Court rules in favour of corporate taxpayers

Calculating profits for tax purposes

The law lords made their decision in a couple of test cases brought by William Grant, the Scotch whisky maker, and Mars UK, part of the large US-based group best-known for confectionery and pet-food products.

Both companies carry significant stocks - with the whisky industry, for example, keeping some of its products for years to allow ageing to take place.
Both Mars and William Grant had adopted the "modern" accounting approach to assessing profits, by booking expenses for profit purposes when stock was sold rather than when these expenses were incurred. That extended to the depreciation of assets used to produce items held as stock.

This meant, in short, that these depreciation charges were taken as an expense only when the stock was sold, not when the asset was depreciating.
But the tax authorities claimed the depreciation that needed to be added back for tax purposes was the full amount that had occurred during the relevant period, irrespective of any de-preciation carried forward in this way for accounting -purposes.

The House of Lords came down in the companies' favour. In a unanimous decision, five law lords ruled that if companies followed the modern accounting approach of booking depreciation as an expense only when stock was sold, tax law should not ignore this, and demand that a different figure should be added back in order to calculate profits for tax purposes.

The amount of money at stake in the two individual cases was relatively small: about £3m for William Grant and £1m for Mars. However, the effects of the decision are expected to be widespread and to have an impact on many manufacturers. A number of cases were known to be waiting on the law lords' decision, notably in the chemical and pharmaceutical industries.

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