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Lords Tax Ruling Will Benefit Many UK Firms, Say Advisors

by Jason Gorringe,, London

04 April 2007

A ruling by the House of Lords in a tax case involving William Grant, the whisky distiller and Mars, the global confectionary company, is a triumph for the application of modern accounting practice for tax purposes and will have a considerable impact on the tax liabilities of a number of large manufacturing businesses, according to business advisory firm Deloitte.

Mark Stephenson, tax partner at Deloitte with responsibility for manufacturing in the North West, explained that the subject of the dispute focused on depreciation charged to stock and the question of whether companies should pay tax on profits before they’ve earned them.

"Specifically, it’s concerned with depreciation of assets used in the production process," Stephenson noted. "In a tax computation, the depreciation charged against profit in the year has to be added back to arrive at the taxable profit (and is replaced by deductions for capital allowances). The issue is whether the add-back should be the (gross) amount written off the asset in the year or the (net) amount actually charged against profit after carrying part of it forward in closing stock."

“HMRC believed it should be the gross amount," he continued. "This would result in the full amount of the depreciation being taxed in the year even though part of it doesn’t get charged to profit in the year. The companies believed it should be the net amount, so the tax charge would reflect the company’s true profit for the year – and the House of Lords upheld the companies’ view.”

Maurice Parry-Wingfield, tax director at Deloitte, added: “The judgment in the Lords dealt with an issue of fundamental importance: the extent to which tax should be based upon accounting profits, in tune with modern practice, or upon the traditional and legalistic approach favoured by HMRC."

Deloitte said that the Lords found on a basis which was rooted in cases going back 80 years or more when accountancy was comparatively undeveloped. They believed that the depreciation charged against profit was simply the amount written off the asset in the balance sheet, and that the closing stock was disconnected from any depreciation as an ingredient of it. Lord Hoffman, who delivered the leading judgment, found in favour of the company on the basis that modern accountancy matches costs against revenue, so the depreciation carried forward as a cost to be matched with future sales shouldn’t be added back in the current year. Deloitte noted that this view appears to be common sense and reflects the views of many commentators on accountancy and tax matters.

"This issue has been around for over 20 years and it’s good to see it resolved by the House of Lords," Parry-Wingfield added. "As Lord Hoffmann said in dismissing HMRC’s argument ‘It may have been the only practical method when record-keeping was not sufficiently sophisticated to enable one to make a meaningful attribution of costs in one year to sales in some future year’. And as Lord Hope put it, ‘the golden rule is that the profits of a trading company must be computed in accordance with currently accepted accounting principles’.”

Whilst the amount of money at stake in the cases (estimated to be around GBP3m for William Grant and GBP1m for Mars) is relatively small, Deloitte predicts that the case will affect many other manufacturers. In William Grant’s case, the long time it takes to mature its whisky means that it would take many years to recoup the extra tax out of future sales. The two cases will also create a precedent for a number of large-scale manufacturers that also have outstanding tax appeals hanging on the issue, including the chemical and pharmaceutical industries.

A comprehensive report in our Intelligence Report series looking at Tax-Effective Global Manufacturing and Financing Structures is available in the Lowtax Library at and a description of the report can be seen at

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