Bentleys, Stokes & Lowless v Beeson
| Jurisdiction | England & Wales |
| Date | 1950 |
| Court | Court of Appeal |
HIGH COURT OF JUSTICE-
COURT OF APPEAL-
Income Tax, Schedule D - Solicitors - Entertainment expenses - Whether allowable deduction.
The Appellants, a firm of solicitors, incurred expenses in entertaining clients. On appeal to the Special Commissioners, they claimed a deduction for the expenses on the grounds that they were incurred for the purpose of earning profits and were money wholly and exclusively laid out or expended for the purposes of the profession within Rule 3 (a) of the Rules applicable to Cases I and II of Schedule D. The Commissioners, being of opinion that the provision of entertainment was not necessary for professional purposes and that the expenses could not be wholly divorced from the relationship of host and guest, held that the expenses were not wholly and exclusively laid out for the purposes of the profession and dismissed the appeal.
Held, that the Commissioners had applied an erroneous test and that there was no evidence upon which they could reach their decision.
Stated under the Income Tax Act, 1918, Section 149, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 9th October, 1950, Bentleys, Stokes & Lowless (hereinafter called "the Appellant firm") appealed against an assessment to Income Tax in the sum of £6,151 made upon it for the year ended 5th April, 1950, under the provisions of Case II, Schedule D, of the Income Tax Act, 1918.
1. The sole question raised by this appeal is whether the Appellant firm is entitled to a deduction, in computing its profits and gains for the purposes of Income Tax for the said year, in respect of entertainment expenses by reason of the matters hereinafter set out.
2. The facts, including the evidence of the two partners of the Appellant firm, as accepted by us are set out in the next succeeding six paragraphs.
3. The Appellant firm carries on the profession of solicitors in partnership and at all material times was comprised of two partners, B.H. Dulanty and R.L. Williams. Its office is situated at 32, Bishopsgate, London, E.C.2. It had been the custom for some years past for the partners, acting on behalf of the Appellant firm, to incur expenses in entertaining existing clients. For
the years 1943-44 to 1948-49 inclusive the Appellant firm had been allowed as a deduction each year a fixed sum of £495 in respect of entertainment expenses in computing its profits and gains for Income Tax purposes. For the year of assessment 1949-50, based on the firm's account for the year ended 31st December, 1948, the amount claimed as a deduction was £539 being apportioned as to £430 expended by B.H. Dulanty and £109 by R.L. Williams.4. As a result of an interview between B.H. Dulanty, the auditor of the firm and the Inspector of Taxes, the Inspector had requested that weekly totals of the expenditure in respect of entertainments expenses incurred by the partners should be recorded. Weekly totals of such expenses were accordingly kept as from 4th October, 1947. In August, 1949, a further interview at which the same parties were present took place, as a result of which the Appellant firm was informed by the Inspector that the said expenditure incurred in the year ended 31st December, 1948, would be disallowed.
5. The nature of the entertainment was all in connection with lunches to existing clients apart from one or two dinners. These took place at the Thatched House Club, an ordinary social club in St. James's Street, of which B.H. Dulanty was a member, or at restaurants. The Appellant firm had a number of clients in the West End of London and in the country and it was more convenient for business interviews to be held in the West End. By giving these clients lunches, during which the business in hand was discussed, the remainder of the day could be devoted to the Appellant firm's routine work by the partners at the office. B.H. Dulanty attended to the commercial work and R.L. Williams to the Admiralty side of the Appellant firm's business. If the partners had decided to hold interviews solely in the office in Bishopsgate, certain clients might have been lost. The entertainment was confined to existing clients who alone were present. The Appellant firm's three largest clients were three companies whose total fees brought in more than £3,000 of profit costs in a year. Directors of those three companies whose offices were in the West End, were entertained at lunch from time to time in the West End for the sake of convenience. The amounts claimed included the cost of the partner's entertainment while entertaining clients. Some of the persons entertained were professional clients from the country for whom the Appellant firm acted. In all cases the legal advice given to clients at lunch was charged to them in the normal way, but the cost never included the expenses in question, which were charged as an expense in the firm's profit and loss account under the heading "Expenses incurred not directly chargeable to Clients".
6. Clients were sometimes entertained at the Palmerston Restaurant which was close to the office in Bishopsgate. The expenses claimed were primarily and principally, but not purely, for business purposes. R.L. Williams, who dealt exclusively with the Admiralty side, and also with some general clients, had to meet in London foreign marine underwriters mainly from Scandinavia, Germany, Holland and France. They were only in London for a short time and telephoned their arrival. They were usually only free at lunch time or night time. Meetings were usually fixed for lunch time. The same underwriters would visit London on several occasions. Foreign underwriters often had agents in London and these agents would bring their foreign employers with them to lunch. R.L. Williams entertained at various restaurants, not at any club.
7. Mr. H. Horsfall Turner gave evidence at the hearing which we accepted as follows. He was an under-secretary of the Law Society. One of the latter's committees-the Professional Purposes Committee-had recently considered the question of entertainment expenses. This Committee considered that the entertainment of existing clients whether with a view to retaining them as clients or of obtaining new business was not unprofessional. It was not uncommon for a solicitor to entertain a client at lunch and discuss business with him, as many solicitors were pressed for time.
8. Copies of entertainment expenses incurred by each of the partners for 1947 onwards, marked "A" and "B" respectively, are annexed to and form part of this Case(1).
In the case of B.H. Dulanty detailed records of this expenditure were kept as from 8th August, 1949. In the case of R.L. Williams detailed records were kept as from 7th January, 1949. Prior to these dates only weekly totals are shown.
The period material to this appeal is the year ended 31st December, 1948. The records of expenses after this date were exhibited at the hearing as examples of the nature of the expenditure previously incurred.
A copy of the Appellant firm's accounts for year ended 31st December, 1948, marked "C", is annexed to and forms part of this case(1).
9. It was contended on behalf of the Appellant firm;
(2) that the test to be applied was whether the expenses were incurred for the purpose of enabling the firm to earn profits and that the question of "necessity" was immaterial;
(3) that the sum of £539 should be allowed as a deduction in computing its profits and gains for Income Tax purposes for the year in question as being money wholly and exclusively laid out or expended for the purposes of the profession.
10. This contention was resisted on behalf of the Respondent on the ground that the expenditure in question was not wholly and exclusively laid out for the purposes of the profession of the Appellant firm within Rule 3 (a) of the Rules applicable to Cases I and II of Schedule D.
11. We the Commissioners gave our decision as follows.
We accept the evidence of Mr. Horsfall Turner that incurring entertainment expenses in respect of existing clients is not a breach of professional etiquette on the part of solicitors. We have no doubt that meeting clients elsewhere than at the office might well be a matter of convenience. The provision of meals or other refreshment on these occasions was no doubt customary and a matter of good policy, but we are unable to say that it was necessary for the purposes of transacting the business in hand or for the profession generally. We cannot come to the conclusion that the moneys expended on entertainment were expended solely for the purposes of the profession and were entirely divorced from the element of hospitality and the relationship of host and guest.
For the above reasons we hold that the sum claimed was not money wholly and exclusively laid out or expended for the purposes of the profession and that the appeal fails. We confirm the assessment.
The representative of the Appellant firm immediately after the determination of the appeal declared to us his dissatisfaction therewith as being
erroneous in point of law and in due course required us to state a Case for the opinion of the High Court pursuant to the Income Tax Act, 1918, Section 149, which Case we have stated and do sign accordingly.R. Coke, W.E. Bradley Commissioners for the Special Purposes of the Income Tax Acts.
Turnstile House,
94-99, High Holborn.
London, W.C.1.
8th March, 1951.
The case came before Roxburgh, J. in the High Court on 26th and 27th July, 1951, and on the latter date judgment was given against the Crown with costs.
Roxburgh, J.-At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 9th October, 1950, Bentleys, Stokes & Lowless, to whom I will refer as "the firm", appealed against an assessment to Income...
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