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HMRC internal manual

Business Income Manual

Capital/revenue divide: tangible assets: land with growing crops

The taxation treatment of expenditure on land on which there are growing crops depends on the nature of the crop.

In CIR v Pilcher [1949] 31TC314, the company bought a cherry orchard at a time when the fruit crop was almost ready for picking. The question was whether the price paid for what was admitted to be a capital asset, an interest in land, could be apportioned. The company claimed that a proportion of the price paid at auction for the land related to the cherries on the trees that were almost ready for picking. The company claimed to deduct £2,500 representing the cost of ripening cherries. Croom-Johnson J found that the expenditure was capital. He explained that the Commissioners’ contrary decision gave ‘the go-by’ to the principles established in the decided cases.

Minerals are part of the land until extracted. A mining concern buying land does not buy the minerals as such. The company buys an interest in the land with the right to win minerals from the land. The same principle can apply to the fruits of the land and the Pilcher case is interesting for the review of the authorities as they apply. Broadly, you have to distinguish between those crops growing on the land which by law are treated as part of the land and belong to the owner, and other crops which by long established rule of law are the property of the tenant. These latter include the normal annual crops of an arable farm - the fruits of industry rather than of nature; fructus industrialis as against fructus naturalis. On the other hand, trees and bushes that produce not one crop but a succession of crops, are, together with their crop, the property of the landlord. The tenant in possession of such land when the crop ripens has the right to pick it and then it becomes theirs, but if they leave before the crop is ripe then the crop remains the landlord’s property.

It follows from these legal rules about the ownership of land, that in any business which consists of taking produce off the land the types of crop which belongs to a tenant are akin to trading stock. But trees are normally part of the land. If the trader owns the land the trees are fixed capital because they are part of that land. Hence, no deduction can be made in respect of any fruit or trees already growing on the land when it is bought. If, however, the business is one of selling trees a deduction can be made for seedling trees bought separately and planted on the land. Once planted the trees become part of the land - the fixed capital of the business - and are not treated as trading stock. Nurseries and market gardens are an exception. In those cases the tenant has the right to remove the trees. The proceeds when sold are a trade receipt.

In the Pilcher case, Jenkins LJ, at page 333, explained the distinction:

‘A clear contrast has always been drawn between those crops which, broadly speaking, are produced in the year by labour of the year, and crops such as fruit growing on trees, where the productive act is the planting of the trees, and where the fruit is produced by the trees year after year, primarily as the result of that initial productive act.’

It may be said that denying the purchaser a deduction for the estimated cost of a crop is unreasonable or inequitable. Jenkins LJ comments on this view in his judgment. The case was heard before the introduction of Capital Gains Tax. Jenkins looked at the position from both the vendor’s and the purchaser’s point of view; saying at pages 335 and 336:

‘One has to remember that this transaction concerned not merely Mr Pilcher but also the vendor of the orchard. Mr Pilcher was able to buy the orchard complete with cherries from the vendor and by that means, accordingly to his own calculation, the cherries stood him in £2,500. It by no means follows that if he had he been minded to buy the cherries from the vendor apart from the land, as a separate transaction, the vendor would have been willing to sell them to him for £2,500, or at any price. The difference is obviously a material one from the vendor’s point of view because, dealing with the matter as he did, he was selling a capital asset, and the resulting capital receipt, prima facie, would attract no tax. If he sold the cherries separately in the way of a trade he would at once have created an income receipt on which, prima facie, tax would have been exigible. Therefore the alteration in the form of the bargain required to make it more favourable to Mr Pilcher from the tax point of view would have involved an alteration not merely of form but of substance owing to its adverse effect on the tax situation of the vendor…’