|
Appeal No. VA01/1/001, 012, 013, 014
AN BINSE LUACHÁLA Port of Cork Company APPELLANT RE: VA01/1/001: Port & Land at Map Reference 2
Ballybricken, ED: Carrigaline, RD: Cork Lower Co. Cork, B E F O R E JUDGMENT OF THE VALUATION TRIBUNAL By Notices of Appeal dated the 30th day of March, 2001 and 11th day of
April, 2001, the appellants appealed against the determinations of the
Commissioner of Valuation in fixing rateable valuations on the above described
relevant properties. The Grounds of Appeal as set out in the Notice of Appeal in relation
to VA01/1/001 are:- "Port of Cork Company is not liable for Rates
and the Rateable Valuation as assessed is excessive" and in relation
to VA01/1/012, 013, 014 are:- "Rateable Valuation is (1) Excessive,
(2) Inequitable & (3) Port of Cork as successors to Cork Harbour Commissioners
are exempt from rates." 1. This appeal proceeded by way of an oral hearing held in the offices of the Tribunal in Ormond House, Ormond Quay Upper, Dublin 7 on the 24th March and the12th May 2003. At the hearing the appellant was represented by Mr. Dermot Gleeson SC and Mr Patrick Dillon Malone, BL instructed by Mr. Eugene M. Glendon, Law Agent, Port of Cork Company. The respondent was represented by Mr. Donal O'Donnell SC and Mr Daniel Feehan, BL instructed by the Chief State Solicitor. 2. The property which is the subject of this appeal comprises the Port, Quay, Wharves, Piers, Lands and Buildings occupied by the Port of Cork Company. Prior to 1998 the property was occupied by the Cork Harbour Commissioners and was included in the exempt valuation list. Following the 1998/4 Revision the property which is located at three separate rating areas was valued in a number of assessments four of which are the subject of this appeal as set out below.
3. The relevant valuation date in all instances is 10th November 1998. 4. Following the 1998/4 Revision the Port of Cork Company lodged appeals to the Commissioner of Valuation in respect each of the four assessments on the grounds of quantum and that the company was entitled to exemption under the rating code. The Commissioner of Valuation rejected the appeals on both grounds and in due course the matter was referred to this Tribunal for determination. 5. On the 9th July 2001 an oral hearing was held by this Tribunal which dealt solely with the matter of exemption as a preliminary issue. On the 24th October 2001 the Tribunal determined that the Port of Cork Company was not entitled to exemption from the payment of rates. This decision was appealed to the High Court and by Judgment of 30th October 2002 the court ruled that the company was indeed entitled to exemption. This decision of the High Court was subsequently upheld by the Supreme Court judgment of 28th July 2003. 6. This appeal to the Tribunal is solely in relation to quantum and it is agreed that the basis of valuation is that as set down in Section 11 of the Valuation (Ireland) Act, 1852 as amended by Section 5 of the Valuation Act 1986. THE APPELLANT'S EVIDENCE 7. As part of the evidence tendered to the Tribunal by the appellant
a number of documents were submitted including the following. Mr. Donal Crowley 9. Mr. Crowley said all fixed assets other than non-depreciable land
have finite lives and hence it was proper that this be recognised in a
company's financial statements. Mr. Crowley said depreciation is defined
in FRS 15 as follows. Consumption includes the wearing out, using up or other reduction in the useful economic life of tangible fixed asset whether arising from use, effluxion of time or obsolescence through either changes in technology or demand for the goods and services produced by the asset." 10. Mr. Crowley thought the following paragraphs of FRS 15 were also
of fundamental importance to this appeal. 78 The fundamental objective of depreciation is to reflect in operating profit the cost of use of the tangible fixed assets (i.e. amount of economic benefits consumed) in the period. This requires a charge to operating profit even if the asset has risen in value or been revalued." 11. Mr. Crowley said it was clear from FRS 15 that the annual depreciation
charge represents the wearing out of an asset on a year-on-year basis
over its useful economic life. The annual depreciation charge is treated
as an expense in the profit and loss account and is matched against the
company's revenue during the asset's economic life. The Port of Cork Company,
he said, used the depreciation approach for two primary reasons. 13. Mr. Crowley said that in arriving at the annual depreciation charge
the directors of the company dealt with the tangible fixed assets under
four main headings and applied what they considered to be the appropriate
rates of depreciation consistent with the nature of the asset and an estimate
of its useful economic life. For example, he said, the buildings were
depreciated over a period of between 20 and 25 years depending upon an
assessment of their remaining useful economic life. Dredging works were
depreciated over a 25-year period whilst the quays and piers were depreciated
over a period of between 25 and 50 years based upon an estimate of their
useful economic life. 15. Mr. Crowley said that in order to provide a proper service to its users it was essential that all the facilities of the Port were properly maintained and that the depth of the channel be kept under constant review in order to meet the demands of modern shipping and larger vessels. 16. Mr. Crowley said he first became aware of the guidance notes published
by the rating forum during the first appeal process. At that time he had
several meetings with the company's consultant valuer, Mr. Desmond Killen,
and the appeal valuer from the Valuation Office, Mr. Shay Aylward. At
these meetings it became clear that the most appropriate method of valuation
was the receipts and expenditure method and he was actively involved in
trying to reach agreement on what items of expenditure were to be included
or excluded in order to arrive at the "divisible balance" in
accordance with the guidance notes. Whilst there was a wide measure of
agreement a major difficulty arose in the interpretation and operation
of those sections of the guidance note dealing with repairs and maintenance.
The relevant paragraphs are those as set out below. 5.32 The calculation of the annual fund that may need to be provided
will require consideration of three major factors: 17. Mr. Crowley said that in his opinion " the sinking fund"
mentioned in paragraph 5.31 was synonymous with the annual depreciation
charge applied in the company's accounts and hence it should be allowed
as an expense in arriving at the divisible balance. Mr. Crowley said that
in his experience companies no longer made provision for a sinking fund
to meet the future cost of repairs as such a practice would represent
an inefficient use of company funds. Mr. Crowley said that it was the
policy of the Port of Cork Company to deal with the costs of repairs and
maintenance in the profit and loss account in the year in which the expenditure
occurred. Major items of expenditure on renewals and replacements - such
as had occurred in 1998 when the roof of the Custom House was renewed
- were treated as an item of capital expenditure and treated as such in
accordance with paragraph 38 of FRS 15 which states: 18. Mr. Crowley said that the Port of Cork Company did not have a policy of setting aside funds specifically for future repairs or renewals. 19. Under cross-examination Mr. Crowley agreed that the concept of a sinking fund was to set aside monies on an annual basis to meet the costs of a specified item of expenditure at a specified future date. He further agreed that the depreciation fund in the company's accounts is not earmarked to any specific purpose and that the monies in the fund could be applied for such purposes as the company considered proper, necessary or appropriate. Dr. Edward Cahill 21. Dr. Cahill told the Tribunal that he qualified as a Chartered Accountant in 1964 and after several years' employment in a number of major manufacturing companies he was appointed to the Chair of Accountancy in University College Cork. 22. Dr. Cahill said he had been requested by Mr. Donal Crowley to prepare a report for the Port of Cork Company, dealing with accountancy, depreciation, sinking funds and related matters in the calculation of a basis for rateable valuation. Dr. Cahill said that in preparing his report he had examined the guidance notes on the receipts and expenditure method of valuation and other relevant documentation in relation to the appeal before the Tribunal. 23. Dr. Cahill in his evidence said that prudent business management dictated that those enterprises using fixed assets in support of their business activities provide for depreciation through a charge in the profit and loss account. The use of depreciation, he said, is even more important when the enterprise in question is a capital-intensive one such as is the case with the Port of Cork Company. 24. Dr. Cahill said that in his opinion there was no conceptual difference between depreciation and a sinking fund in relation to fixed assets. While sinking funds may have been the norm in the past it was not currently accepted accountancy practice to use sinking funds as a method of providing for depreciation. Dr. Cahill in his précis defined depreciation as "the consumption of the value of economic benefits expected to flow from a fixed asset, whether arising from use, obsolescence or the passage of time". Dr. Cahill said that the object of financial statements was to provide information about the financial position of an enterprise and in accordance with FRS 15 it was mandatory that depreciation of fixed assets be recognised in the profit and loss account. As a non-cash expense "depreciation augments cash-flow and helps in the provision of funds to invest in new fixed assets for replacement of or other purposes" (emphasis added). 25. Dr. Cahill said he had carried out extensive research in relation to sinking funds and had come to the conclusion that their use was no longer accepted accountancy practice. It was a fact that companies now use depreciation as a method of setting aside funds which remain in the company and augment cash flows. " It is these internal resources" he said "through depreciation as a major constituent element, that contribute to the purchase of assets." 26. Dr. Cahill described the Port of Cork Company as an asset intensive business all of which assets were essential in order to generate the level of revenue it earns. Since fixed assets (other than land) have a finite life it follows that these assets must be depreciated over their estimated life-cycle so as to give an accurate view of the financial performance of the enterprise. Failure to make proper allowance for depreciation would lead to a misrepresentation of the economic reality of the enterprise. 27. Dr. Cahill said he had examined the guidance notes on the receipts and expenditure method of valuation and in his opinion the hypothetical tenant's obligation to maintain the subject property was analogous to that of a tenant under a modern full-repairing and insuring lease. Accordingly therefore the Port of Cork Company as the hypothetical tenant in this instance would be acting prudently in setting aside an annual amount i.e. the depreciation charge to meet ongoing and future repairing obligations. 28. Under cross-examination Mr. Cahill confirmed that he had never come across the use of sinking funds during his career as a practising accountant. Nonetheless he was aware of their intention which was the setting aside of funds on an annual basis specifically for a particular purpose and for that purpose alone. He agreed that depreciation on the other hand did not impose an obligation to replace the assets and indeed the money so set aside could be used for any valid purpose of the enterprise. Dr. Cahill further agreed that providing for depreciation was mandatory under accounting regulations whereas the provision of a sinking fund was discretionary and represented in his opinion a special form of depreciation not commonly found in current business practice. In essence, he said, sinking funds related to future expenditure whereas depreciation represented the consumption of an asset on a year-on-year basis by reference to its initial cost. 29. When asked about the statutory definition of net annual value Dr. Cahill said he had interpreted the repairing obligations contained therein to mean that the property had to be returned at the end of the hypothetical lease period in the same physical state as it was in at the commencement of the term - in his opinion this obligation could, in some instances, give rise to renewal or reinstatement as appropriate. The obligation to repair in his opinion was onerous and represented more than normal repair and maintenance and the only effective method of providing for it when using the receipts and expenditure method of valuation was to allow the annual depreciation charge in full. 30. Dr. Cahill said that whilst he had not specifically addressed the findings in the East Link case he was familiar with it and the comments contained in the judgment regarding the repairing covenants and the concept that "renewal of part may be necessary in order to properly carry out his repairing covenant". Dr. Cahill observed that the "provision" referred to in the East Link case did not represent depreciation in his understanding of that word. Dr. Cahill went on to say that in his experience tenants of property occupied under a lease would as a general rule charge expenditure on repairs of an unusual nature to the accounts in the year in which the expenditure occurred. Only in exceptional cases would the tenants look to the future and make provision for this type of expenditure. 31. Dr. Cahill agreed that at times there could be a fine line between repairs and renewal. In accountancy terms there had to be a consistent approach and in his opinion those works of renewal which conferred identifiable economic benefit to the asset were works of a capital nature and should be recognised as such in the accounts. Mr. Desmond Killen 33. In his evidence Mr. Killen said that in arriving at his opinion of
Net Annual Value of the subject property he had considered all four accepted
methods of valuation in order to see which was the most appropriate having
regard to the nature and scale of the property concerned. The various
methods of valuation are: 34. Mr. Killen said he had rejected the first method because there was no evidence of open-market transactions and had come to the conclusion that the Contractor's Method was not appropriate for the valuation of Port Enterprises. As far as the Comparative Method was concerned he was of the opinion that it was reasonable to have some regard to how the Port of Belfast was valued by virtue of the fact that it was in direct competition with the Port of Cork Company and indeed other Ports in this State. On balance however he had come to the conclusion that the receipts and expenditure method was the preferred method and the one most likely to contain the smallest margin of error. Nonetheless he was putting forward two alternative valuations - one on the comparative method and the other on the receipts and expenditure method. Valuation on the Comparative Method Relevant Revenues (1998) £7,538,686 Valuation on Receipts and Expenditure Method Buildings £135,261 (85% of £159,130) 37. Mr. Killen said that the hypothetical tenant as envisaged in rating
law was deemed to be a prudent one. It was his opinion that such a tenant
would make provision for a sinking fund to meet the anticipated cost of
future repairs and/or replacement of a major item(s). The matter of providing
for this eventuality was well recognised at paragraph 5.31 of the guidance
note, in Ryde on Rating and the Council Tax at paragraphs 7.21 and 7.22,
in case law and more particularly in the following cases: 38. Mr. Killen said that having regard to all the authorities cited he had come to the conclusion that the depreciation charge of £1,154,593 in respect of the fixed assets should be treated as being the sinking fund envisaged in paragraph 5.31 of the guidance note and hence treated as an expense in arriving at the divisible balance. 39. Mr. Killen said he agreed in principle with the valuation put forward
by Mr. Aylward save that full allowance should be made for the agreed
depreciation charge of £1,154,593. If this figure was introduced
as an item of expenditure into Mr. Aylward's calculations the following
situation ensued and represented his opinion of appropriate net annual
value as set out below. Rating Area NAV Calculated Rateable Valuation 40. Mr. Killen said the obligations of the hypothetical tenant in rating law were similar to if not indeed greater than a tenant under a commercial lease arrangement. In the latter case the tenant is required to return the property at the end of the lease period as new whereas in the former the hypothetical tenant is obliged at all times to maintain the property in its actual state. This obligation, he said, could amount to more than mere repair and the use of the words "other expenses" in section 11 reflected this additional responsibility. 41. In relation to the guidance note Mr. Killen said he fully accepted the principles set down in paragraphs 5.31 and 5.32 and contended that the annual depreciation charge in the 1998 accounts was equivalent to the sinking fund mentioned in paragraph 5.31. He did not agree with the proposition put to him that the possibility of providing a sinking fund was not an obligation to provide one and that each case must be considered on its own merits having regard to the nature of the property concerned. Mr. Killen agreed also that he could not find any case law relating to Docks and Harbours (which had been valued in the United Kingdom for more than one hundred years prior to the introduction of the existing formula method) where depreciation or even a sinking fund had been allowed in respect of quays, jetties or harbour walls. 42. Mr. Killen agreed that he had used the receipts and expenditure method
of valuation for other types of property in the past and had never previously
sought to have the annual depreciation charge included as an expense.
However, Mr. Killen said that as a result of the research he had carried
out in relation to this appeal it was something that he would have to
look at in future appeals depending upon the type of the property concerned
and other considerations. THE RESPONDENT'S EVIDENCE Mr. Shay Alyward 45. Mr. Aylward said that when first faced with the task of valuing the subject property he had come to the conclusion having regard to the nature of the enterprise concerned that the most appropriate method of valuation was the receipts and expenditure method. In coming to this conclusion he considered the words of Mr. Justice Barron in the case Yeats County Ryan Hotel (1986 No. 603ss) to be apposite: "What is the prospective tenant likely to offer by way of rent upon the basis laid down in section 11 of the Valuation Act 1852. Profit earning ability is the basic element in determining the net annual value and it is based not on the actual profits but what a prospective tenant would anticipate would be his profit." 46. In relation to this appeal therefore the rent which the hypothetical tenant would offer must be determined by reference to the operating profit derived from the accounts of the appellant company. These accounts, Mr. Aylward said, required to be examined and adjusted if necessary in accordance with the principles set down in the guidance note dealing with valuations carried out using the receipts and expenditure method of valuation. 47. Mr. Aylward said that the receipts and expenditure method of valuation
was long established and well outlined in a previous decision of this
Tribunal -Trustees of Fitzgerald Memorial Park v The Commissioner of Valuation
(VA95/1/001). 49. Mr. Aylward said that following discussions with Mr. Killen and Mr. Crowley it was agreed that the 1998 accounts would form the basis of the Valuation using the receipts and expenditure method of valuation. It was further agreed that the Port would be valued as a single entity and that the Net Annual Value so determined would be apportioned on an agreed basis between the various entries in the Valuation Lists of the relevant rating authority areas. 50. Mr. Aylward said he had considered the 1998 financial statements in some detail and had also examined those for a number of previous years. Arising out of this examination there was a large element of agreement between him and Mr. Killen regarding the preparation of the valuation using the receipts and expenditure method of valuation. Generally speaking the 1998 accounts were used but under the heading of "dredging provision" a sum of £300,000 was allowed as against the actual figure of £157,995 which appeared in the accounts. This higher figure was agreed having regard to figures appearing under this heading in financial statements of previous years. The only major item in dispute was the allowance of the annual depreciation charge in respect of the buildings, piers and quays, dredging and site development works, in the agreed sum £1,154,593 under the heading of expenditure as contended for by the appellant. 51. Mr. Aylward said he had examined the 1998 accounts and those for a number of previous years and found no provision for meeting the cost of major repairs in the future by way of a sinking fund or otherwise. Mr. Aylward said he did not accept the proposition put to him by the appellant that the depreciation was synonymous with a sinking fund or provision. In his opinion depreciation and sinking fund provisions were fundamentally different in concept. Depreciation, he said, was the annual writing-off of the cost of an existing asset whilst a sinking fund was a charge against profits to provide for the replacement of a wasting asset at some time in the future. A sinking fund is established to provide for periodic payments into a fund accumulated to meet a specific objective at a specific time in the future. Depreciation on the other hand was non-specific and imposed no obligation to replace the asset. 52. Mr. Aylward said he had carried out several valuations of various
types of properties using the receipts and expenditure method of valuation
and in no instance had depreciation been allowed under the heading of
expenditure. In his valuation of the subject property he had made what
he considered to be an adequate allowance for repairs based on a perusal
of the accounts. Mr. Aylward said he had fully discussed the basis of
his valuation with Mr. Killen and Mr. Crowley and the only item not agreed
was the proposal by the appellant that the depreciation of buildings and
other fixed assets be allowed as expenditure on the basis that it represented
a provision for the cost of major repairs at some time in the future.
The depreciation of the relevant assets appearing in the accounts was
agreed in the amount of £1,154,593 which figure was apportioned
as follows: 53. Taking the above factors into account Mr. Aylward put forward his opinion of Net Annual Value as set out in the Appendix to this judgment. 54. Under cross-examination Mr. Aylward agreed that the concept of depreciation was continually evolving in the world of accountancy practice and furthermore that the use of sinking funds in the preparation of financial statements is a somewhat outdated practice. He also agreed that the phrase "subsequent expenditure to ensure that the tangible fixed asset maintained its previously assessed standard of performance" as used in paragraph 34 of FRS 15 was not equivalent to "the probable average costs for repairs… and other expenses (if any) necessary to maintain the hereditament in its actual state" as contained in section 11. 55. When asked to comment on the findings in the East Link case and in particular the words "it may be that the tenant would wish to make provision for the possibility of having to carry out a major or substantial repair at an unspecified time in the future and he might do so by the establishment of a reserve, a sinking fund or the like." Mr. Aylward expressed the view that what the Tribunal had in mind was in fact the provision of a sinking fund or the actual setting aside of monies into a fund earmarked for future repairs. a. 56. Mr. Aylward agreed that he had in his report to the Commissioner of Valuation at first appeal stage stated "whilst the provision of a sinking fund to replace wasting assets is prudent no Port Company has made such a provision in their accounts." When asked about the statement Mr. Aylward said that, if the appellant had provided for such a sinking fund or if some specific provision for future repairs had been made in the 1998 accounts, then he would have regarded the monies so set aside under the heading of expenditure before arriving at the divisible balance. In the absence of such a provision, Mr. Aylward said, he could not allow a notional figure under this heading and this course of action, he said, clearly reflects the findings in the East Link case. Mr. Aylward said that since the decision was taken to use the receipts and expenditure method of valuation, then only those expenses actually incurred in routine repairs and maintenance or those monies specifically set aside to meet the cost of future repairs of a major nature and at some specific future date were allowable under the headings of expenditure. Such an approach, he said, was in line with the principles set down in paragraphs 5.31 and 5.32 of the guidance note. Mr. Aylward said that in his opinion the decision of the Tribunal in the East Link case was a fair and accurate interpretation of paragraphs 5.31 and 5.32. Evidence of Mr. Terence O'Rourke BA FCA. 58. Mr. O'Rourke, having taken the oath, adopted his précis of
evidence which had previously been received by the Tribunal as being his
evidence-in-chief. Mr. O'Rourke said that in preparing his précis
he had considered the following documentation: 59. Mr. O'Rourke said it was clear from the evidence put forward by the appellant that the key issue was whether or not the depreciation charge in the accounts in respect of the fixed tangible assets should be allowable as a deduction against income when using the receipts and expenditure method of valuation. Mr. O'Rourke said that in order to address that issue it was important to understand the difference in accountancy terms between depreciation and sinking fund provisions. 60. Depreciation, Mr. O'Rourke said, was defined in FRS 15 as being "the measure of the cost (or re-valued amount) of the economic benefits of the tangible asset that have been consumed during the period." Put simply, Mr. O'Rourke said, depreciation is the allocation of the cost of an original tangible fixed asset (or its latest valuation) on a systematic basis to be charged in the accounts and to be matched with the revenue or other income generated from those assets. On the other hand, he said, a sinking fund is something entirely different - it is the purpose of a sinking fund to put aside monies on a systematic basis to meet the cost of purchasing an asset at a specific date in the future. In the circumstances, Mr. O'Rourke said, it would be incorrect to substitute a depreciation charge for a sinking fund of the type envisaged in paragraph 5.31 of the guidance note. 61. Mr. O'Rourke said he had carefully considered the statutory definition of Net Annual Value and the findings in the East Link case in relation to repairs. In the guidance note and in the East Link judgment it is suggested, he said, that certain repair costs can be capitalised or provided for "by the establishment of a reserved or sinking fund or the like". This very issue, Mr. O'Rourke, said was dealt with explicitly in FRS 15 at paragraph 34 which states "subsequent expenditure to ensure that the tangible fixed asset maintains its previously assessed standard of performance should be recognised in the profit and loss account as it is incurred". It follows therefore that repairs and maintenance costs should be expensed in the profit and loss account. This type of expenditure, Mr. O'Rourke said, was of the type included in section 11 i.e. "the probable annual cost of repairs, insurance and other expenses (if any)". That being the case it followed that repairs and maintenance charges should be expensed in the profit and loss account for the year in which they are incurred. 62. Mr. O'Rourke went on to say that the type of lease contemplated in the definition of net annual value was similar to "an operating lease" in accountancy terms. In such a situation, whilst the tenant has an obligation to bear the costs of maintenance, repairs and other expenses associated with occupation the tenant did not have an obligation to account for, nor to bear, the wasting away of the asset nor its renewal. The rent paid by the tenant remunerates the landlord for all the economic risks borne by the landlord including depreciation. The cost of repairs and maintenance borne by the tenant would be expensed in the normal manner. From time to time, Mr. O'Rourke said, it may be necessary for the tenant to meet a large or lumpy item of expenditure which would not necessarily enhance or improve the property. In some circumstances a tenant could decide to provide for this eventuality by setting aside monies on a systematic basis during the period leading up to the time when the expenditure is required. Such a provision - for this is what it is, Mr. O'Rourke said - would be allowable under the relevant accountancy standards. 63. Mr. O'Rourke said he had examined the accounts of the appellant company and found no such provisions in the accounts other than those in respect of dredging which Mr. Aylward had allowed for in preparing his valuation on the receipts and expenditure method. Mr. O'Rourke said it was right and proper that the appellant's accounts include a charge for depreciation in respect of tangible fixed assets. However, it could not be said that the depreciation charge was synonymous with a sinking fund and allowed as an expense when using the receipts and expenditure method of valuation. 64. Under examination Mr. O'Rourke said he had rarely come across the use of a sinking fund during his career as an auditor. He further agreed that the use of sinking funds represented an inefficient use of the assets of an enterprise. Mr. O'Rourke agreed that whilst there was a superficial similarity between a sinking fund, a reserve fund or a provision they were in fact distinctly different. In the case of a reserve fund whilst monies may be maintained in a company's accounts for some intended purpose the monies so set aside were not segregated nor maintained in a separate bank account. That provision, he said, was merely the notation of a liability the amount and timing of which was uncertain. A sinking fund, however, was the actual setting aside of money on a regular basis which was kept in a separate account and earmarked for a specific purpose. 65. When asked to comment on the contents of paragraph 30 of the East Link judgment "On the other hand, it may be that the tenant would wish to make provision for the possibility of having to carry out a major or substantial repair at some unspecified time in the future and he might do so by the establishment of a Reserve or Sinking Fund or the like". Mr. O'Rourke said he considered the use of the words reserve or sinking fund to be the same. He agreed, however, that the words "or the like" could be interpreted to mean that the cost of repairs referred to could be capitalised and depreciated. 66. Mr. O'Rourke agreed that in long lease situations it was probable that a tenant could from time to time be liable for repairs distinct in nature from ongoing annual repairs. When asked how the future costs of these could be distinguished in the accounts Mr. O'Rourke said it could be done by a way of a provision. However, in his experience tenants occupying buildings under a modern FRI lease rarely if ever made such a provision but absorbed the costs of the repairs in the year in which they were incurred. APPELLANT'S SUBMISSION 67. Mr. Dermot Gleeson said that the net point to be resolved by the Tribunal was whether and to what extent the depreciation of assets in the accounts of the appellant company should be taken into account in calculating the rateable valuation of the subject property. 68. Mr. Gleeson said that this Tribunal in the East Link case had accepted the general principle that it may be reasonable for a hypothetical tenant to make provision for the possibility of having to carry out major work or substantial repairs at a non-specified time in the future by "the establishment of a reserve or sinking fund." In making this statement the Tribunal cited the case St. Alban's County Council v St. Alban's Waterworks Company and Clare (1954) 47 R&IT 191 and also accepted that the precise calculation of what part of such fund may be allowed for valuation would depend on a number of factors including the amount to be provided, the duration of the hypothetical tenancy and the rate of return which should be employed. Mr. Gleeson submitted that the principles contained in the St. Alban's case should equally apply to the provision for depreciation in the accounts of a tenant and that more particularly to the appellant in this appeal. 69. Mr. Gleeson pointed out that the appellant company was a very asset intensive business - with tangible fixed assets of £48.7million and a turnover of £10.9million in 1998. If depreciation, he said, was omitted from the financial statements it would give rise to the misrepresentation of the profits or surplus earned in the accounting period in question. Equally if depreciation was not allowed as an expense when using the receipts and expenditure method of valuation it would lead to a distortion in the divisible balance thus leading to an estimate of Net Annual Value that would be neither fair nor reasonable. 70. Mr. Gleeson submitted that the terms sinking fund and depreciation were interchangeable in the context of calculating the net annual value of the subject property when using the receipts and expenditure method of valuation. In the accountancy world the provision of a sinking fund was redundant and was now replaced by depreciation which allowed the funds so designated to remain in the company and be used in the general conduct of its business and in supporting operative cash flow. There was no reason why the funds so designated could not be used to meet the costs of repairs of an unusual nature. 71. Mr. Gleeson said that in calculating the net annual value of a property regard must be had to its nature and extent and the hypothetical lease term. In this case, having regard to the scale and nature of the property, the hypothetical lease-term must be lengthy even approaching perpetuity. Thus it was reasonable to assume that some of the constituent parts of the property would wear out and eventually need replacing during the hypothetical term the cost of which must be reflected in the accounts when using the receipts and expenditure method of valuation. 72. Mr. Gleeson said that the repairing obligation in section 11 was unusual and rendered necessary the provision of sufficient funds to meet both the cost of repairs of an ongoing nature and those of a major nature which might arise at periodic intervals to ensure the property was maintained in the state in which it was found at the valuation date. The obligation to maintain the property in its actual state was one which only existed in the rating world and represented more than the repairing covenants usually found in conventional lease arrangements. 73. Mr. Gleeson said that the accounts of the appellant company were prepared in accordance with the best current accounting practice. Since sinking funds were things of the past there was no specific provision in the accounts for meeting the future cost of repairs of a major nature or renewal. However, the absence of such an express provision did not preclude the Tribunal from making such a provision by use of the appropriate depreciation charge either in whole or in part. Indeed failure to do so would lead to an over assessment of Net Annual Value. THE RESPONDENT'S SUBMISSION 74. Mr. Donal O'Donnell said that there was a large degree of agreement regarding the method of valuation and the application of the guidance note. The fundamental issue in dispute was whether the appellant is entitled to claim the depreciation of a fixed real asset as an expense in arriving at the amount available for rent and rates that is the divisible balance. The classes of assets and the depreciated amount in each instance were isolated and agreed by the valuers. 75. Mr. O'Donnell said it was accepted that it was proper for the appellant to make provision for depreciation in preparing its financial statements. However, in rating law it is necessary to have a hypothetical lessor and a hypothetical lessee. That being the case he said, it begged the question as to in whose balance sheet would the assets appear and in whose profit and loss account would a provision for depreciation be made. In terms of law, accountancy and common sense the answer was clear - the assets would be found in the balance sheet of the owner/lessor who would make such provision for depreciation as fair or appropriate having regard to the nature of the asset or assets in question. 76. Mr. O'Donnell submitted that a provision of a sinking fund to meet the cost of future repairs by a tenant would be an unusual and exceptional circumstance and this was recognised by the Tribunal in the East Link case. If substantial repairs were envisaged then it might be prudent to make a provision for a sinking fund or alternatively the cost of the major repair could be accounted for in the year in which the expenditure occurred. In the latter case the expenditure so incurred could be spread over a number of years and when added to the cost of routine repairs of an annual nature would give a good indication of "the probable average annual cost of repairs -necessary to maintain the hereditament in its actual state" as provided for in section 11. 77. Mr. O'Donnell argued that once the decision is taken to use the receipts and expenditure method of valuation then it follows that only those figures actually appearing in the accounts - either for one or several years - can be used. The accounts formulated by the appellant in this appeal contain no provision for meeting the cost of major repairs either by way of a sinking fund or any other alternative method. The only previous occasion when "lumpy" expenditure was incurred was the major works to the Custom House and on that occasion the costs were capitalised in the balance sheet and subsequently depreciated in the usual manner. 78. Mr. O'Donnell said that it was clear from the expert accountancy evidence that depreciation and sinking funds are different concepts. In the circumstances the appellant's argument could not be sustained nor could it be entertained in the light of the findings of the Tribunal in the East Link case. 79. Mr. O'Donnell referred to section 11 and said that the only way to establish the "probable average cost of repairs" was to look at the pattern of repair costs in the past and use this analysis to make a judgement as to what costs might be in the future. In relation to the hypothetical term Mr. O'Donnell said that, while section 11 contemplated a letting from year to year, it was well established in case law that the hypothetical letting will continue until such time as notice to quit was served. However, it would be wrong to say that the hypothetical term could be one in perpetuity. 80. Mr. O'Donnell took issue with Mr. Killen's evidence to the effect that the hypothetical tenant in the rating world was akin to that of a tenant in a conventional, full-repairing and insuring lease arrangement whereby a tenant is obliged to hand back the leased premises at the end of the term "in the condition in which the tenant obtained the premises at the commencement of the lease i.e. "as new". Such a proposition Mr. O'Donnell said was theoretically conceivable but logically impossible. Under section 11 the hypothetical tenant is obliged to maintain the property and the best guide as to what the likely cost might be was the actual cost that had been incurred in the past. If there was a sinking fund or some other provision in place to meet the cost of lumpy expenditure in the future such a provision would be allowable as an expense and this was the essence of the East Link judgment. Findings: The Tribunal has carefully considered all the submissions and evidence
both oral and documentary presented to it and has had regard to all the
authorities, guidance notes and the body of case law referred to by the
parties and makes the following findings and determinations. 1. The property which is the subject of this appeal is owned and occupied
by the Port of Cork Company. By virtue of its nature and scale it is the
type of property which is rarely if ever let on the open market. 2. The relevant date for valuation purposes is the 10th November 1998
and hence net annual value is to be determined in accordance with the
rating code prevailing prior to the implementation of the Valuation Act
2001. Net annual value is defined in the Valuation Act 1852 at Section
11 thereof as being 3. During the course of this appeal the appellant made reference to how
the valuation of Ports and Docks in other jurisdictions and which are
to an extent in competition with Cork are valued for rating purposes.
Interesting though this information may be, it has no relevance to this
appeal. It is the function of this Tribunal to determine the net annual
value of the subject property strictly in accordance with the relevant
rating law of this country. 4. For the purposes of this appeal the parties are agreed that the receipts
and expenditure method of valuation is the most appropriate method of
arriving at net annual value. It was also agreed that the 1998 accounts
would form the basis of the valuation determined by the use of this method.
Furthermore the expert valuation witnesses in arriving at their respective
opinion of net annual value adhered to the Guidance Note on the Receipts
and Expenditure Method of Valuation for Non-domestic Rating published
by the Joint Professional Institutions Rating Valuation Forum. (The Guidance
Note) 5. During the course of the first appeal process and in the preparation
for the appeal to this Tribunal the valuers, ably assisted by Mr. Donal
Crowley, succeeded in achieving a large degree of agreement in preparing
their respective valuations on the receipts and expenditure method of
valuation. As a result the matters in dispute were effectively reduced
to a single net issue " whether and to what extent the depreciation
of assets shown in the 1998 accounts of the appellant company should be
taken into account in calculating the value of the subject property".
The Tribunal commends all those involved for their efforts in this regard
which were of considerable assistance to the Tribunal and allowed it to
concentrate on the main issues in dispute. 6. The statutory definition of net annual value as stated earlier is to be found in section 11 of the Valuation (Ireland) Act 1852. The definition has been in use now for over 150 years and has stood the test of time to the extent that it has been restated in the Valuation Act 2001 almost verbatim. During the course of the oral hearing the definition came under some scrutiny and in particular three elements were identified as being of some import in the context of this appeal, namely the "hypothetical term", "actual state" and the "probable average annual cost of repairs". The Tribunal has carefully considered the evidence and submissions made on these three elements and makes the following observations. a Hypothetical Term b. The probable average annual cost of repairs c. Actual State All of the above observations must be viewed in the light of the Valuation
Acts of 1852 and 1854 which envisaged that revaluations would be carried
out at regular intervals with annual revisions in between to take account
of additions to the Valuation Lists or alterations to existing entries.
It was not intended that valuations would remain in the Valuation List
for a lengthy period of time free from examination at regular intervals.
In such a scenario the valuation of a property would be subject to periodic
review and take into account all the factors that would have a bearing
on net annual value at the valuation date such as physical state, physical
and functional obsolescence and other intrinsic and extrinsic characteristics.
In effect an assessment of Net Annual Value, like a set of financial statements,
is but a snapshot in time that has a validity of its own until such time
as it is revised or re-valued in accordance with the Valuation Act. 7. Paragraphs 34 and 41 of FRS 15 deal comprehensively with repairs and
maintenance expenditure and make a distinction between those repairs which
should be recognised in the profit and loss account and expenditure which
provides an enhancement of economic benefit of the asset and which should
be capitalised in the accounts. It would seem therefore that major repairs
or those of an unusual nature (not being improvements) should be dealt
with in the profit and loss account and it is up to the operator of the
enterprise to make such provision for this type of expenditure as it sees
fit or as Dr. Cahill said "take the hit" in the year in which
the expenditure occurs. 8. The Tribunal has carefully reviewed all the evidence both documentary
and oral in relation to depreciation, provisions, and reserve or sinking
funds and has come to the conclusion that there is a distinct difference
between a sinking fund as contemplated in the guidance note and depreciation
in accountancy terminology and practice. In a typical landlord and tenant
situation depreciation would be found in the accounts of the landlord
who would attempt to ensure that the amount paid in rent would exceed
the annual depreciation charge shown in the accounts and indeed it would
be hard to envisage a situation where it did not. In any event, no matter
how long the term of the hypothetical lease, depreciation cannot be the
tenant's responsibility because if it were then the tenant would be assuming
the role of the lessor / landlord which is something the tenant cannot
be in the rating world. 9. This Tribunal in the East Link case at paragraphs 30 and 31 dealt
with the question of obsolescence and the cost of major repairs as distinct
from repairs of a repetitive nature. This Tribunal accepts the principles
set down in the East Link case - that where a valuation is prepared on
a receipts and expenditure method it would be improper for the Tribunal
to introduce into those accounts a notional "reserve or sinking fund
or the like" to meet the future cost of "lumpy expenditure"
on repairs, maintenance or renewal that may be necessary from time to
time during the term of the hypothetical lease. 10. The Tribunal accepts the argument that the hypothetical tenant may
from time to time have to meet the costs of " lumpy expenditure and
repairs" and that it is proper that these be allowed in some shape
or form under the heading of expenditure. However, in the absence of evidence
that such expenditure has been incurred and shown as such in the profit
and loss account or has been provided for in some form or other, the Tribunal,
in the light of the East Link case cannot make any allowance under the
heading of repairs other than those appearing in the accounts for the
year 1998. It should also be said that neither party advanced any evidence
of previous repairs of an unusual nature other than the expenditure on
the new roof and other works in connection with the Custom House, the
costs of which were capitalised. However, it should be said that the hypothetical
tenant as envisaged under rating law would in normal circumstances seek
to examine more than one year's financial statements before formulating
an opinion of rental value. Such an examination for a number of years
would give a better picture of the "probable average annual cost
of repairs" than that obtained from an examination of one year's
accounts only. The Tribunal notes with interest that under the general
heading of dredging in the 1998 profit and loss account there is a charge
of £157,995 in respect of "general dredging". Mr. Aylward
in arriving at his divisible balance made a provision of £300,000
under this heading following an examination of the accounts for several
years. In the Tribunal's opinion this is the correct approach and it begs
the question as to whether or not a similar exercise was, or ought to
have been carried out, in relation to repairs and maintenance the costs
of which are not shown separately in the expense column but are contained
under the general heading of "operating and maintenance costs"
in the 1998 accounts. 11. It was put to the Tribunal that a competent valuer when using the
receipts and expenditure method of valuation ought to exercise a degree
of discretion in the examination of the accounts. In those circumstances
where there is no "reserve", "sinking fund" or such
like provision in the accounts (as in this instance) and where such a
provision would be reasonable having regard to the nature of the property
then the valuer should exercise his/her judgment and make such a notional
provision as he/she considers necessary or appropriate. The Tribunal has,
it must be said, a degree of sympathy with this general proposition but
in the light of the East Link judgment and in the absence of any evidence
as to how this notional provision might be calculated (other than by having
some regard to the annual depreciation charge) the Tribunal finds itself
constrained from making any such allowance. It should also be said that
neither party introduced evidence identifying or quantifying expenditure
of a major repairing nature or renewals which might arise at some specific
time or times in the future the estimated cost of which must be provided
for by the hypothetical tenant one way or another. In the absence of such
an exercise and in the light of the East Link judgment the Tribunal once
again finds itself constrained from even attempting to make any assumptions
as to what allowance, if any, should be made for this eventuality. Should
the policy of the appellant company change so as to provide for the establishment
of a reserve or specific fund or some other method of provision to meet
anticipated expenditure under the heading of future repairs then the matter
can be looked at afresh at some future revision or revaluation stage. 12. A critical examination of Mr. Aylward's valuation, contained in the
Appendix to this judgment, revealed a minor miscalculation of the amount
attributable for rent and rates in the Cork County Council rating area.
The figure shown in Mr. Aylward's valuation, £1,266,722, is incorrect
and should be £1,247,056. The effect of this adjustment is to reduce
the rateable valuation of this section of the property from £4046
to £3983. Determination VA01/1/001 £3983 €5057.37 And the Tribunal so determines. |
|||||||||||||||