UT-2023-000116; - [2025] UKUT 00164 (TCC)

In relation to Ground 4(2), Nellsar contend that the FTT erred in holding that the apportionment method adopted by Nellsar for corporation tax purposes was not just and reasonable. Nellsar relies on paragraph 105(3) of Schedule 29 which requires a “just and reasonable” apportionment in certain circumstances (which the FTT did not consider applied in this case).

In those circumstances, pursuant to paragraph 105 (3) of Schedule 29, where assets are acquired together:

“any values allocated to particular assets by the company in accordance with generally accepted accounting practice shall be accepted for the purposes of this Schedule.” (Nellsar’s emphasis)

Mr Farrell submitted that the FTT erred in preferring HMRC’s argument that paragraph 5 of Schedule 29 took precedence over paragraph 105. To the extent that there were multiple possible methods of assessing value for the purposes of FRS 7.9, the FTT erred in concluding that Nellsar’s accounts were not compliant with GAAP.

This ground of appeal is effectively a re-run of the argument that failed before the FTT.

The FTT dealt with this argument at FTT [202]-[203] as follows:

“202.

We prefer the argument of Mr Jones on this point. As he pointed out, the basic scheme of the legislation was to align the tax treatment of intangibles with the correct accounting treatment of them. It would be a strange outcome if paragraph 105(3)(b) gave a company the option of “switching off” the correct accounting treatment under GAAP where intangible assets are acquired as part of a business acquisition, and replacing it with a “just and reasonable apportionment” of the overall acquisition cost. Mr Farrell’s fallback argument on the point – that an apportionment decided on the basis of depreciated replacement cost would necessarily be a “just and reasonable” one because it was a basis “approved by accounting standards” – is equally unattractive, because it proceeds from the starting point that the accounts are not “correct” (i.e. GAAP-compliant) for the very reason that they adopted a depreciated replacement cost basis of valuation of the properties.

203.

As Mr Jones pointed out, there are clearly situations where paragraph 105(3)(b) can fill what would otherwise be a potential lacuna arising from the absence of any requirement under GAAP to value any particular asset in a company’s accounts – for example where a company had incurred expenditure on a bundle of intangible assets and GAAP did not require it to allocate individual values to the constituent parts of the bundle; it might be necessary to differentiate between the different parts for tax purposes, in which case paragraph 105(3)(b) provided the appropriate mechanism for doing so. This provided a justification for paragraph 105 which did not put it into conflict with paragraph 5.”

We agree with the reasoning and the conclusion of the FTT on this point. In particular, we accept Mr Jones’ submission, which was also accepted by the FTT, that the starting point of Nellsar’s argument is the very premise which made its accounts non-compliant with GAAP in the first place i.e. the use of DRC as a valuation method. It would, therefore, be neither just nor reasonable to revert to the same incorrect method to arrive at a valuation under paragraph 105(3)(b).

Accordingly, we dismiss Nellsar’s appeal on Ground 4(2).