First Tier Tribunal (Tax) (“FTT”) finds in taxpayer’s favour in relation to the treatment of deferred revenue expenditure (“DRE”)

Published: 29/6/2021

In a decision dated 18 May 2021, Judge Tony Beare found in favour of Enyo’s client, West Burton Property Limited (“West Burton”), which is part of the EDF group (“EDF”).

This followed a 5-day hearing in the FTT that took place in April 2021. The decision confirmed (inter alia) that the accounting approach adopted by West Burton in relation to DRE it had incurred on maintaining its power station was correct and in compliance with Generally Accepted Accounting Practice.


EDF acquired a company now known as EDF Energy (Thermal Generation Limited) (“Power Ltd”) in December 2001. At that time, West Burton owned a 2000MW coal-fired power station (“the Power Station”) and West Burton was a wholly owned subsidiary of Power Ltd. On 19 November 2001 – prior to EDF’s ownership of the Power Station – West Burton had granted a lease for 10 years and 1 day to Power Ltd (“the Lease”) to enable it to operate the Power Station. 

On 16 November 2011, shortly before the lease expired, West Burton sold the freehold interest in the Power Station, together with all fixed property, plant and equipment, to Power Ltd. The consideration was equal to the net book value of the assets in question (i.e. the cost of the assets in question less accumulated depreciation). The net book value figure was approximately £244m (total cost of £698m less accumulated depreciation of approximately £454m). As a result, from West Burton’s perspective, the sale gave rise to neither a profit nor a loss for accounting purposes. This meant that West Burton’s profit and loss account for the financial year in which the sale occurred did not, on its face, show a profit or a loss in relation to the transaction. Of the c£244m net book value, c£65m was unamortised DRE. 

The DRE existed because, as would be expected, West Burton had incurred costs in maintaining the Power Station. The costs that West Burton incurred were initially capitalised in its accounts for the financial year in which the cost was incurred, and then amortised over 4 years. In the 10 years between 2001 and 2011 (when West Burton sold the Power Station) it incurred approximately £156.5m of DRE in aggregate. From that figure, £91.5m was depreciated in West Burton’s profit and loss accounts in the financial years prior to its financial year ending in 2011. As a result, at the time of the sale, there remained c£65m of undepreciated DRE in West Burton’s profit and loss account for which West Burton claimed a deduction in its accounts for the period ended 16 November 2011.

HMRC’s challenge 

HMRC challenged the deduction of c£65m of DRE from West Burton’s taxable profits for the accounting period ending 16 November 2011 alleging that the deduction should be nil. HMRC raised two grounds for this challenge:

  1. That the sale of the Power Station was not within the scope of West Burton’s property business as it did not concern the exploitation of land as a source of rent or other receipts– so the c£65m of DRE could not be taken into account in calculating the taxable profits; and/or
  2. That even if HMRC were wrong about issue (1) above, since the unamortised DRE was not brought into account as a debit in the profit and loss account (HMRC’s view being that because the relevant figure was a nil net balance it was not “brought into account” for the purposes of s48 CTA 2009), there was no basis for West Burton to claim a deduction in respect of that DRE in computing taxable profits. 

The Decision

The parties were, in the main, agreed on the relevant legislative provisions, and the Tribunal was provided with expert accounting evidence from both sides. 

Judge Beare found resoundingly in favour of West Burton on both issues and allowed its appeal in full, stating that West Burton’s positions on the two issues identified above were “correct as a matter of law” (Paragraph 26 of the judgment). 

In relation to the first issue, the judge concluded that HMRC’s approach was “overly narrow” and that the sale of its main capital asset did fall to be taken into account in calculating the taxable profits of West Burton’s property business. It necessarily followed that West Burton was right to bring the items that it did into its profit and loss account, and right that the items should be taken into account in the calculation of West Burton’s taxable profits for the year in question.

The judge went on to say that even if this analysis was wrong, there was a second separate reason why West Burton’s arguments in relation to this first issue should succeed. The DRE in question was “quite plainly” incurred by West Burton for the purposes of maintaining and overhauling the Power Station in the period when West Burton was leasing it to Power Ltd. As a result, West Burton was entitled to DRE relief if and when that figure was brought into account as a debit in calculating its profits. That would be the case irrespective of whether the transaction triggering the tax treatment was (unlike here) outside the scope of West Burton’s property business. Without that deduction, the judge identified that West Burton’s profits would be over-stated. 

On the second issue, the judge concluded that HMRC’s position was wrong, and that the “incorrect conclusion” that HMRC had drawn (i.e. there was nothing/net nil to take into account) came as a result of it adopting too narrow an interpretation of the term “items brought into account as credit or debits in calculating the profits”. The judge stated that he “could not disagree more” with the position advanced by HMRC that the sale proceeds had not increased the profits appearing in West Burton’s profit and loss account, and that the DRE had not depleted those profits. 

Notwithstanding having resoundingly agreed with West Burton’s position, the judge went on to make further comments that, in his view, the position HMRC had adopted if upheld by the Tribunal would lead both to unfairness and to undermining the system historically used in the UK for calculating taxable profits. The judge warned of the “potentially significant upheaval” to the UK taxation regime were HMRC’s suggested approach adopted (Paragraph 91).


The decision will come as a welcome relief to a number of taxpayers who adopted the same approach as West Burton in relation to unamortised DRE. We understand that a number of similar appeals have been stayed behind West Burton, which was, in effect, being treated as a test case in this area. In light of the judge’s clear endorsement of West Burton’s position, it remains to be seen whether HMRC will continue to challenge taxpayers on this basis.

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