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HMRC internal manual

Business Income Manual

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Measuring the profits (particular trades): Mineral extraction: CIR v New Sharlston Collieries Co Ltd [1936] 21TC69

The point at issue was whether the company could make an error or mistake relief claim. It wished to include a deduction in its accounts for payments made to indemnify it against compensation claims, by the owners of the surface land, for damages from working the mine.

The company leased a seam of coal and covenanted to indemnify the lessor against any claims for damages from the surface owners. The lessor had acquired the seam from the owner of the estate, but had not been granted any right to let down the surface. The lessor had agreed to pay the estate owner, or her tenants, compensation for any damage to the surface lands and buildings due to mine workings.

The company entered into an agreement with the tenant of the surface land and was granted full liberty to work the coal, although such working might cause subsidence, in return for rental payments. However, the company did not acquire the right to work the coal without any liability to pay damages.

Held that the payments were rent payable in respect of an easement, within the meaning of the legislation in force at the time, and were not an allowable deduction for tax purposes. Although the payments were disallowed in this case they would now be allowable under current legislation. See BIM62035.

Lord Justice Slesser noted, at page 79:

‘The immunity from action is clearly a benefit, and, in so far as that action if it were brought would be one for nuisance in respect of land, it follows that the rent paid is in respect of benefits over or derived from land within the scope of the extended definition [in the legislation then in force,] Section 21 of the Finance Act, 1934.’