O'Brien (HM Inspector of Taxes) v Benson's Hosiery (Holdings) Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 25 October 1979 |
| Date | 25 October 1979 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)
COURT OF APPEAL-
HOUSE OF LORDS-
Corporation tax-Chargeable gains-Meaning of "property" and "assets" under Part III of Finance Act 1965 (c 25)-Whether £50,000 received from director to secure release from service agreement a chargeable gain-Finance Act 1965, s 22(1), (3) and (4)(b).
In September 1968 the Company, a holding company, acquired the total issued share capital in a company which marketed hosiery ("Hosiery") and B, the sales and marketing director of Hosiery, entered into a seven-year service agreement with the holding company to act for it in the same capacity. Under that agreement B carried out sales and merchandising duties for Hosiery and another subsidiary of the Company with conspicuous success. In April 1970, following negotiations, B and the company entered into a supplemental agreement whereby B paid the Company a capital sum of £50,000 for the release of his obligations under the service agreement. The Company, appealing to the Special Commissioners against a corporation tax assessment raised on the basis that the £50,000 was a chargeable gain, contended (i) that the right of an employer under a service contract to the employee's services was not a chargeable asset; (ii) alternatively, if it was, that it was acquired for a consideration which could not be valued within the meaning of s 22(4)(b), Finance Act 1965, (i.e. the asset was deemed to be acquired for a consideration then equal to its market value); (iii) alternatively, that under s 22(3) the £50,000 was derived from the shares in Hosiery and the other subsidiary, the values of which were diminished by virtue of B's departure, so that the chargeable gain fell to be computed by reference to those shares. It was contended on behalf of the Crown that the Company's rights under the service agreement constituted an asset for the purposes of s 22(3), and that the £50,000 was a capital sum "received in return for…surrender of rights" within s 22(3)(c). The Commissioners allowed the Company's appeal, holding that an employer's rights under a personal service contract were not "property" within the meaning of s 22(1). The Crown demanded a Case.
The Chancery Division, allowing the Crown's appeal held (1) that the £50,000 was a capital sum received in return for forfeiture or surrender of rights within the meaning of s 22(3)(c); (2) that the Company's contractual rights were "property" and "assets" for the purposes of s 22(1); and the said sum was "derived from" the service agreement alone and there was no justification to look
behind it to the underlying value of the shares in Hosiery and the other subsidiary (Commissioners of Inland Revenue v. Montgomery 49 TC 679; [1975] Ch 266 applied); (3) that the matter should be remitted to the Special Commissioners to hear evidence and argument on, and determine whether the said rights could be valued, and if so, the value thereof. The Company appealedThe Court of Appeal, allowing the Company's appeal extracted from Nokes v. Doncaster Amalgamated Collieries Ltd. [1940] AC 1014 a general principle that contracts of employment were not assignable and so were not property or assets. The Crown appealed and the House of Lords unanimously reversed the Court of Appeal and held, per curiam, that: (1) the Nokes case provided no guidance for capital gains tax purposes, being in any event concerned only with the transfer or assignment of rights under an employment contract whereas the capital gains tax legislation was concerned with disposals; (2) the employer's rights to obtain a substantial sum for the release of B from his contract sufficiently bore the mark of an asset of the employer, being something which he could turn to account; (3) s 22(3)(a) would be apt to cover a case of damages recovered by an employer from a third party for wrongful procurement of breach of contract by the employee; (4) it was erroneous to deduce from s 22(4), which had no application to the present appeal, a principle that for capital gains tax purposes an asset must have a market value; Inland Revenue Commissioners v. Crossman [1937] AC 26 distinguished; (5) (as had been held in the Courts below) the £50,000 was not derived from the employer's shareholding in its subsidiaries.
Stated under s 56 of the Taxes Management Act 1970 by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 22 and 23 September 1975 Benson's Hosiery (Holdings) Ltd. ("the Company") appealed against an assessment to corporation tax in the sum of £50,000.
2. Shortly stated the question for our decision was whether for the purposes of Part III, Finance Act 1965 ("the Act") a chargeable gain arose on the receipt by the Company in its accounting period ended 31 July 1970 of £50,000 paid by an employee and director of the Company to secure his release from his service contract with the Company.
3. The following witnesses gave evidence before us: Peter Brian James ("Mr. James"), chartered accountant, partner in David Kroll & Co., the Company's auditors; John Michael Wariner, ("Mr. Wariner"), chartered accountant and since 1 October 1970, financial director of the Company.
4. Copies, which are available for inspection by the Court if required, of the following documents were proved or admitted before us:
(2) the Company's annual report and accounts for year ended 31 July 1970;
(3) the Company's prospectus dated 25 September 1968;
(4) service agreement dated 23 September 1968 ("the service agreement") between the Company and Mr. Robert Solomon Behar ("Mr. Behar");
(5) agreement dated 2 April 1970 ("the supplemental agreement") supplemental to the service agreement.
5. As a result of the evidence both oral and documentary adduced before us we find the following facts proved or admitted:
(2) The Company is a holding company and does not itself trade. On 25 September 1968 the Company acquired the whole of the issued share capital of Benson's Hosiery Ltd. ("Hosiery") in exchange for 7850 ordinary shares of 2s. each of the Company credited as fully paid up. The share capital of Hosiery was taken into the Company's books at a value of £124,785. A figure of £49,851, being the excess of the said value of £124,785 over £74,934 (which was taken to be the value of the net tangible assets of Hosiery) was included in the value of "goodwill" in the consolidated accounts of the Company and its subsidiaries. Goodwill was not, however, shown in the balance sheets of the Company or of any of its separate subsidiary companies. Also on 25 September 1968 the Company, by way of capitalization of the sum standing to the credit of share premium accounts, which arose from the acquisition of Hosiery, issued to its members 124 fully paid ordinary shares of 2s. each for each 2s. share already held.
(3) At about the same time as the Company acquired Hosiery, it also acquired for cash the whole of the issued share capital of South Coast Warehousemen Ltd. ("South Coast").
(4) Hosiery and South Coast were the first two subsidiaries which the Company acquired.
(5) At the time of its acquisition by the Company, Hosiery carried on the business of marketing of hosiery. One quarter of Hosiery's share capital was owned by Mr. Behar, who for some years had been Hosiery's sales and merchandise director and who had pioneered successful new methods of marketing. Following the Company's acquisition of Hosiery and the share issue referred to in sub-para (1) above, Mr. Behar became entitled to 245,250 ordinary shares of 2s. each in the Company.
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(6) By the service agreement Mr. Behar was appointed sales and merchandise director of the Company for seven years at a salary of £4,000 per annum. The material clauses of the agreement are:
1. Mr Behar shall be and he is hereby appointed Sales and Merchandise Director of the Company upon the terms hereinafter appearing for the term of Seven Years from the 23 day of September 1968 and thereafter unless and until determined by not less than 3 months notice in writing given by either party to the other and as such Sales and Merchandise Director Mr Behar will perform the duties and exercise the powers which may from time to time be assigned to or vested in him by the Board of Directors of the Company or any Managing Director of the Company including rendering services to any Subsidiary of the Company. 2. Mr Behar shall devote the whole of his time attention and abilities to his duties hereunder (including the business of such of its Subsidiary Companies as the Board may from time to time require) and shall comply with the directions from time to time given and made by the Board and shall well and faithfully serve the Company and use his utmost endeavours to promote the interests thereof…4. There shall be paid to Mr Behar as such Sales and Merchandise Director (to include any remuneration payable to him as a Director of the Company or of any of its Subsidiary or associated companies) a salary payable monthly in arrear on the first of each month but to be deemed to accrue from day to day from the said 23rd day of September One thousand nine hundred and sixty-eight at the rate of Four thousand pounds per annum such salary to be the subject of review by Agreement between the parties from time to time…8. The Board shall be at liberty from time to time to appoint any other person or persons to be a Sales and Merchandise Director of the company jointly with Mr Behar and to appoint such Assistant Sales and Merchandise Director of the Company as they may think fit. 9. The reconstruction or amalgamation of the Company during the continuance of this Agreement whereunder Mr Behar shall be offered comparable employment on terms not less favourable to him than those herein contained shall not...
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...source (emphasis added). He went on to say, "The true view was hinted at by Fox J. in O'Brien v. Benson's Hosiery (Holdings) Ltd. 53 T.C. 241 when he referred—to 'the reality of the matter'. 36 One has to look in each case for the real (rather than the immediate) source of the capital sum."......
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Mertrux Ltd v The Commissioners for HM Revenue and Customs
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