Able (UK) Ltd. v Revenue & Customs [2006] EWHC 3046 (Ch)

Case No CH/2006/APP/309

[2006] EWHC 3046 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date Thursday, 19 October 2006

Before

MR JUSTICE BRIGGS

Between

ABLE (UK) LIMITEDClaimant

HER MAJESTY’S REVENUE & CUSTOMSDefendant

Wordwave International, a Merrill Communications Company

PO Box 1336, Kingston-Upon-Thames, Surrey KT1 1QT

Tel No: 020 8974 7300 Fax No: 020 8974 7301

Email Address: tape@merrillcorp.com

MR RICHARD VALLAT (instructed by Vantis (Accountants)) appeared for Appellant

MR DAVID REES (instructed by HMRC) appeared for Defendant

Judgment

[1]This is an appeal by Able (UK) Limited by way of case stated against a decision of the Commissioners for General Purposes of the Income Tax for the Division of Hartlepool with Stockton-on-Tees (“the General Commissioners”) made on 14 April 2005. The only issue in the appeal before the General Commissioners and here was whether a certain compensation payment received by the appellant under section 31(3) of the Land Compensation Act 1961 was income or capital. The General Commissioners decided that the payment was income.

[2]Section 31(3) of the Land Compensation Act provides as follows:

“Where the acquiring authority withdraw a notice to treat under this section, the authority shall be liable be pay compensation to the person to whom it was given for any loss or expenses occasioned to him by the giving and withdrawal of the notice…”

[3]The factual background to this appeal is as follows, and I derive it mainly from a statement of facts not in dispute put by the parties before the General Commissioners and included in the bundle on the appeal. Able commenced trading on 1 June 1987 and on 2 August 1989 it acquired land at Seaton Meadows, Brenda Road, Seaton Crewe in Hartlepool (“the land”) from Stephenson Civil Engineering Limited for use in its trade for about £335,000 odd. In April 1990, Able sought planning permission to use part of the land for hazardous waste disposal. That application was refused. In 1991, Northumbrian Water Limited (“NWL”) entered into negotiations with Able to acquire the land for the construction of a sewage treatment plant. When the parties failed to agree a price, NWL promoted a compulsory purchase order in respect of part of the land (“the CPO land”).

[4]The compulsory purchase order was confirmed by the Secretary of State for the Environment on 22 July 1992. Notice to treat was served on Able by NWL on 14 August 1992. Notice of entry was served on 18 August and NWL took possession of the land on 4 January 1993. In July 1992, prior to service of the Notice of Treat, Able lodged an application for a certificate of appropriate alternative development in respect of the land. The proposed used was for the disposal of hazardous wastes. This certificate was granted on appeal on 14 June 1994. Able lodged a claim for compensation from NWL for an amount in excess of £22 million on 26 September 1994.

[5]NWL then withdrew its notice to treat on 9 November 1994. On an application by Able for judicial review challenging that withdrawal, the court confirmed in November 1995 that NWL were entitled to withdraw the Notice to Treat. Having withdrawn its original claim for compensation, in July 1997 Able made a new claim for compensation for losses and expenses arising out of the giving and withdrawal of the notice to treat under section 31(3) of the Land Compensation Act 1961. On the second occasion, Able’s claim was for £10.2 million.

[6]The Lands Tribunal determined the claim on 2 June 2000 after the parties had reached an agreement as to the amount payable, and awarded Able a payment of £2.185 million, which is the amount of compensation the character of which is to be determined as between income and capital.

[7]Able’s corporation tax return for the year ended 31 December 2000 was received by the Inland Revenue on 4 October 2001. An inquiry was opened into the company’s self-assessment and returned by the issue of a notice of inquiry in April 2002. After an exchange of correspondence, a notice of closure was issued on 26 November 2003. The company did not agree with the inspector’s conclusions. A revenue amendment was issued on 13 January 2004. Able’s agent appealed on their behalf against the Revenue amendment in a letter of 6 February 2004 and that led to the appeal before the General Commissioners.

[8]A distinguishing feature of Able’s claim to compensation under section 31(3) of the Land Compensation Act, was that it was heavily based upon an allegation that by being temporarily deprived of the use of the land, Able lost a never to be repeated opportunity to bid for and enter into highly profitable long-term general waste disposal contracts, and in particular a contract with Cleveland County Council, at a time when the general waste disposal market was uniquely favourable to it. Able’s claim went so far as to assert that, if the land had been available for use during the relevant period, it would have enjoyed a virtual monopoly in the region in respect of general waste disposal. In short, Able’s claim was that, by being kept out of the market during a relatively short period in which the land, if it had been available, would have been uniquely valuable to it as a place for general waste disposal, Able suffered a permanent loss rather than the more usual temporary loss, limited that is to the time when the use of the land is actually sterilised between the giving and withdrawal of the Notice to Treat.

[9]I turn to the Case Stated. After summarising the rival arguments and listing the authorities cited, the General Commissioners made their findings of fact and expressed their conclusions on the issue before them as follows in paragraph 9, which I need to read in full:

“We the Commissioners having heard the various representations and contentions considered that: 9.1 That there was no permanent loss of the use of the CPO Land, but rather there was an interruption in its availability for trading purposes for a finite period. The period in question was not significantly large given the total period of time that the whole site would ultimately be in operation. 9.2 Whilst it was demonstrated that the established practice for the capital valuation of a landfill site was to look to the profitability of the operation carried out on the land, rather than by way of comparative values, it is also the way to value a revenue loss caused by an interruption to use. 9.3 The interruption to the Taxpayer’s business caused by Northumbrian Water Ltd’s actions in respect of the CPO Land had a consequential effect on the Taxpayer’s business as a whole, in that it was unable to fully exploit the landfill market as it had intended. This was a loss for which compensation was paid. 9.4 The contemporaneous documentation, in particular the detailed claims submitted to the Lands Tribunal indicated that the Taxpayer and its professional advisers regarded the compensation claim to the Lands Tribunal to be for loss of profits. 9.5 Applying the five indicia as to whether receipts are of a capital or income nature we did not accept the Taxpayer’s contentions that four were applicable. The only one that was clearly applicable was that the compensation was a lump sum payment rather than recurrent and we would not expect compensation by way of a Lands Tribunal award to be any other way. 9.6 For the reasons above the payment received by the Appellant was a revenue receipt.”

[10]The five indicia referred to in paragraph 9.5 of the Case Stated are those set out by Dyson LJ in IRC v John Lewis Properties Plc

[2003] STC 117

at paragraphs 80 to 87 in his judgment.

[11]Mr Richard Vallat for Able challenged the decision of the General Commissioners on two main grounds. The first was that the General Commissioners’ finding that Able’s claim had been for compensation for loss of profits, or, in the words of paragraph 9.3 of the Case Stated, an inability fully to exploit the landfill market as it had intended, was wrong to the point of perversity so as to fall within the error of law narrowly identified in Edwards v Bairstow

[1956] AC 14

, as facts which no person acting judicially and properly instructed as to the relevant law could have found. He said that the only proper conclusion on the evidence before the General Commissioners was that Able’s claim was in respect of a diminution in the value of its land, and therefore by definition a capital loss.

[12]Second, he submitted that in any event the decision was wrong in law because, however characterised, the loss was of such a permanent nature that it was a capital not revenue loss.

[13]Taking the first of those two grounds of appeal, Able’s attack originally focused on paragraphs 9.2 to 9.4 of the Case Stated, but the criticism of paragraph 9.2 falls away once it is appreciated, as both parties now do, that it means no more than that profitability plays a part in the capital valuation of a landfill site as well as in the valuation of a revenue loss. That is common sense and was common ground before me. The General Commissioners were not saying that the precise method employed would necessarily be the same in each case.

[14]The main target of Mr Vallat’s challenge to the General Commissioners’ factual findings is found in paragraph 9.3 in the General Commissioners’ conclusion that the loss for which Able obtained compensation was the damage to it business caused by it being unable fully to exploit the landfill market as it had intended.

[15]Closely related to that finding was the General Commissioners’ conclusion in paragraph 9.4 that the detailed claim submitted to the Lands Tribunal showed that Able and its advisers regarded the claim as being for loss of profits. This, Mr Vallat challenged with equal vigour. He submitted that the evidence before the General Commissioners showed that the claim was for compensation for diminution in the value of the land and that this is how Able and its advisers regarded it.

[16]In addition, Mr Vallat submitted that the General Commissioners were wrong to conclude, also in paragraph 9.4 of the Case Stated, that other contemporaneous documents also disclosed the same attitude of mind on the part of Able and its advisers.

[17]The evidence before the General Commissioners consisted of the following: 1.) copies of the full written Statement of Case in the compensation claim to the Lands Tribunal. Since the claim was settled at the court door, that constituted the entirety of Able’s presentation of its case. It took the form of a detailed Statement of Case with supporting calculations, together with a witness statement by a Mr Andrew Crawford, a consultant with Gerald Eve, Chartered Surveyors, and Chairman of the Minerals Practice Panel of the Royal Institution of Chartered Surveyors, clearly an undoubted expert in valuing compensation claims of this type.

[2]) the evidence of Mr Crawford himself as a witness of fact which took the form of a proof which was taken as read, examination in-chief and cross-examination of the substance of which there is an agreed note; 3.) the witness statement and oral evidence in chief and under cross-examination of Peter Stephenson, the Chief Executive and Managing Director of Able; 4.) the witness statement and oral evidence under cross-examination of Mr Sean Ruff, Able’s accountant; 5.) a bundle of documents which, for relevant purposes included certain correspondence during the time both of Able’s original £22 million compensation claim which was commenced in 1994 and during the time of the later claim for £10.2 million launched in 1997; 6.) the statement of facts not in dispute. For the purposes of his submissions, Mr Vallat concentrated on times (1), (2) and (5) in that list.

[18]It is well-settled and it is common ground on this appeal that the first question to be asked when seeking to classify a payment as capital or income, is what the payment was for. When the issue is as to the classification of a compensation payment in the hands of a recipient, the question is: for what loss was the compensation paid? This is the question which the General Commissioners were seeking to answer in paragraph 9.3 of the Case Stated. It is partly a question of primary fact, but also, importantly, a question of analysis.

[19]The giving and subsequent withdrawal by NWL of the notice to treat for which Able was entitled to compensation, had the immediate effect of preventing Able from making any profitable use of the CPO land between 14 August 1992 and 9 November 1994. Able also claimed that its additional adjacent land was also sterilised for landfill purposes by the giving and withdrawal of the notice

[20]For as long as Able continued to dispute NWL’s right to withdraw the notice, that is until November 1995, Able made no actual use of the land. I consider that this further one year period of non-use was not caused by the giving or withdrawal of the notice to treat; it was caused by Able’s pursuit of an incorrect claim in the judicial review proceedings. The General Commissioners made no express finding about that, and may, to judge from paragraph 5.7 of the Case Stated, have been prepared to include that additional year in the period of interruption for which compensation was payable, effectively giving Able the benefit of the doubt as to the length of the period of interruption.

[21]During that period, an initially very favourable market for general waste landfill operations declined to a point, where, by 1996, it had, by comparison with hazardous waste operations, become uneconomic: see paragraph 5.7 of the Case Stated which is not challenged. Able’s claim in the Lands Tribunal was that hazardous waste operations were, on a net present value calculation, less profitable than general waste operations: see, for example, page 22 of Able’s Statement of Case, a passage to which I shall return in due course.

[22]It is not seriously suggested, despite a faint hint of it in Able’s Statement of Case to the Lands Tribunal, that the giving and withdrawal by NWL of its notice to treat itself had any aggravating affect upon the declining general waste market. The market deteriorated due to the coming on stream of a large amount of additional landfill space for general waste during the relevant period. Clearly that market change was the cause of any diminution in the value of Able’s land, including but not limited to the CPO land, referable to its use being confined to hazardous rather than general waste disposal. For the purpose of analysis I shall assume that Able would have been able to make that assertion good, if its claim for compensation had not been settled.

[23]It seems to me inevitably to follow that the enduring loss caused to Able by the giving and withdrawal of the notice to treat, was not a diminution in the value of its land, other than purely temporarily during the period of interruption, but a permanent loss of the opportunity to put its land to its most beneficial use during uniquely favourable market conditions which are unlikely ever to return. In short, the decline in the value of the land was caused by the adverse turn in the market; the giving and withdrawal of the notice prevented Able from exploiting its land as beneficially as it wished to do while that favourable market lasted.

[24]Reading Able’s Statement of Case in the Lands Tribunal, together with Mr Crawford’s supporting witness statement deployed in the Lands Tribunal, demonstrates, in my judgment, that Able’s claim for compensation was devised and presented on exactly that basis. There is no substitute for reading the material in its entirety, but the following extracts sufficiently capture its flavour:

“16. When NWL took possession of the CPO lands there were approximately 600,000m³ (six hundred thousand cubic metres) of consented voidspace in Cleveland available for landfilling (see section E to the claim). This was sufficient airspace for just over one year and of the total commercially available demand for voidspace in Cleveland. Able UK Limited already had permissions on parts of their site and, as is proven by the CAAD, and subsequent permissions, were capable of securing permissions and licensing in respect of the whole of their site (see section C to this claim). Had Able UK Limited had possession of their full site then they would have been in the position to secure a potential monopoly of the Cleveland Landfill Markets. Subsequent events have now precluded this possibility. 17. By the date NWL sought to withdraw their Notice to Treat and the ability to take this action had been confirmed by the High Court the volume of consent voidspace had increased to a figure in excess of 6,000,000m³ (six million cubic metres and is now in excess of 100,000,000m³ (including Able UK Limited’s most recent resolution to grant permission)…. 19. Able UK Limited’s business has been significantly affected by the action of NWL in taking and holding possession of the CPO lands for a significant period. Their service of the Notice to Treat prevented Able UK Limited from exploiting the market at a time when demand for airspace would have been extremely high and the withdrawal of the Notice to Treat came too late to allow Able UK Limited to achieve the position where they would have been able to had NWL not taken possession of their land. 20. The claim is structured on this basis. A13. The bulk of the claim, as set out in Part 2 - Head of Claim 1, relates to the losses incurred by Able UK Limited as a result of not being in a position fully to exploit the landfill market, arising from the service and withdrawal of the NTT. Had Able UK Limited not been under threat of CPO and then subject to the NTT in the early 1990s, then they would have owned and operated one of, if not the most significant, landfill sites in the North East and may have been in virtually a monopoly position. A14. The claim will show that, because Able UK Limited were under the threat of, and then actually suffered, dispossession of a significant part of their facility they consciously altered their working plans for the site such that it changed from a site capable of securing, and operating viably, at higher volumes of a mix household, commercial can industrial and special wastes, to a site, more viably operated at a lower volume of more specialised wastes. A15. The claim will then show that, by the time possession was handed back and the ability to take that action confirmed, the nature of the general market had changed because of the grant of a number of planning permissions at alternative sites and progress in the award of contracts, particularly the Cleveland County Waste Contract, reducing the volumes of arisings available in general market. A16. The claim will show that it is now more viable for Able UK Limited to operate the facility as a site dedicated mainly to special wastes. The calculations of the claim will show that the working scheme which would have been progressed, were it not for the service and withdrawal of the NTT, would have had a greater present value than the scheme now to be worked and this element of the claim is calculated as the difference in value between the two schemes. D1. Shortly after NWL served Notices to Treat and of Entry, Cleveland County Council commenced the pre-qualification and tender process for the award of the contract to handle the County’s household waste requiring the disposal of approximately 310,000 tonnes waste per annum over a period of 10 - 25 years. G9. For reasons described elsewhere in this report, service to the Notice to Treat and possession of the CPO lands by NWL this strategy altered. The original strategy was based on the premise that approximately two thirds of the input would be lower value, high volume household, commercial and industrial wastes and the remaining one third of the input would be high value special wastes. The possession of the site by NWL reduced the potential airspace at the site by in excess of 65% and in the circumstances Able UK Limited had to change their strategy for the site, reserving the remaining airspace for the higher value special wastes. This is evidenced by the internal company memoranda and notes etc presented at Appendix 21. G10. Following withdrawal of the Notice to Treat and for reasons described elsewhere in this claim (i.e. reduction in the volume of waste arisings in the general market and increase in the volume of airspace available) the company have had to maintain this revised strategy and rely now largely on the deposit of special wastes at higher unit prices but at lower volumes. 1.1 The attached calculation (No.1) is that described in Section A - the Description of the Claim. 1.2 The basis of calculation assumes that, prior to Notice to Treat and possessions of the land by NWL, Able UK would have had the opportunity to develop a landfill site capable of taking the full range of household, commercial, industrial and special wastes at an overall rate of tipping in the order of 320,000 cubic metres per annum reflecting the general demand described is Section F. 1.3 Able UK were excluded from elements of the landfill market by NWL’s threat of, and actual possession of, the subject site. By the time NWL sought to withdraw their Notice to Treat events in relation both to planning permissions in the vicinity and contracts available in the market had changed to the extent that Able UK Limited have now had to develop a strategy for the site based on the deposit of mainly special wastes, at the significantly lower rate of tipping of 100,000 cubic metres per annum albeit at a higher unit price. 1.4 The attached calculation shows the net present value of the potential income stream at the site at the date of Notice to Treat, assuming the higher rate of infilling of the full range of wastes and, the net present value of the scheme now, assuming predominantly special wastes at the lower rate of input and higher price. 1.5 The loss claimed under this heading is the difference between these two net present values.”

[25]There then followed tables of calculations which were based upon a capitalisation of an annual profit margin available from each of the two alternative schemes so as to produce a net present value of each scheme, with compensation claimed for the difference between the two.

[26]Mr Crawford’s witness statement in the Lands Tribunal also needs to be read in full, but the following paragraphs capture its flavour:

“6.4 The claim is essentially for the losses to Able resulting from lost contracts and lost ability to bid in the market for contracts due to its inability to use the whole of its land comprising the Order Lands and its retained land… 6.27 The bulk of the claim for losses arising from the service and withdrawal of the NTT relate to the difference in value between a high volume mixed waste (medium value/tonne) strategy (which would have been possible with the Order land and retained land) and a lower volume hazardous waste (higher value/tonne) strategy forced upon the company using the retained land only. 20.9 The claim is not founded solely on the fact that Able were excluded from the Cleveland County Waste Contract procedures. Possession of the Order lands by NWL restricted Able’s ability to pursue the opportunities to secure the large volumes of other wastes in the market at a time when void space was restricted. 20.11 The bulk of the claim, as set out in Part 2 - Head of Claim 1 to the claim, relates to the losses incurred by Able as a result of not being in a position fully to exploit the landfill market, arising from their service and withdrawal of the NTT. Had Able not been under threat of CPO and then subject to the NTT in the early 1990s then they would have owned and operated one of, if not the, most significant landfill sites in the North East of England and would have been in a very strong position to exploit the landfill markets.”

[27]It is striking that nowhere in the Statement of Case or in Mr Crawford’s witness statement to the Lands Tribunal is there any express mention of land valuation or diminution in the value of land, although it is fair to say that the valuation technique which appears from the figures and their accompanying notes, is one capable of being applied to the valuation of land, in particular special use land such as, for example, hotels and, as here, landfill sites.

[28]Had that been the totality of Able’s evidence as to the nature of the compensation claim deployed before the General Commissioners, they could hardly have described the underlying loss otherwise than as they did in paragraph 9.3 in the Case Stated. They adopted in their concise summary the very language used by Mr Crawford in the Statement of Case and in his witness statement. But that was not the totality of the evidence. There was also his proof of evidence, his examination in chief and his cross-examination. “9. Following Notice to Treat and service of, I recall, a General Vesting Declaration, Northumbrian Water took possession of the land. A very substantial claim for compensation was lodged reflecting the value of the asset of which Able UK had been deprived at that time. Following receipt of the claim, Northumbrian Water withdrew their Notices, as they were entitled to do under Compulsory Purchase legislation and handed back the site to Able. 10. When such action is taken the party affected by the compulsory acquisition is still entitled to compensation if it can be demonstrated that a loss was incurred. A further and revised claim was submitted, reflecting the revised circumstances. The revised claim reflected the loss by measuring the value of the land (landfill) before and after the service of Notices to Treat and General Vesting Declaration. In my experience this is a valid measure of compensation assessing, as it does, the diminution in value of the land assets as a consequence of the actions of the Acquiring Authority. 11. Unlike, say, an office or shop, there is often very little comparable rental or other transactional evidence upon which to base the valuation of landfill or mineral sites. In such circumstances it is common practice to have regard to actual or potential profits a site is capable of generating in assessing the royalty value to apply to a site which will then be capitalised to arrive at the capital value of the land of which the landfill or mineral form a part. The royalty will be the appropriate proportion of profit attributable to the land which enables the land owner or site operated to make a profit. …13. My valuations, as submitted to the Lands Tribunal, followed the model set out in a previous Tribunal case Clive Haddon v Black Country Development Corporation 166/1299. Although a little difficult to analyse, this case effectively does exactly the exercise described in the above paragraph although in this case 70% of the difference between revenue and costs was attributable to the value of the land. My valuations did not seek to claim any element as profit in compensation. The valuations compared the before and after value of land (described in my submission as “airspace” or “the working scheme”).

14. Under the six basic rules of valuation for compensation it is recognised that loss of profits can be payable provided such losses are not too remote. Such a claim would be pursued under Rule 6. However, the principle Rule is Rule 2 which relates to the assessment of compensation under the market value of land. I have had the opportunity to read again my statement of evidence as submitted to the Lands Tribunal and to review the claim for compensation and am satisfied that my valuations, being valuations of land before and after the action giving rise to the compensation, are valuations under Rule 2 i.e. are valuations of land.

15. Very extensive negotiations were held between myself and John Trustram Eve of Grimley GVA - agent for Northumbrian Water. As I recall, all those negotiations were around the general model set out in the Black Country case. Where we differed in our valuations was on the rates of input of waste and output of clay to and from the site and in our assessments of costs and revenues and yields. All these variables were inputs to the valuation of land.”

[29]His cross-examination included cross-examination about the basis and method of his valuation and in his evidence in chief, of which as I have said, there is an agreed note as to its substance though not a verbatim note. He is reported to have said that he had not been engaged to value the business but rather the land, and he explained that both he and the NWL surveyor with whom he had negotiated had used the same method of calculation.

[30]In my judgment, there is an obvious tension between an objective assessment of Able’s written claim in the Lands Tribunal and Mr Crawford’s after the event description of the nature and purpose of his handiwork. Objectively, the claim was for the difference in net present value as at November 1992 between two alternative business schemes on the basis that the giving and withdrawal of the notice to treat caused Able to have to adopt the less profitable of those two schemes. Yet Mr Crawford describes his handiwork to the General Commissioners as simply an assessment of the diminution in value of Able’s land caused by the interruption in its use, not a valuation of its business.

[31]The General Commissioners needed to choose which of those two descriptions fairly reflected Able’s claim in fact. They chose the first and, although they have not stated so in terms, must be taken to have rejected the second. In my judgment, the General Commissioners’ conclusion cannot possibly be described as perverse or beyond reason.

[32]That is sufficient to require Able’s first main ground of appeal to be rejected so far as it relates to paragraph 9.3 of the Case Stated, but I also consider that the General Commissioners’ conclusion, precisely summarised in paragraph 9.3 of the Statement of Case, was both correct and, in reality, inevitable, in particular when it is borne in mind that the enduring deterioration of the value of the land was caused by market forces, not by the giving and withdrawal of the notice. The claim was pursued on the only basis sensibly available, namely that what Able lost was the opportunity to exploit its land to the full by profitable business activities while market conditions were, briefly, uniquely favourable.

[33]It is true that the method of calculation used by Mr Crawford to compare the net present value of the two alternative business schemes was a profits-based method which could have been employed in valuing Able’s land or in valuing a diminution in its value caused by a change in the market, but it is a fallacy to assume, as Mr Crawford appeared to do in his evidence before the General Commissioners, that the method chosen for calculating compensation dictates the character of the loss for which compensation is paid. That fallacy is well known to the law, as will appear when I address Able’s second ground of appeal. But first I must deal with Able’s challenge to paragraph 9.4 of the Case Stated.

[34]It will be apparent from the foregoing that I consider that the General Commissioners were equally entitled to conclude that the written Statement of Case to the Lands Tribunal did indicate that Able and its advisers regarded the claim as being, in substance, for loss of profits. Since the essence of the written case was that Able was forced to adopt a less profitable exploitation of its land than that which would have been available but for the giving and withdrawal of the notice to treat, that conclusion seems to me to be inevitable.

[35]Paragraph 9.4 does not make clear what the General Commissioners regarded as the relevant contemporaneous correspondence, but the candidates consist of three letters written on behalf of Able in December 1994, June 1995 and June 2000 in each of which the compensation claim is referred to as either being or at least including “a claim in respect of lost profits”.

[36]The first two letters are contemporaneous with the earlier £22 million claim lodged in September 1994 and withdrawn in or about 1996. Only the third letter is contemporaneous with the second claim, lodged in July 1997 and settled in June 2000. In my judgment, paragraph 9.4 of the Case Stated cannot be faulted on the basis submitted by Mr Vallat that the General Commissioners may have been wrongly relying on the earlier two letters when they were not contemporaneous with the relevant claim. Taken together, the three letters merely confirm the impression primarily to be derived from the Statement of Case itself, that all along Able regarded its loss as a loss of profit. If it had such a view at a time when it was claiming up until 1996 in respect of a permanent loss of the CPO land, it seems to me even more likely that it had such a view once, after the failure of its judicial review proceedings, it became clear that its enjoyment of its land and its right to compensation was only on the basis of a temporary interruption. It follows that the Edwards v Bairstow challenge to the General Commissioners’ decision fails in its entirety.

[37]I turn now to the second ground of appeal which relies upon an alleged error of law.

[38]Besides setting out the rival contentions of the parties and stating in paragraph 9.5 of the Case Stated that they did not derive much assistance from the John Lewis criteria, the General Commissioners gave no detailed legal analysis in support of their conclusion that the agreed compensation was an income receipt. The question for me is simply whether, on the facts found, they were correct in law to do so.

[39]This is not the time or the place for a detailed analysis of the law on a subject which often gives rise to fine distinctions. I was taken to a large number of authorities and imply no lack of respect or gratitude for counsel’s endeavours if I only refer to a few of them.

[40]Mr Vallat submitted that, regardless whether the loss was analysed as a loss of opportunity to exploit land, or diminution in value of the land, but a fortiori if the latter, the enduring character of the loss requires both the loss and therefore the compensation paid in respect of it to be characterised as capital rather than income. He supports that submission by reference to a series of cases in which permanent loss has been so analysed, by contrast with cases in which the loss was only temporary, which he says are distinguishable, and he suggests that the true test is that the choice between capital and income is ultimately one of degree.

[41]His sheath anchor is the decision of the House of Lords in Glenboig Union Fireclay Co Ltd v IRC [1922] 12 TC 427 in which a railway company obtained, pursuant to statutory powers, a permanent restraint on the extraction of fire clay on the taxpayer’s land in the vicinity of the relevant railway on payment of statutory compensation. The House of Lords held, affirming the Court of Session, that the loss and the compensation were both to be characterised as capital in nature, even though its amount had been assessed by reference to the taxpayer’s consequential loss of profit because the taxpayer’s right to extract the fire clay had been permanently sterilised. As Lord Buckmaster put it at page 463:

“It appears to me to make no difference whether it be regarded as a sale of the asset out and out, or whether it be treated merely as a means of preventing the acquisition of profit that would otherwise be gained. In either case the capital asset of the Company to that extent has been sterilised and destroyed, and it is in respect of that action that the sum of £15,316 was paid.”

[42]Outside the field of compensation for loss, Mr Vallat relied on McClure v Peter

[1988] STC 749

to show that the same conclusion may be reached where payment is made for a transaction which realises once and for all the value of a particular characteristic of land, thereby permanently diminishing the value of the land in the hands of the payee. There, the taxpayer had been paid for permitting tipping of waste on his land from a nearby motorway construction site, wholly realising the value of his land as a tip.

[43]The ratio of the case is to be found in the judgment of Sir Nicholas Browne-Wilkinson V-C (as he then was) at page 756 as follows:

“In my judgment the case is authority for the proposition that where the value of an asset is attributable to a number of different characteristics, the consideration received for a transaction which realises once and for all the capital value of one of those characteristics (thereby diminishing the remaining value of the whole asset) is capable of constituting capital, not income, and that is so notwithstanding that the asset itself and all the rights in it remain throughout the property of the taxpayer.”

The case to which the Vice-Chancellor referred was Earl Hague Trustees v IRC.

[44]If that is so, submits Mr Vallat, then why should compensation for an interruption which permanently deprives Able of the opportunity to use its land as a general rather than hazardous waste disposal site, not be similarly characterised?

[45]Mr Vallat then relied on a series of cases showing that expenditure on the acquisition, preparation of and the obtaining of planning permission for landfill sites is capital expenditure, for example, ECC Quarries v Watkiss

[1975] STC 578

and Rolfe v Wimpy Waste Management

[1989] STC 454

. By analogy he submitted that compensation for the permanent loss of one of the available landfill uses should be similarly characterised.

[46]Mr Vallat also prayed in aid the first of Dyson LJ’s five indicia in the John Lewis case, which may be headed “duration”, and for that purpose I can quote from paragraph 80 of his judgment at page 143, where he says as follows:

“The first factor is duration. If what is disposed of is long-lasting, it is more likely to be a capital asset than if it is something which is evanescent. The cases show that an asset which has an enduring or long-lasting quality is likely to be regarded as a capital asset, and payment received for its acquisition a capital receipt.”

[47]Finally, and perhaps in anticipation of the possibility that the Glenboig case might be distinguished on the basis that here there has only been a partial sterilisation of a valuable attribute of the land, Mr Vallat referred me to obiter dicta of Sir Raymond Evershed MR in Higgs v Olivier 33 TC 133, to the effect that the question whether payment for a covenant by an actor to limit his acting activities was part of the profits or gains arising from his trade or profession, might be a question of fact and degree depending on the duration and the ambit of the restraint.

[48]In my judgment, the principles relevant to the present case are as follows: (a). The compensation takes it character, ie as income or capital, from the character of the loss. This is because the first question in compensation cases is: what loss is the compensation paid for? See, for example, per Lord Hoffmann in Deeny v Gooda Walker

[1996] STC 299

at page 309. (b). The question is to be addressed by the practical application of business commonsense, rather than, if different, a purely juristic classification of the rights secured, employed or exhausted in the process: see again per Dyson LJ in the John Lewis case at paragraph 73 of his judgment. (c). In cases where there has been only a temporary interference with the trader’s use of his fixed asset, the following rule laid down by Diplock LJ (as he then was) in London & Thames Haven Oil Wharves v Attwooll [1966] 43 TC 491 at 515, has stood the test of time and been repeatedly followed and approved. Diplock LJ said this:

“I start by formulating what I believe to be the relevant rule. Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received, instead of the compensation. The rule is applicable whatever the source of the legal right of the trader to recover the compensation.”

Diplock LJ then expressly included statutory compensation within his formulation of the rule and explained that the rule only applies where the answer to the question “what is the compensation for?” is that it is for the failure of the trader to receive a sum of money. In that case damages were paid for the negligent handling of a tanker which damaged the trader’s new jetty and included compensation for the jetty being out of action for 380 days of an expected 25 year life while under repair. That part of the compensation was held to be the trader’s loss of profit which he would have earned from licensing his customers to use the jetty and was therefore treated as a loss of income. (d). The method of calculation of the compensation is not decisive, although it may sometimes be of assistance as a pointer. For example, in the Glenboig case, the compensation was calculated by reference to the taxpayer’s anticipated loss of profit from extracting the fire clay, but it was still treated as capital, whereas in the Attwooll case, the compensation was calculated by reference to the capital value of the jetty, since being brand new there were no trading figures, but it was still treated as income. (e). The Glenboig sterilisation principle has no application either to the partial sterilisation of an asset or to a case where the hindrance or interference for which the compensation is paid, leaves the taxpayer’s asset intact but merely causes it to be used for a time in a different, less profitable, way: see White v Davies

[1979] 1 WLR 908

per Sir Nicholas Browne-Wilkinson V-C (as he then was) at pages 914 to 916. In that case Diplock LJ’s test in the Attwooll case was applied to statutory compensation paid to a farmer under a scheme whereby, in order to reduce excessive milk production, he agreed not to sell milk but rather for four years only to use his land for sheep or beef cattle. 54. The same principle also emerges from the following passage in the judgment of Willmer LJ in the Attwooll case at page 511, where, citing Lord Clyde in Burmah Steamship v Commissioners for Inland Revenue [1931] 16 TC 67, he said:

“But, as the case just referred to shows, it is very relevant to inquire whether the thing, in respect of which the taxpayer has recovered damages or compensation, is deprivation of one of the capital assets of his trading enterprise, or, short of that, a mere restriction of his trading opportunities.”

[49]Applying those principles to the facts of this case: (a). the agreed compensation was for Able’s loss of opportunity to profit from the beneficial use of its land, that loss occurring both during and because of the deterioration in the market after the period between the giving and the withdrawal of the notice to treat. (b). That conclusion derives from a practical businesslike appreciation of the predicament faced by Able as a result of the giving and withdrawal of the notice to treat. (c). There was only a temporary interference with Able’s use of its fixed asset, ie, its landfill site for trading purposes: see paragraph 9.1 of the Case Stated, and the compensation was paid for loss of monetary receipts by Able, ie the profit which it could have derived from contracts bid for and entered into during the period of the interference when market forces would otherwise have created a short-lived opportunity to maximise those profits beyond what is now available. Accordingly, Lord Diplock’s rule is, in my judgment, applicable. Plainly the application of that rule leads to the characterisation of both the loss and the compensation as income. Had there been no interruption, Able would have derived a greater revenue profit from the landfill business for the loss of which the compensation was paid. (d). The method of calculation of the loss was also by reference to the lost profit, ie, the difference between the profitability of the scheme prevented by the interruption and the best scheme available to Able having regard to the interruption, but that is not decisive, nor is it decisive that a profitability-based analysis could equally have been used as a means of assessing the diminution in the value of Able’s land which occurred during, but which was not caused by the period of interruption in its use. (e). There has plainly been no permanent or complete sterilisation of the use of the land for landfill, still less the deprivation of one of Able’s fixed assets, but only of temporary restriction on Able’s trading opportunities, albeit unfortunately during a short-lived market boom caused by a shortage of landfill capacity elsewhere in the region.

[50]Turning briefly to Mr Vallat’s submissions, first, for the reasons already given I do not consider that the Glenboig sterilisation principle is applicable to this case. Secondly, the cases like McClure v Peter which are also about the complete exhaustion of a profitable feature of a fixed asset are, in my judgment, equally inapplicable for the same reasons. Third, it is common ground that expenditure on a capital asset may be capital expenditure, but there is no relevant analogy with a loss of profitability arising from a temporary interference with its use.

[51]Fourth, while the John Lewis indicia, including the duration factor, may, in appropriate cases be valuable tools, the Court of Appeal in that case were at pains to limit their observations to cases of the type then under review which are, in my judgment, far removed from cases about compensation for loss. In any event, to the extent that duration is relevant, the interruption in use in this case was only for a little over two years, or three years if the period of the judicial review proceedings is taken into account, and the loss, albeit in a sense once and for all, was only of a relatively fleeting market opportunity.

[52]Finally, while the distinction between capital and income may occasionally be so finely balanced as to be a matter of degree, there is no general principle that the duration of the loss is decisive. Usually, the distinction between capital and income, like other questions of characterisation, is one of law. Furthermore, if it were a matter of degree it would, as was recognised in Higgs v Olivier, be a matter of fact for the Commissioners.

[53]I therefore conclude that the General Commissioners were correct in law to characterise both the compensation and the loss in this case as income rather than capital items and I therefore dismiss the appeal. - - - - - -