Black Nominees Ltd v Nicol

JurisdictionEngland & Wales
CourtChancery Division
Judgment Date16 Apr 1975

HIGH COURT OF JUSTICE (CHANCERY DIVISION)-

(1) Black Nominees Ltd
and
Nicol (H.M. Inspector of Taxes) Nicol (H.M. Inspector of Taxes) v Black Nominees Ltd

Income tax, Schedule D-Actress-Tax avoidance scheme-Actress employed at a salary by company formed to exploit her services-Profits from those services indirectly reaching trustee for her under discretionary settlement in form of loan repayments-Whether capital receipts-Whether trustee assessable thereon under Case I, II or VI of Schedule D.

An elaborate scheme was devised with the object of enabling C, an actress in cinematograph films, to avoid income tax and surtax on a large part of her earnings. C was to enter into a service agreement ("agreement M") with a company called Rosebroom whereby she undertook to serve Rosebroom exclusively as an actress for seven years at a salary rising from £7,500 to £13,500 per annum, giving Rosebroom or its assigns power to exploit her professional services ("the C rights"), e.g. by selling them to film companies. A series of transactions was planned, each of which, after the relevant trusts were set up, had a plausible commercial justification, whereby 671/2 per cent. of the profits from the C rights was to reach the Appellant Company, as trustee of a discretionary settlement of which C was a beneficiary, in the form of repayments of a loan, and the balance of 321/2 per cent. would go to the sellers of the scheme ("the financiers") and their associates as commission. Of the parties herein mentioned the Appellant, Godmour and Swanlack were companies controlled by C's advisers, G & Co. were the financiers and the remainder were companies acting at the behest of the financiers or their associates. Godmour and Swanlack were in form trading companies; the Appellant's memorandum of association gave it no power to trade.

Three settlements were made on 14th December 1965 by a third party. By settlement A (trustee Godmour) £75 was settled on trust to pay the income for 21 years to the Appellant as trustee of settlement B or its assigns. By settlement B (trustee the Appellant) the income interest under settlement A was declared to be held on trust for sale and the proceeds on discretionary trusts for beneficiaries who included C. By settlement D (trustee Swanlack) £25 was settled in trust for the same beneficiaries excluding C. Godmour and Swanlack irrevocably appointed that their respective trust funds should be held as circulating capital of businesses to be carried on by them.

By agreement F (dated 17th December), for £25 paid by Godmour, Rosebroom undertook to endeavour to procure C to enter into agreement M and granted Godmour an option to acquire agreement T for £500, the benefit thereof to be held on the trusts of settlement A; agreement T, annexed in draft to agreement F, provided that for an annual fee of £750 Rosebroom would procure that C performed her services under agreement M for or at the direction of Godmour or its assigns. By agreement G (dated 17th December) Godmour sold the benefit of agreement T, conditionally on the consent of the Appellant

or its assigns (required by settlement A), for £150 to Cymbeline. By agreement H (dated 17th December) Cymbeline agreed with Swanlack to endeavour to acquire the benefit of agreement T, and on that basis granted an option to Swanlack, exercisable at any time, to acquire the C rights for £484,250 less 821/2 per cent. of the profits received from the C rights by Cymbeline prior to the exercise of the option; by the same agreement Swanlack agreed to deposit £479,050 with Budd as soon as Cymbeline had acquired the C rights and to procure a guarantee for a further £5,200, the deposit to be released to Swanlack as and when the receipt by Cymbeline of profits from the C rights reduced the option price below the deposit. The option was not expected to be, and was not, exercised, in view of the risk that receipts directly accruing to Swanlack from the C rights might be held to be trading receipts. It was a term of agreement H that the benefit of the agreement and the option should be held by Swanlack on the trusts of settlement D

The scheme was to be set in motion by the sale by the Appellant of its income interest under settlement A to Cymbeline for £475,000. By agreement K (dated 17th December) the Appellant agreed in advance to lend Swanlack the proceeds of that sale free of interest, the liability of Swanlack for repayment to be limited by reference to the assets of settlement D. Thus Swanlack would have available £475,000 of the deposit of £479,050 required under agreement H. By agreement O (dated 20th December) G & Co. agreed to provide Swanlack with the balance of £4,050 and the guarantee required under agreement H, and Swanlack agreed that as and when the deposit was released it would repay the £4,050 and pay G & Co. further sums equal to 15 per cent. of the profits from the C rights. Those sums, with the 171/2 per cent. to be retained by Cymbeline, made up the 321/2 per cent. of the profits from the C rights given up by C as the price of the scheme. Cymbeline was acting as agent for Univats in the purchase of the Appellant's interest under settlement A and the purchase under agreement G of the C rights, and as agent for Downer in entering into agreement H with Swanlack. By further agreements Downer was given an option to purchase the C rights from Univats for £476,130, thus enabling Univats to put Cymbeline in funds to pay the Appellant, and the deposit under agreement H was made available to Downer to finance the purchase from Univats.

The service agreement (agreement M) between C and Rosebroom became effective on 20th December 1965. On 22nd December agreement T was signed with Rosebroom and Cymbeline as parties, and at a completion meeting on the same day the sale by the Appellant to Cymbeline and the other outstanding transactions were carried out. A representative of K Ltd., bankers, attended the meeting with drafts and paying-in slips. Initially K Ltd. handed a draft for £475,000 to Univats, which handed it to Cymbeline to hand to the Appellant. That draft was returned to K Ltd. with a paying-in slip; K Ltd. then provided the Appellant with a draft for £475,000 to hand to Swanlack, and so forth, with the ultimate result that Downer paid Univats for the C rights and Univats repaid to K Ltd. the £475,000 initially advanced. At the end of the meeting K Ltd. were not standing out of any money. The financiers provided £4,050 for incidental expenses, including the agreed payments of £150 to Godmour and £500 to Rosebroom, the fee of K Ltd. and legal costs, which sum they recovered in due course under agreement O.

On 28th January 1966 Cymbeline entered into an agreement with a film company under which payments for C's services aggregating £100,000 were to be made for eight weeks from 31st January 1966, and further valuable contracts speedily ensued. The agreed share of the profits from those contracts duly reached the Appellant, as the trustee of settlement B, in the form of loan repayments under agreement K. Assessments to income tax under Schedule D for the years 1965-66, 1966-67 and 1967-68 were made on the Appellant on the footing that those sums fell within Case I, II or VI of that Schedule. On appeal, the Appellant contended that they were capital receipts. The Crown attacked none of the transactions as being other than what it purported to be, but contended that at the completion meeting no payments of £475,000 were in reality made. The Special Commissioners upheld that contention and held that the Appellant was assessable under Case II as the person receiving or entitled to annual profits or gains arising from a profession carried on by C; in the alternative, they held that in selling its income interest under settlement A the Appellant carried on a trade and that it was accordingly assessable under Case I. The Appellant demanded a Case. A Case was also demanded by the Crown in order to preserve the first two years' liability on the current year basis under Case I or Case VI in case the sums in question should ultimately be held not to be profits of a continuing profession of C.

In the High Court it was further contended for the Appellant, in the alternative, that C ceased to carry on her profession at the commencement of the service agreement and that the appropriate Schedule of charge, if any, was Schedule E.

Held, (1) that the only effect of the circular payments of £475,000 was the distribution of the profits from the C rights between those acting in C's interests and the interests of the financiers and their associates respectively;

(2) that the Appellant received as income its entitlement to part of those profits, or sums equal thereto and derived therefrom;

(3) that although Godmour and Swanlack purported to be trading, and if they were trading so was the Appellant, there was no evidence of trading by any of them, so that Case I did not apply;

(4) that on becoming a salaried employee of Rosebroom under the service agreement C ceased to carry on a profession, so that Case II did not apply;

(5) that the sums derived by the Appellant from the exploitation by Cymbeline of the C rights did not fall within Schedule E but within Case VI of Schedule D.

CASE

Stated under the Taxes Management Act 1970, s. 56, 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 28th to 30th October 1970, 2nd to 6th November 1970, 16th to 18th November 1970 (being all inclusive dates), 30th November 1970, 1st December 1970 and 27th January 1972, Black Nominees Ltd. (hereinafter called "Black Nominees") appealed against the following assessments to income tax:

1965-66

£475,000

1966-67

£40,000

1967-68

£44,000

We understood the questions raised in these appeals to be:

  1. (a) whether by virtue of the provisions of s....

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