement between the expert witnesses about paragraph 77. Mr Carne exhibited a letter dated 7 July 1999 from Mr Andrew C Leonard, Assistant Technical Director of the Accounting Standards Board. That letter stated that the cases where FRS 15 envisaged depreciation being treated as part of the cost of another asset were only fixed assets and not stock. Mr Carne accepted that to that extent FRS 15 appeared to conflict with the Companies Act by saying that depreciation expense could by-pass the profit and loss account and go straight to another asset. Mr Holgate considered that Mr Andrews' view was a personal view of a member of the staff of the Accounting Standards Board but not the formal position of the Board. He disagreed with it. He pointed out that the first line of paragraph 77 of FRS 15 referred to a tangible fixed asset but the last line referred to an asset which could include stock. We agree with Mr Holgate's interpretation of paragraph 77 because we think that if the last sentence was intended to apply only to intangible fixed assets it would have said so. It is also relevant that in International Accounting Standards 2 (Inventories) depreciation is not considered to be an expense if it is carried forward in stock.

The expert evidence

Mr Holgate

45. For the Appellants Mr Holgate started his evidence by defining his terms. "Assets" are defined in the Accounting Standards Board's Statement of Principles as "rights or other access to future economic benefits controlled by an entity as a result of past transactions or events". More simply, an asset was viewed as something that would be of value or benefit in the future which was, as a result, carried forward in the balance sheet at the end of the year. A "debit" could either be an increase in the cost or value of an asset or it could be an expense (which was a decrease in profit). A "credit" could be either an increase in income or it could be a decrease in the cost or value of an asset. An "expense" could be viewed as a cost which was consumed in the period in question; it did not give rise to future value or benefit and so was not treated as an asset. It was charged (deducted) in the profit and loss account in arriving at profit for the year.
46. Mr Holgate told us that a key issue in accounting is whether a cost that has been incurred is to be treated as an expense or an asset. So, for example, rent, wages and salaries are expenses. However, if staff have been engaged on building an asset for the company the appropriate element of their wages is capitalised and treated not as an expense but as part of the cost of that asset. The cost of purchasing office furniture is the cost of an asset but depreciation of the furniture is an expense and charged to the profit and loss account. The cost of plant and machinery is the cost of an asset which is depreciated over its useful life; the depreciation is treated as an expense and charged to the profit and loss account. However, if the plant is used in the production of stock that element of the depreciation was regarded as part of the cost of that stock.
47. Mr Holgate also told us that initially all depreciation is recorded in a depreciation account and at the end of the year, once the closing stock quantities are known, some of the depreciation is allocated to the carrying amount (value) of the stock. The remainder is charged as an expense in the profit and loss account. However, there was no significant difference if a company debited the full amount of depreciation in the profit and loss account and then credited the amount of depreciation in stock which was capitalised - these were just different mechanical ways of recording the same event. In the case of a continuing business the adjustment for depreciation in stock was based on the difference between opening and closing stock. If levels of stock were increasing the normal adjustment would be made; if levels were decreasing the amount of depreciation in stock would become a negative figure and so there would be a reduction in the amount of depreciation in stock at the period end when compared with the previous period end.
48. Turning to SSAP 9 Mr Holgate emphasised that it dealt with cost not value. The capitalisation of wages or depreciation was part of the accumulation of the total cost of an asset. Value was relevant only in that the carrying amount of an asset, based on accumulating costs, should not exceed the recoverable amount. Recoverable amount was defined in Financial Reporting Standard 11 (Impairment of fixed assets and goodwill) (issued in July 1998) as the higher of value in use or net realisable value. If cost did exceed the recoverable amount then the carrying amount would be the recoverable amount and, to deal with the difference between the two, a provision for loss of stock would have to be shown as an expense. Thus expenses treated as part of the cost of an asset were not treated as expenses in the period in which they were incurred but as expenses in the period in which the asset was sold when all costs were set against the proceeds of sale.
49. Mr Holgate concluded that it was a matter of accounting principle that it was only the depreciation which was charged as an expense in the year which was recorded in the profit and loss account. Depreciation in stock represented a legitimate cost of the production of the stock and was carried forward in the year-end balance sheet as an asset; it was not charged to the profit and loss account during the year. Both Mars and William Grant had adopted an entirely normal procedure.

Mr Carne

50. Mr Carne began his evidence by noting that the format of accounts had changed over the course of the years. He relied upon SSAP 12 for the principle that the full amount of depreciation should be charged to the profit and loss account. He accepted that format 1 for the profit and loss account in Schedule 4 of the Companies Act did not show a figure for depreciation in the profit and loss account but argued that Note 17 provided that the amount of any provision for depreciation had to be disclosed in a note to the accounts. He went on to argue that the amount so disclosed had to be the gross amount relying by analogy on format 2 and on paragraph 88(2) of Schedule 4.
51. By way of analogy Mr Carne referred to paragraph 76 of FRS 4 (Capital instruments). Paragraph 76 provides:

"76. The FRS also requires all finance costs to be charged to the profit and loss account. However, the FRS does not prohibit the capitalisation of finance costs as part of the cost of an asset by way of a simultaneous transfer from the profit and loss account that is separately disclosed."

52. This made it clear that the gross interest expense was first charged to the profit and loss account and then the portion capitalised was transferred out.
53. Mr Carne also referred us to the International Accounting Standards which will have to be used by UK listed groups for their consolidated accounts from 2005 onwards. Individual companies could choose to move to these standards if they wished. Mr Carne agreed that in International Accounting Standards 2 (Inventories) depreciation was not considered to be an expense if it were carried forward in stock.
54. Mr Carne concluded that the 1996 accounts of Mars showed a true and fair view. SSAP 12, which was the relevant standard at the time, and the Companies Act, required the full amount of depreciation to be charged to the profit and loss account and this had been done. The company had later adjusted the gross depreciation by the amount of depreciation in cost. Turning to William Grant Mr Carne concluded that the accounts showed a true and fair view. Note 4 contained additional information to that normally disclosed in the accounts. It complied with the Companies Act requirement to show the full amount of depreciation charged in the year and then showed a credit for the amount of depreciation in stock in accordance with FRS 15.

The agreement of the expert witnesses

55. Mr Holgate was of the opinion that only net depreciation was charged in the profit and loss account. Mr Carne agreed that that was one possible interpretation but the other was that gross depreciation was charged in the profit and loss account after which there was a credit for depreciation in closing stock. However, both experts agreed that the overall net effect on reported profits was the net depreciation charge. Both experts also agreed that the Mars and William Grant cases were in substance the same as regards depreciation in stock.

The arguments of the Appellants

56. For the Appellants Mr Aaronson argued that the starting point for a company's tax computation was the profit for the year computed in accordance with generally accepted accountancy practice, relying upon Gallagher v Jones [1993] STC 537 and later section 42 of the 1998 Act. Section 74(1)(f) then required an adjustment for capital employed in the trade. Depreciation was such a deduction relying on Addie & Sons v Commissioners of Inland Revenue (1875) 1 TC 1 and so an adjustment was required. However, the amount deducted in the accounting profits for depreciation did not include depreciation in stock and that was confirmed by the joint report of the expert witnesses. Accordingly, for tax purposes, it was only necessary to add back the depreciation which had been deducted in the accounting profits and not to add back the depreciation in stock. The fact that the Companies Act required the accounts to disclose the full amount of depreciation charged during the year did not affect the amount which had been deducted. Mr Aaronson relied upon the evidence of both expert witnesses that the practical effect of the accounting rules which had to be applied was that only the net depreciation was deducted in the accounts of the Appellants in any year; in other words, the total depreciation less the part carried into stock. In particular he argued that the whole essence of SSAP 9 was that certain costs, including depreciation, were not deducted as expenses but were carried forward and included in the carrying amount of the stock.
57. Mr Aaronson also relied upon Gallagher v Jones for the principles that if there were alternative accounting principles with equal validity the principle consistently adopted by the taxpayer should be applied; that the principles of accountancy were not static and developed over time; and that the question of when expenditure falls to be deducted for tax purposes has to be answered from a practical and business point of view. He relied upon Duple Motor Bodies v Ostime 39 TC 537 at 571 and 574 for the principle that overhead costs which are included in the cost of unsold stock are not deducted in the accounts. The issue was really one of timing. When trading stock held at the year end was sold that part of the cost which represented depreciation was then subtracted from the costs (or added back as profit) in the tax computations. Mr Aaronson distinguished the decision of the Hong Kong Court of Final Appeal in Commissioners of Inland Revenue v Secan Limited which, he argued, was a decision on a statutory provision which did not apply in the United Kingdom. Also, it did not reflect generally accepted accountancy practice in the United Kingdom.

The arguments of the Inland Revenue

58. For the Inland Revenue Mr Milne accepted that both Mars and William Grant had computed their accounting profits in accordance with generally accepted accounting practice and principles in accordance with section 42 of the 1998 Act (although strictly that section applied only to the appeal of William Grant). He also accepted that there was no difference in net effect between debiting the net depreciation to the profit and loss account on the one hand and debiting gross depreciation and then crediting the amount which was capitalised in depreciation in stock on the other hand.
59. However, Mr Milne did dispute that the correct tax adjustment had been made to those properly computed profits. He argued that the relevant question was how much depreciation had been deducted in computing profits not what was the net effect of depreciation on the profit. It was his argument that gross depreciation had been deducted in computing profits. He argued that the amounts incurred on stock were expenses of the year in which they were incurred but at the end of the year there was a further process of arriving at a value to be placed on closing stock which was carried forward to the following year; this was not merely a carry forward of costs but a valuation of stock. That meant that there was a deduction of the whole of the expenses incurred during the year followed by a credit of a closing figure for unsold stock. Accordingly, the Appellants had deducted the full amount of depreciation in computing their accounting profits even though an amount had been included in the value of stock at the end of the year
60. Mr Milne relied upon Gallagher v Jones for the principle that the adjustment required for tax purposes was a matter of law upon which the accountancy evidence was not conclusive. He also relied upon the words of Lord Justice Nolan in Gallagher v Jones at 556g to 557e. He argued that it was necessary to apply common sense to depreciation to determine what from a practical and business point of view it was calculated to effect and that was the recognition of the diminution in the carrying value of the fixed assets. Finally, he also relied upon Commissioner of Inland Revenue v Secan Ltd (2000) 74 TC 1 which was a judgment of the Court of Final Appeal Hong Kong. In particular he argued that in Secan the taxpayer claimed that he had not had a deduction for interest because it was in the carrying value of the work in progress in the balance sheet and not shown in the profit and loss account; in the present appeal the Appellants were arguing that they did not have to add back the amount of gross depreciation because that part which was depreciation in cost was in the value of stock in the balance sheet.
61. Mr Milne went on to argue that in considering the appropriate add back for depreciation it was relevant to consider the effect of the capital allowances legislation. Capital allowances were given on the full cost of the asset without any reduction for depreciation carried to stock and so it would be common sense to conclude that the add back should be the full amount of depreciation without any reduction for depreciation carried to stock.
62. Finally, Mr Milne cited Whimster & Co v The Commissioners of Inland Revenue ...1925) 12 TC 813 at 823 for the principle that for tax purposes what was relevant was the value of stock at the end of the year not the cost of it; and he cited Commissioners of Inland Revenue v Cock Russell & Co Ltd (1949) 29 TC 387 for the principle that separate items of stock could be valued at cost price or market price whichever was the lower. He also cited Patrick v Bradstone Mills Limited (1953) 35 TC 44 at 68; Minister of National Revenue v Anaconda American Brass Limited [1956] AC 85; and Duple Motor Bodies at 566, 567.

Reasons for decision

63. In considering the arguments of the parties we start with the words of the legislation.
64. Section 42 of the 1998 Act provides that the profits of a trade must be computed in accordance with generally accepted accountancy practice, subject to any adjustment required by law in computing profits for those purposes. Section 42 applies to periods of account beginning after 6 April 1999 and so applies to the appeal of William Grant. However, it was not disputed that section 42 reflects the law as it existed before 6 April 1999 and that the same principle applied to the appeal of Mars.
65. In these appeals it was agreed that both Appellants had computed their profits in accordance with generally accepted accountancy practice. Accordingly we can pass to the second stage of the test in section 42 and consider the application of the adjustment required by law. The adjustment required by law in these appeals is set out in section 74(1)(f) of the 1988 Act which provides that, in computing the amount of profits to be charged to tax, no sum shall be deducted in respect of any sum employed or intended to be employed as capital in the trade. Addie is authority for the principle that depreciation of fixed assets is expenditure of additional capital and so cannot be a deduction for tax purposes. Clearly therefore an accounting profit, which has been calculated by making a deduction for depreciation, must be adjusted for tax purposes by cancelling that deduction or "adding it back". What we have to find is the amount of depreciation which has been deducted in computing the accounting profits.
66. Both expert witnesses agreed that it was only net depreciation which had been deducted in computing the accounting profits. That would suggest that it is only net depreciation which has to be added back for tax purposes.
67. However a feature of this case is that, although it is accepted that accounts produced in accordance with generally accepted accountancy practice show a deduction (in the profit and loss account) of only the amount of the net depreciation, nevertheless the amount of the gross depreciation is relevant in the computation of the provision for depreciation, which appears in the balance sheet. It is that provision, of course, which shows, "the diminution in value" of the assets being depreciated, to adopt the language of paragraph 88 of Schedule 4 to the Companies Act 1985.
68. Thus it is perfectly possible, where the accounting policy adopted by the Appellants is followed, for the following situation to arise. A certain fixed asset – say, a machine – may be fully depreciated, so that it stands in the balance sheet at nil value (represented by mutually cancelling amounts of cost and provision for depreciation), but nevertheless the full amount of depreciation (equal to both the cost of the machine and the provision for depreciation) has not been effectively charged to the profit and loss account. This is the position because part of that depreciation, instead of being effectively charged to the profit and loss account is instead accounted for as an element of the cost of unsold trading stock.
69. In this way, the accounting policy adopted by the Appellants shows a transfer of value from a fixed asset (the cost or value of the machine) to unsold trading stock, which is generally regarded as a current asset, without that transfer being "reflected in the profit and loss account", to adopt the language of paragraph 16 of SSAP 12.
70. The wording of SSAP 12 is relevant to the Mars appeal, but (as we have noted) it was superseded with effect from 2000 by FRS 15, which, at paragraph 77, permitted the depreciation charge for a period not to be recognised in the profit and loss account if it was "permitted to be included in the carrying amount of another asset" (in this case unsold trading stock).
71. Nevertheless, even on the wording of paragraph 77 a peculiarity arises, namely that although part of the depreciation charge can in certain circumstances not be recognised in the profit and loss account, the "depreciable amount" of a tangible fixed asset must be "allocated on a systematic basis over its [i.e. the asset's] useful economic life" and "the depreciation method used should reflect as fairly as possible the pattern in which the asset's economic benefits are consumed by the entity". This seems to tie down the period over which an asset can be depreciated to the period of that asset's useful economic life, and this is inconsistent with a policy which recognises the full charge for depreciating the asset over a longer period than this – effectively a period ending only when the trading stock whose value is debited with part of the depreciation charge is finally sold or written down.
72. Furthermore, a provision for depreciation in the balance sheet which takes account of the gross depreciation, but a computation of profits which recognises only a deduction of the amount of the net depreciation in the profit and loss account, seem to be inconsistent one with another. The "contra" item, whereby the gross depreciation charged to the profit and loss account is adjusted by transferring an amount out of the profit and loss account to increase the carrying value of unsold trading stock, must be examined. If that "contra" item is truly a "contra" item, so that one can say that the amount of depreciation charged to the profit and loss account is only the amount of the net depreciation, not the amount of the gross depreciation, it is difficult to see how the provision for depreciation in the balance sheet can stand. This is the situation which is recognised by note 4 in the 2002 statutory accounts of William Grant, which clearly shows what has happened, namely that there has been a gross depreciation charge of £6,705,000, of which £1,695,000 has been the subject of a "contra" item and debited to the carrying value of unsold trading stock – but begs the question as to how in these circumstances the amount of the provision for depreciation stated in the balance sheet is made up.
73. We intend absolutely no criticism of Mars, William Grant or their advisers in making this observation. The precise nature of the "contra" item, whether it is in every respect a pro tanto cancellation of the gross depreciation charge or alternatively an accounting adjustment to the gross depreciation charge, debiting the carrying amount of unsold trading stock with an amount representing depreciation on fixed assets, is a matter of no importance in any accounting context – or indeed in any context (as far as we can see) other than the determination of the issue arising in the present case.
74. Insofar as the features which we have mentioned relate to the accounting treatment, as to which there is general agreement as to its correctness, they do not call for any comment from us. We are only concerned with the question of the adjustments required or authorised by the 1988 Act in computing profits for the purposes of Case I of Schedule D.
75. Profits computed for those purposes allow no deduction in respect of capital. This mirrors the Schedule D charging provision which refers to annual profits or gains and excludes capital receipts (however they are accounted for). Since Addie, which was the first case reported in the first volume of Tax Cases, it has been recognised that depreciation cannot be deducted for the purposes of Case I, because depreciation is in the nature of capital.
76. However, generally accepted accountancy practice (of course) treats depreciation as a revenue (not a capital) expense, and, further, treats depreciation as capable of constituting an element of the cost of unsold stock. Our recognition of the validity of the accountancy practice does not affect the legal nature of depreciation for the purposes of Case I as capital, or the requirement that no sum shall be deducted in respect of it in the computation of profits for Case I purposes.
77. We accept the expert evidence of Mr Holgate that the capitalisation of depreciation is, as a matter of generally accepted accountancy practice, part of the accumulation of the total cost of an asset in relation to which the capitalisation has been made – in this case unsold trading stock. But it seems to us (although neither side argued this) that the part of the cost of unsold trading stock which is represented by capitalised depreciation ought not to be recognised (as, effectively, a taxable receipt) in the computation of trading profits for the purposes of Case I. This is because, as a matter of law, it is in the nature of capital, and its capital nature is not altered by its absorption into the cost of trading stock for accounting purposes – any more than the capital nature of depreciation is altered by its treatment as a periodic charge in the profit and loss account. Thus the increase in the value of trading stock in the balance sheet which is represented by depreciation in stock ought not to be taken into account for the purposes of the computation for tax purposes of trading profits. To do so would effectively charge a capital amount to corporation tax on income, without any statutory authority. As we have observed, the charge to tax on trading profits under Case I of Schedule D extends only to "annual profits or gains" – see section 18 of the 1988 Act.
78. We go on to consider the development of the authorities cited to us, bearing in mind as we do so that the accepted principles of commercial accountancy are not static; as the evidence in this case shows, they may be modified, refined or elaborated over time as circumstances change and accounting insights sharpen.
79. As long ago as 1925, it was decided in Whimster that: in computing profits or gains for the purposes of income tax, the profits of any particular year must be taken to consist of the difference between the receipts for that year and the expenditure laid out to earn those receipts; that the amount of profit or loss must be framed consistently with the ordinary principles of commercial accounting, so far as applicable, and in conformity with the rules of the Taxes Acts; that the ordinary principles of commercial accounting require that the values of stock in trade at the beginning and the end of the period should be entered at cost or market price whichever is the lower; and that even if profits are put to reserve they are nonetheless profits for the year to which the account relates and, as such, assessable to income tax. Mr Milne relied upon Whimster for the principle that for tax purposes what was relevant was the value of stock at the end of the year not the cost of it. However, Whimster was decided in 1925 before the issue of SSAP 9 in 1975. The Explanatory Note to SSAP 9 makes it clear that the applicable concept is the matching of cost and revenue, not value. Thus we would now read the references in Whimster to the values of stock as being references to the cost of stock (or to value if that is lower).
80. In 1949 it was decided in Cock Russell at 392 that, although there is nothing in the legislation which indicates that, in computing the profits and gains of a commercial concern, regard should be paid to the value of the stock in trade at the start and end of the accounting period, that must be done as it is impossible to assess profits and gains merely on a statement of receipts and payments. Thus it was established at this early stage that, in computing profits, it is necessary to bring into account the amount of stock at both the start and the end of the accounting period; by "amount" we mean cost or market value whichever is the lower.
81. In Duple Motor Bodies (1961) the issue was whether an amount for work in progress should be calculated by taking the direct costs of materials and labour alone (as argued by the taxpayer company) or whether a proportion of overhead expenditure should also be added (as argued by the Inland Revenue). The then accountancy evidence was that either method would produce a true figure of profit for tax purposes and the House of Lords did not require the taxpayer company to change its practice.
82. We note that there was no question of including any capital element in trading stock values in Whimster, Cock Russell, or Duple Motor Bodies.
83. In 1975 Statement of Standard Accounting Practice 9 (SSAP 9) was originally issued. It provided that the determination of profit for an accounting year required the matching of costs with related revenues. The cost of unsold or unconsumed stocks will have been incurred in the expectation of future revenue, and when this will not arise until a later year it is appropriate to carry forward this cost to be matched with the revenue when it arises; the applicable concept is the matching of cost and revenue in the year in which the revenue arises rather than in the year in which the cost is incurred. Duple Motor Bodies was decided before the issue of SSAP 9 and so would probably not be decided in the same way today.
84. The next development occurred in Gallagher v Jones (1993) which concerned the prepayment of expenses and so is not directly relevant to this appeal but is of interest. That appeal concerned traders who hired out boats in the short term. One trader acquired three boats under leases for a primary period of twenty-four months with an initial payment of £14,562 followed by seventeen monthly payments of £2,080 each and thereafter for a secondary period of twenty-one years at an annual rent of £5. The trading accounts for the first year treated as expenditure the initial payment and the five monthly payments made that year. The accounts showed a trading loss which the trader claimed to carry forward, arguing that expenditure should be deducted in the year in which it is incurred. The Court of Appeal held otherwise. In his judgment at 556g to 557e, which passage was relied upon by Mr Milne, Lord Justice Nolan considered whether there had previously been any exceptions to the rule that expenses are deductible in the period of account in which they are incurred. Mr Glick, for the Inland Revenue, suggested that the effect of the accountancy practice whereby unsold stock in trade was brought into account at the beginning and end of an accounting period was to disallow the deduction of expenditure on the unsold stock and carry it forward to be set against the price for which the stock was sold. Lord Justice Nolan accepted that that was one way of describing the effect of the practice but thought that, as a matter of legal analysis, the practice involved the deduction of the whole of the expenses incurred during the period but the crediting against them of a closing figure for unsold stock as a notional receipt.
85. SSAP 9 was not relevant in that appeal but it is clear from SSAP 9 that the applicable accounting concept for stocks is the matching of cost and revenue in the year in which the revenue arises rather than in the year in which the cost is incurred. As far as depreciation is concerned SSAP 12 is consistent with Lord Justice Nolan's view because it sets out an accounting principle that all depreciation should be reflected in the profit and loss account even if closing stock also includes depreciation in stock.
86. (We record that the expert witnesses were of the opinion that opening stock would not now be regarded as a purchase from the previous year of account and that closing stock would not be described as being a notional sale from one year to the next; the most common approach would be to regard closing stock as one of the assets carried forward from one year to the next.)
87. It is against this background that it is possible to consider the decision in Secan. In Secan a construction company purchased in 1988 a site and incurred development costs. To meet the costs it borrowed and incurred interest and financing charges. It could have treated the interest as part of general expenses thus producing a substantial loss each year to be carried forward to future years. Instead it decided to capitalise the interest charges by treating them as additional costs of the development. At the end of the year the value of the property shown in the balance sheet included the costs of acquisition and development and also interest. The interest was not mentioned in the profit and loss account. This practice was also followed for 1989 and 1990. In 1989 there was a note to the accounts showing that interest had been capitalised and added to the value of the property under development. During these three years small losses were made. In 1990 a profit was made and, after deducting the losses of the previous years, tax was due and paid. In 1991 the company began to sell the flats. If it had continued to prepare its accounts in the same way as formerly it would have obtained relief for the interest payments by treating them as part of the cost of sales and deducting the appropriate portion from the proceeds of sales made in the current year. Instead it sought to re-write all its accounts retrospectively so as to set all the interest charges from 1998 onwards against the proceeds of sale for the current year. However, the company realised that this would give a double deduction for the cost of sales because interest had already been taken into account as part of the costs of the development. It therefore made an adjustment so as in effect to re-calculate the cost of sales in the current year by retrospectively excluding capitalised interest from the cost of sales.
88. The company argued that its original accounting method had not been in accordance with the relevant Hong Kong statute which required that all outgoings and expenses, including interest, should be deducted to the extent to which they were incurred during the basis period for the year of assessment. The Inland Revenue argued that the statute did not prohibit the capitalisation of interest and that the interest had already been deducted in the years in which it was incurred but, because it had been capitalised, the deduction did not give rise to any losses capable of being carried forward.
89. The Court held that the statute permitted outgoings to be deducted only to the extent to which they were incurred in the relevant year; that the accounts for the first three years were properly prepared in accordance with ordinary accounting principles, and that interest had been deducted not by a reduction of earnings in the profit and loss account but by an increase in the value of an asset in the balance sheet. There was no basis on which a taxpayer could challenge an assessment based on its own financial statements so long as those were prepared in accordance with ordinary accounting principles, showed a true and fair view of its affairs, and were not inconsistent with the statute.
90. Applying the principles in Secan to the facts of the present appeal we start from the fact that the accounts of the Appellants have been prepared in accordance with the correct principles of commercial accountancy and show a true and fair view of their affairs. In their financial statements the Appellants have, in effect, taken account of the gross amount of depreciation in their profit and loss account (in order to make the provision for depreciation which appears in the balance sheet) but then capitalised some of it and transferred that part to the balance sheet as part of the asset of stock. So far as the profit and loss account is concerned, this transfer has (in accordance with correct principles of commercial accountancy) been treated as a true "contra" item, with the result that only net depreciation therefore is treated for those purposes as an expense in the profit and loss account.
91. Section 74(1)(f) of the 1988 Act requires the computation of profits for tax purposes to be made without any deduction in respect of capital. This excludes any deduction for depreciation. In our judgment this requires that any depreciation charged to the profit and loss account must be "added back" for tax purposes. We also consider that for tax purposes any element of depreciation must be removed from the carrying amount in the balance sheet of unsold trading stock.
92. We conclude that the amount to be "added back" must be the amount of net depreciation.
93. The reasoning supporting this conclusion is either that, as the Appellants argued, it is only net depreciation that has been deducted in the computations of profits in accordance with generally accepted accountancy practice which are before us. On that basis the "contra" item is accepted as a true "contra" item reducing the charge for depreciation in the profit and loss account from the amount of gross depreciation to the amount of net depreciation.
94. Alternatively, as we prefer, the "contra" item, although a true "contra" item for accountancy purposes, is not to be accepted as such as a matter of law – because the provisions for depreciation in the balance sheets prepared in accordance with the Companies Act 1985 do not recognise the "contra" item as actually reducing the charge for depreciation in the profit and loss account. Therefore the amount of gross depreciation must be taken to have been actually charged in the profit and loss account. This accords with the ratio in Secan and with Lord Justice Nolan's observations in Gallagher v Jones. But the matter does not stop there. The adjustment required by section 74(1)(f) of the 1988 Act in respect of the amount of gross depreciation must be offset by the amount of the "contra" item in order to avoid that capital amount becoming chargeable to corporation tax on income in the period – a result for which there is no statutory authority.

Decision

95. Our decision on the issue for determination in the appeals is that the adjustment required for the purposes of corporation tax by way of "adding back" depreciation to arrive at the amount of taxable profits is the amount of net depreciation, not the amount of gross depreciation.
96. The appeals are therefore allowed.

Court of appeal certificate

97. Under the provisions of section 56A(2) of the Taxes Management Act 1970 we hereby certify that this decision involves a point of law relating wholly or mainly to the construction of an enactment which was fully argued before us and fully considered by us. This means that any party to the appeal of Mars may appeal directly to the Court of Appeal if all the parties to that appeal consent and if the leave of the Court of Appeal is obtained.

DR NUALA BRICE

JOHN WALTERS QC

SPECIAL COMMISSIONERS

SC 3027/2003

SC 3123/2003

98. 03.04/2

This Decision was released to the parties on 8 March 2004. This version corrects accidental slips under Regulation 25(3).

DR NUALA BRICE

SPECIAL COMMISSIONER

99. 03.04