Readers' Forum
Replies to Queries — 4
Onerous lease
B Limited occupied its factory premises for nearly 40 years, under a succession of leases. As a result of ill health, the directors decided to retire and close the company. All staff were made redundant, the equipment was all sold, book debts collected and all liabilities settled. The company has a bank balance of £130,000.
Readers' Forum
Replies to Queries — 4
Onerous lease
B Limited occupied its factory premises for nearly 40 years, under a succession of leases. As a result of ill health, the directors decided to retire and close the company. All staff were made redundant, the equipment was all sold, book debts collected and all liabilities settled. The company has a bank balance of £130,000.
The factory lease expires in March 2006 and the annual rent is £16,000. The landlord is holding out for full settlement of the rent until the end of the lease, plus dilapidations, which a surveyor's report indicates could be as much as £140,000. There is no possibility of sub-letting or of assigning the lease.
The company's accounts for the last few years show taxable profits/losses as follows:
March 2001 Loss £14,000
(carried back)
March 2002 Profit £45,000
(tax paid £8,875)
March 2003 Profit £56,000
(tax paid £10,640
Draft accounts to December 2003 show a loss of £32,000 after redundancy pay of £7,000 for the staff and £12,000 for the two directors. To what extent can a provision be made in the December 2003 accounts for the remaining rent due under the lease (£36,000) or for the dilapidations? No provision has yet been made.
Is it necessary to await the completion of the negotiations with the landlord before finalising the accounts and submitting a claim to the Revenue?
As the loss to December is a terminal loss, this can be carried back up to three years, but presumably any excess terminal loss would be unrelievable. Thus, assuming full provision can be made for the remaining rent payable, taking into account the losses already incurred, any provision in excess of £33,000 for dilapidations (£101,000 profits less £32,000 current loss plus £36,000 rent) would generate the maximum available refund of tax paid. Is this correct?
(Query T16,455) — Saint David.
It is essential that whatever figure is inserted in the accounts is justifiable under United Kingdom Generally Accepted Accounting Practice. On the face of it, a provision would be necessary in these circumstances in order to give a true and fair view of the company's financial condition at the balance sheet date.
Under Statement of Standard Accounting Practice 17, the estimate must be the best available of that liability on the day upon which the accounts are signed off. It would, therefore, seem appropriate for this to be delayed, if at all practicable, until terms for the early surrender of the lease can be reached with the landlord.
Under section 42(1), Finance Act 1998, United Kingdom Generally Accepted Accounting Practice treatment can, nonetheless, be overridden by a rule of law. Herbert Smith v Honour [1999] STC 173 suggests, however, that an Inland Revenue challenge by reference to the accounting period in which the liability is to be claimed would be unlikely to succeed under this provision.
It seems possible, however, that the Inland Revenue might call in aid section 74(1)(a), Taxes Act 1988. Anglo Brewery Co v Commissioners of Inland Revenue [1925] 12 TC 803 and Godden v A Wilson's Stores (Holdings) Ltd [1962] 40 TC 161, cases on voluntary redundancy payments, could be cited as authority for the proposition that this expenditure had not been incurred for the purposes of the trade because it related to closing it down. In relation to a running lease, however, it may be possible to deploy the reasoning in Commissioners of Inland Revenue v Cosmotron Manufacturing Co Ltd [1997] STC 1134 to overcome this problem.