Clayton (HM Inspector of Taxes) v Gothorp
| Jurisdiction | England & Wales |
| Judgment Date | 30 March 1971 |
| Date | 30 March 1971 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income tax, Schedule E - Emoluments of employment - Loan to employee taking full-time training course - Ceasing to be repayable on completion of further term of service after end of course - Whether assessable and for what year - Whether exempt as scholarship income - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), ss. 156, Sch. E, and 458; Finance Act 1956 (4 & 5 Eliz. 2, c. 54) Sch. 2, para. 1.
In September 1965 a county council entered into an agreement with the Respondent's wife, who was then in their employ as an assistant health visitor, whereby the council was to make her a loan of £637 to enable her to take a nine months' full-time course of training as a health visitor and was to pay the fees for the course and examination and she undertook to serve the council as a health visitor for a further 18 months after completion of the course. The agreement further provided that if she duly so served the council for that period the loan of £637 should become irrecoverable. The Respondent's wife left the council's employ at the commencement of the course, and while on it she received by monthly instalments the said sum of £637, which was equivalent to the gross salary which she would have received on continuing as an assistant health visitor. Having successfully completed the course she returned to the council's employ as a health visitor on 15th July 1966, and remained in post until 18th January 1968, when she resigned.
The Respondent was assessed to income tax under Schedule E for the year 1967-68 on the footing that the said £637 was a profit of his wife's employment for that year. On appeal, he contended that that amount, which she received as a loan, was not taxable; alternatively, that it was in the nature of a scholarship; alternatively, that it was not assessable for the year 1967-68. The General Commissioners held that the loan was not a scholarship, but that it was not assessable because the right not to repay it arose from the loan agreement and not from any contract of service.
Held, that the loan was not income from a scholarship, and the discharge of the obligation to repay it was a reward for past services and as such an emolument of the employment for 1967-68.
Stated under s. 64 of the Income Tax Act 1952 by the Commissioners for the General Purposes of Income Tax for the Division of Agbrigg Lower in the West Riding of the County of York for the opinion of the High Court of Justice.
1. At a meeting of the said Commissioners held at 11 Market Street, Wakefield, on 5th March 1969 for the purpose of hearing appeals, Mr. David Gothorp, of 8 St. John's Mount, Wakefield, appealed against an income tax assessment amounting to £637 under Schedule E for the year 1967-68.
2. We found the following facts to be proved:
(i) Mr. Gothorp is a Detective Inspector of the West Yorkshire Constabulary, and the assessment was made upon him in virtue of allegedly taxable emoluments of his wife as health visitor.
(ii) His wife, Mrs. Enid Gothorp, was until 26th September 1965 employed by the West Riding County Council as an assistant health visitor, when her employment was terminated by the council.
(iii) On 27th September 1965 Mrs. Gothorp commenced a course of training at the Bradford Institute of Technology (later to become Bradford University) to lead to the Certificate for Health Visitors in the United Kingdom issued by the Council for the Training of Health Visitors.
(iv) By an agreement dated 20th September 1965 and made between the West Riding County Council of the one part and Mrs. Gothorp of the other part, the County Council agreed to make a loan of £637 10s. to Mrs. Gothorp so as to enable her to take the said course of training and the County Council agreed to pay the fees of the said course and examination fee to be incurred by her on the terms and conditions therein contained. A copy of the said agreement is annexed hereto, marked "A", and forms part of this Case(1). By clause 3 of the said agreement after the completion of the said course of training Mrs. Gothorp agreed to serve for a period of at least 18 months with the County Council as health visitor/school nurse in either a qualified or unqualified capacity as the case might be. By clause 4 of the said agreement, inter alia, if Mrs. Gothorp should fail to serve with the County Council as prescribed in clause 3 thereof then she agreed to pay to the county Council forthwith the amount of the loan already paid to her together with simple interest thereon at the rate of £5 per cent. per annum. By clause 5 of the said agreement if, in accordance with clause 3 thereof, Mrs. Gothorp should serve with the County Council for the period therein specified then the said agreement was to be void and of no effect at the termination of such period and no right of recovery was to exist against Mrs. Gothorp in respect of the loan already made under the terms of the said agreement.
(v) During the said course of training Mrs. Gothorp received the said sum of £637 10s. from the County Council by monthly instalments. The amount of the said sum was equivalent to the gross salary which she would have received from the County Council had she continued in employment as an assistant health visitor.
(vi) When Mrs. Gothorp went to Bradford University to begin the course the County Council returned her National Insurance cards to her, which she stamped herself at the student rate of contributions, the Ministry of Social Security holding that such persons were not in paid employment and came within the category of students; she was not from that time, while she was at Bradford University, in the employ of the County Council.
(vii) In the event Mrs. Gothorp duly completed the said course of training and obtained her certificate. She returned to the employ of the County Council as a health visitor on 15th July 1966, and remained in post until 18th January 1968, when she gave up this employment. She had then completed her service under clause 3 of the said agreement, and pursuant to clause 5 the County Council had no right of recovery against her in respect of the said loan.
(viii) The Crown then raised the assessment in the sum of £637 for the year 1967-68.
3. Mr. Gothorp produced correspondence passing between the Royal College of Nursing and a Senior Principal Inspector of Taxes in November 1960, when the former was pressing to establish the principle that payments by local authorities to student health visitors should not be regarded as taxable. On 18th November 1960 Mr. W. Walne, Senior Principal Inspector of Taxes, under reference C.I. 3537/1960/69AJM, stated:
I confirm that Local Authority grants made to student Health Visitors on the condition that they serve the Authority for a period on completion of their training, will in future be regarded as tax-free provided that in all other respects the statutory conditions for exemption as a scholarship are satisfied, i.e. that the grant is of the nature of a scholarship and that the recipient should receive full-time education at a university, school or other educational establishment. This change of practice is not considered to give an automatic right to all those who have been taxed on the grants in the past to receive repayment of tax in respect of them.
Mr. Gothorp produced other correspondence, not perhaps strictly relevant, which he claimed showed that in other cases payment of a loan equivalent to the minimum annual salary of a health visitor was considered by the Crown to be exempt from tax: he also produced copies of advertisements by 15 local authorities seeking health visitors including among the inducements to join "tax free training allowances". The other correspondence which Mr. Gothorp produced is summarised as follows:
(2) Letter from the Chief Inspector of Taxes dated 12th October 1960 to the Woman Public Health Officers Association under reference T.1248/13/54/69/ VGF, indicating the conditions of exemption from income tax.
(3) Letter from H.M. Inspector of Taxes, Wakefield 1st District, to City Treasurer, Wakefield, dated 26th June 1963 under reference TCL/EB/2361, indicating that payments received by student health visitors were exempt from tax. Evidence was adduced by Mrs. Gothorp that the students referred to in the letter had taken the same course at the University as herself under similar conditions of grant.
(4) Letter from the Royal College of Nursing, dated September 1967, to Medical Officers of Health and Chief Nursing Officers with copy letter referred to. Evidence was adduced by Mrs. Gothorp that she had attended Bradford University for not less than three consecutive terms and that the payment she received did not exceed 75 per cent. of a health visitor's minimum salary (£920).
(5) Letter from the Royal College of Nursing to the Medical Officer of Health, Wakefield, dated 27th September 1967 under reference PHD/GP/RJW.
As stated, we do not regard these as relevant, but include them as part of the Case at the Respondent's request.
4. We heard Mr. Gothorp and his wife Mrs. Gothorp; and we heard Mr. Clayton, H.M. Inspector of Taxes, Wakefield 1st District. Mr. Gothorp was not represented professionally, but he made it quite clear that he did not consider that the money which his wife received as a loan from the County Council when she was a student was taxable. He claimed that this money was in the nature of a scholarship (s. 458, Income Tax Act 1952) and that none of Mrs. Gothorp's fellow students had their allowances taxed. Mr. Gothorp referred to Dracup v.Radcliffe (1946) 27 T.C. 188 (following M'Keownv. Roe [1928] I.R. 195) as indicating that an assessment for the year 1967-68 was invalid in any case.
He also referred to vol. 11 of the Tax Encyclopaedia at para. 3-458, where the following appears:
exemption is sometimes obtained in practice in respect of incomes...
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