[2023] UKUT 153 (LC)

The starting point for this assessment is to estimate what profit would have been achieved in the no-scheme world at the reference property in the years when trading was affected by acquisition and relocation, so that a comparison can be made with the actual profit achieved in those years. The comparison can be made either on a net profit basis, or on a gross profit basis with adjustment for different overheads as necessary. Mr Woodward adopted the net profit approach and Mr Epstein the gross profit approach.

Mr Woodward assessed the no-scheme world net profit using the financial results achieved by the claimant at the reference property in the year ending 31 March 2015 (“YE 2015”), the last full year of trading before the acquisition and relocation. As the figures above show, annual net sales amounted to £672,130, of which 77.54% was stated to be gross profit (sales less cost of sales) of £521,170. From the gross profit £215,004 was deducted for overheads to account for rent (£50,000), service charge (12,459), rates (£21,775), wages (£99,987) and miscellaneous items (£30,783), leaving a net profit of £306,166. In accounting terms this is described as EBITDA (earnings before interest, tax, depreciation and amortisation).

Trade in YE 2016 was affected by cessation of business in the reference property on 15 November 2015. Trade did not recommence in the relocation property until 1 July 2016, so YE 2017 was also affected. To calculate the claim for loss of profit in the two affected years Mr Woodward assumed that in the no-scheme world profits of at least £306,166 (as in YE 2015) would have been achieved in each affected year. The actual profit for each year was shown in the management accounts at £167,642 and £157,135 respectively so the claim for temporary loss of profit was assessed as set out below, although we note that Mr Woodward’s assessment of £287,522 differs by £33 from that shown below:

For the respondent, Mr Epstein was concerned that the management accounts provided by the claimant in support of the claim were potentially unreliable since auditors had stated in a letter only that the information in the claim “agreed materially” with the accounting records. Moreover, the data was not supported by any sworn witness statement. He had a particular concern that the gross profit percentages of 77.54% for YE 2015 and 77.47% for YE 2016 were very different from those in the claimant’s audited accounts for the same years at 49.78% and 47.67% respectively. However, it had been explained to him that the audited accounts differed because deductions for wages and store occupancy costs had been made from the product margin on sales.

Mr Epstein adopted Mr Henderson’s view that money spent on overheads in the relocation property would have represented value for money, so his approach to assessing temporary loss was based on gross profit. From the management accounts he took actual net sales achieved in the affected years and compared these with the level of sales predicted for those years in the no-scheme world. To assist him in predicting sales in the no-scheme world Mr Epstein analysed the claimant’s company wide data on net sales, and the number of stores fully operational in each year, to assess the average sales per store from YE 2013 through to YE 2020, together with the year on year percentage change. He compared this with the actual sales and year on year change in Watford, as set out below:

Mr Epstein observed that sales for YE 2015 were the highest of any year, both at the property and across all stores, and that average sales per store fell year on year thereafter. Monthly sales data supplied for the reference property showed that sales for April to September 2015 were 5% below the same period in 2014. Although sales in October and half of November 2015, i.e. the six weeks leading up to vacation of the property, were significantly higher than for the same period in the previous year, he considered that this would be explained by the pre-vacation clearance sale. Mr Epstein therefore concluded that in the no-scheme world sales at the reference property would have fallen after YE 2015, which caused him to avoid using the YE 2015 sales as a benchmark for future years.

In the absence of sales data from a basket of comparator stores, Mr Epstein looked at the average growth in sales across all stores between YE 2013 and YE 2015, which was 34.0%, and compared it with the growth in sales at the reference property over the same period, at 28.1%. He concluded that sales growth at the reference property was either broadly equivalent to (YE 2015) or below (YE 2014) that of an average store, so that using growth figures for an average store would not understate estimated sales in the no-scheme world. He therefore made a forecast of what sales would have been in the no-scheme world after YE 2015 by applying the year on year percentage change of an average store to the YE 2015 sales figures. These results were then compared with sales actually achieved in those years, to assess the extent of sales lost over the years affected by relocation, revealing that by YE 2019 post-relocation sales were better than the forecast.

For the three years when sales were lost, Mr Epstein assessed the loss of gross profit by applying a percentage of 65% to the lost sales figures. He declined to rely on the figure of 77% shown in the Watford store management accounts, since this was not substantiated by audited evidence and was significantly higher than any gross profit percentage that he had observed in the branch management accounts of other retail jewellers. His figure of 65% was taken from the top of the range of gross profit figures (55% to 65%) which he had observed in such accounts. He therefore assessed the loss of gross profit at £258,336, as shown below:

Having established a figure for loss of gross profit over the three affected trading years, Mr Epstein made a deduction for costs saved during the period when the business was closed for trading between 15 November 2015 and 1 July 2016. For the majority of that period until the new lease took effect on 20 June 2016 (218 days), no property overheads or wages were incurred. The saving was assessed at £103,937, being a proportional amount (218/366) of the annual costs in the reference property for rent (£50,000), service charge (£12,500), business rates (£22,000) and wages (£90,000). For the further 11 day period until trading recommenced, Mr Epstein assessed the costs saved at £ 4,306, being a proportional amount (11/366) of rent (£50,000), net additional service charge in reference property (£3,282) and wages (£90,000). The saving on rent occurred because of the six month rent free period in the relocation property, by comparison with the no-scheme world situation in the reference property. The total of costs saved therefore amounted to £108,243 (£103,937 plus £4,306).

Mr Epstein’s assessment of the claim for temporary loss of profits was: