Bolton (HM Inspector of Taxes) v Halpern & Woolf
| Jurisdiction | England & Wales |
| Judgment Date | 29 October 1980 |
| Date | 29 October 1980 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
Income tax, Schedule D-Partnership profits-Payment under a guarantee given by a former partner-Whether deductible in computing profits when firm entitled to be indemnified by him-Whether a withdrawal of capital or sum paid for a capital asset-Income and Corporation Taxes Act 1970, ss 108(1) and 130(f) and (k).
L, in April 1964, agreed with the bank to guarantee the account of a long-standing client company. As part of its service to clients the accountancy firm which he had founded had previously guaranteed the company's overdrafts. The purpose of the new guarantee, which at the bank's insistence was in L's name and not the firm's, was to avoid the possibility of the firm having to pay under earlier guarantees and to retain as a going concern their principal client. L also had a shareholding in and had advanced moneys to the company.
When, in 1965, L's brother, D, became a partner it was agreed that should any loss arise under the guarantees it was to be borne by L alone. L died in 1967. D carried on the practice alone until 6 April 1968 when he was joined by R. The bank claimed payment of £14,000 under the guarantee in February 1969 and this sum was later paid.
In the partnership accounts to 28 February 1967 a special provision was raised in respect of the liability under the guarantee. It was charged not to the profit and loss account but to L's capital account where it formed part of a larger amount which he owed to the partnership. In the 1969 accounts £14,000 was charged to profit and loss account as revenue expenditure but the profit and loss allocation account was credited with £14,000 from the special reserve, turning a net loss for the year into a profit divisible between the then two partners. The partnership balance sheet continued to include £14,000 as part of a larger amount owing to the partnership by L and, subsequent to his death, by his estate.
Before the Commissioners it was agreed that the partnership as from time to time constituted should be treated as having carried on the same continuous practice. On the partners' appeal against an income tax assessment for 1970-71 the Inspector of Taxes contended that because of L's personal financial involvement in the company the payment under the guarantee was not, as the partners claimed, an expense incurred wholly and exclusively for the purposes of the profession but represented a withdrawal of capital. The Commissioners found for the partners.
In the High Court the Inspector contended that the deduction was not justified as the partners suffered no loss, alternatively, the payment was a withdrawal of capital or on capital account.
The Chancery Division, allowing the Crown's appeal, held that this was not a case of apportioning a partnership liability between partners according to their partnership obligations; in arriving at the profits of the partnership for the year in question it was wrong to ignore that the partners had a specific right against the estate of a former partner to be recouped the whole of any expenditure made by them in meeting the obligation for which deduction was claimed. Accordingly the £14,000 was not deductible.
The Court of Appeal, allowing the partners' appeal, held that the £14,000 found by the Commissioners to have been an expense of the partnership was deductible because the partnership's profits and losses had to be computed ignoring the fact that the burden of that payment must as between the continuing partners and L's estate fall on the deceased partner.
McCash & Hunter v. Commissioners of Inland Revenue 36 TC 170 followed.
Stated under s 56 of the Taxes Management Act 1970 by the Commissioners for the General Purposes of the Income Tax for the Division of St. Marylebone for the opinion of the High Court of Justice.
1. At a meeting of the said Commissioners held on 4 February 1976 the Respondents appealed against an assessment to income tax for the year 1970-71 in the sum of £7,000.
2. The question for our determination was whether a sum of £14,000 charged in the accounts of the Respondents' accountancy practice for the year ended 6 April 1969, being a sum due to Lloyds Bank Ltd., Wellesley Road, Croydon branch (hereinafter referred to as "Lloyds") under a guarantee entered into by the late Mr. Louis Halpern (hereinafter referred to as "Mr. Halpern") on behalf of Lewis Carr & Co. Ltd. (hereinafter referred to as the "company") as hereinafter appears was deductible in arriving at the profits of the Respondents assessable to income tax for the year 1970-71.
3. Evidence was given by: (a) David Halpern, a Fellow of the Institute of Chartered Accountants and the senior partner of the Respondents, (hereinafter referred to as "Mr. D. Halpern"); (b) Emile Woolf, a Fellow of the Institute of Chartered Accountants, a teacher of accountancy and auditing during the past 12 years, and an examiner of the Institute of Certified Accountants.
4. The following documents were produced and admitted or proved at the hearing of the appeal, bundle "A" of documents comprising:
A.(1) Letter dated 1 May 1964 from Lloyds to Mr. Halpern.
A.(2-5) Contract of guarantee (undated) between Mr. Halpern and Lloyds.
A.(6-8) Profit and loss account of the Respondents for the year to 28 February 1967 and balance sheet at that date and a copy of the partners' accounts.
A.(9-12) Profit and loss account of the Respondents for the year to 6 April 1969 and balance sheet at that date, a copy of the partners' capital accounts and the profit and loss allocation account.
A.(13) Letter dated 26 January 1976 from the National Westminster Bank Ltd., Finsbury Park branch (hereinafter referred to as "National Westminster") to the Respondents.
A.(14) Letter dated 3 February 1976 from Barclays Bank Ltd., Newgate Street branch (hereinafter referred to as "Barclays") to Mr. D. Halpern.
B. Bundle of documents comprising eleven documents separately numbered B(1)-B(11).
C.(1) Share certificate numbered 4 relating to a holding by Mr. Halpern of 6000 ordinary shares of £1 each in the company.
C.(2) Copy trading and profit and loss account for the year to 31 December 1965 and balance sheet at that date of the company.
D. Letters from the Respondents to the Inspector of Taxes dated 14 June 1973 and 9 October 1974.
With the exception of bundle "A" of documents(1), the above documents are not attached to and do not form part of this Case for reasons of brevity and economy, no party having requested their inclusion, but the provisions thereof so far as relevant to this appeal have been incorporated herein, and the originals are available and can be produced to the High Court if required.
5. We found the following facts set forth below admitted or proved on the evidence adduced at the hearing of the appeal.
6. The accountancy firm of Halpern & Woolf was formed in or about 1929 by Mr. Halpern who was later joined by a Mr. F. M. Woolf. Mr. Halpern died in 1967. He was the father of Mr. D. Halpern the present senior partner. A Mr. Clive Samuel Russell became a partner on 6 April 1968. Mr. D. Halpern became a partner on 16 November 1965 and practised on his own account under the name of Halpern & Woolf from 20 July 1967 until 6 April 1968. He was formerly an employee of the firm and in 1963 he carried on the business himself for four months during the illness of his father. It was agreed that for the purposes of the appeal the partnership as originally constituted and the partnership at the date of the hearing should be treated as having carried on the same continuous practice as accountants.
7. Mr. Halpern never formally qualified as an accountant. His qualifications rested on his experience, but he was recognized by the Board of Trade as a duly qualified accountant for the purposes of the Companies Act 1948. The practice had since its formation consisted of, in addition to auditing and accountancy, the provision of financial services and advice for clients.
8. As part of this service Mr. Halpern had, since 1956, guaranteed the bank overdraft of the company which had for many years banked with Barclays. In 1964 the company was pressed by Barclays to repay its overdraft and Mr. Halpern arranged finance for it with Lloyds and the company transferred its account to Lloyds. On or about 27 April 1964 Mr. Halpern entered into a contract of guarantee with Lloyds to secure the company's overdraft up to £21,000 (exhibit A(2)) which Lloyds acknowledged by letter dated 1 May 1964 (exhibit A (1)). This guarantee replaced earlier guarantees securing the company's overdraft up to £25,000. The guarantee was in the name of Mr. Halpern and not the firm name in order to meet the requirements of the bank. The company had been a client of the firm since 1946 and the earlier guarantee was part of a long history of guarantees which had gradually increased in amount. The purpose of the new guarantee was to avoid the possibility of Lloyds requiring the Respondents themselves to pay under the earlier guarantee, and to retain as their principal client a going concern. In addition to the guarantee Mr. Halpern also made a personal loan to the company of £4,000 in order that the overdraft should not exceed the guaranteed amount and on 1 January 1965 his
advances to the company totalled £12,902 free of interest. In December 1965 the company increased its capital to £10,000 in ordinary shares of £1 each in order to show a better capital position on the accounts and 6000 such shares were issued to Mr. Halpern beneficially. In 1965, when Mr. D. Halpern became a partner, it was agreed that should any loss arise under the guarantees it would be borne by Mr. Halpern alone. No entry was made in the accounts until 28 February 1967 when Mr. Halpern's capital account was debited with £13,000 described as "Adjustment for Special Provision for Guarantee liability re Client" (exhibit A...To continue reading
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