Commissioners of Inland Revenue v Brander & Cruickshank
| Jurisdiction | Scotland |
| Judgment Date | 08 December 1970 |
| Date | 08 December 1970 |
| Court | Court of Session (Inner House - First Division) |
COURT OF SESSION (FIRST DIVISION)-
HOUSE OF LORDS-
Income tax, Schedule D - Profits of profession - Law agents - Also acting as secretaries and registrars of companies - Compensation for loss of registrarships - Whether receipt of profession - Whether registrarships offices.
The Respondents were a firm of law agents, conducting a substantial general legal business and also acting as secretaries and/or registrars to some 30 or 40 companies. Apart from directors' fees received by the partners under deduction of tax, their net receipts from all sources, including secretarial salaries and registrars' fees, were assessed to income tax under Case II of Schedule D. Half the firm's income, apart from directors' fees, came from their work as secretaries. They had not set out as professional registrars and their registrarships were incidental to their primary business as law agents and secretaries. Until 1965, when the companies were taken over by U Ltd., they had been secretaries and registrars of H Ltd. from 1935 and its wholly-owned subsidiary D Ltd. from its formation (and their senior partner had been a director of H Ltd. from 1935). Their salaries from those companies as secretaries and registrars were £750 and £500; they spent about two-thirds of their time on the registrarships. Under the terms of the takeover U Ltd. paid them £2,500 as compensation for loss of the registrarships. The Respondents had never before received, and did not consider themselves entitled to, payment for the termination of a registrarship; it was only because of a personal friendship between them that the senior partner had felt it proper to raise the matter of an ex gratia payment with the director of H Ltd. who negotiated the takeover. The Respondents continued as secretaries for some time after the takeover, as a large amount of work had to be carried out, and resigned voluntarily in September 1966.
On appeal against an assessment to income tax under Case II of Schedule D for the year 1967-68, the Respondents contended that their appointments as registrars of H Ltd. and D Ltd. were offices and that the said amount of £2,500 was exempt from taxation under s. 38(3), Finance Act 1960. For the Crown it was contended (inter alia) that the £2,500 was a receipt of the Respondents' profession, that it was not assessable under Schedule E, and that the registrarships were in the nature of agencies and not offices or employments within Schedule E. The Special Commissioners held that the registrarships were offices, and that those offices were not assets of the Respondents' business assessable under Schedule D, since they were not exploited or turned to account nor could they be disposed of in the normal way.
Held, that the Commissioners were justified in holding that the registrarships were
(a) offices within Schedule E and
(b) not assets of the Respondents' profession, and that the £2,500 was not assessable under Schedule D.
Lord Morris considered that, in addition to the Commissioners' reasons for holding that the registrarships were not assets of the Respondents' profession, it was also relevant that the Respondents did not regard themselves as entitled to any payment and had only raised the question because of a personal friendship between their senior partner and the director concerned.
Lords Guest and Upjohn considered that, following Mitchell v. Ross, it would not be legitimate in any event to attribute to Schedule D compensation for the termination of an office within Schedule E.
Lord Donovan considered that, where the Commissioners found as a fact (as they had not in this case) that a taxpayer had sought an office as part and parcel of his trade or profession, the terminal payments might be regarded as part of the income of the trade or profession, not on the ground that the office was an asset thereof but on the ground that it was a source of profit belonging to the trade or profession.
Lord Reid considered that the Crown's appeal should be dismissed for the reasons given by the rest of their Lordships.
Stated for the opinion of the Court of Session, as the Court of Exchequer in Scotland, under the Income Tax Management Act 1964, s. 12(5), and the Income Tax Act 1952, s. 64.
I. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held at Edinburgh on 5th and 6th March 1968 for the purpose of hearing appeals, the firm of Brander & Cruickshank (the partners whereof were J. S. R. Cruickshank, J. Graham Fulton, John O. Farquharson, J. Strath Mackenzie, Colin H. Black, Alan W. Baird and R. Scott Brown) (hereinafter called "the Respondents") appealed against an assessment to income tax for the year 1967-68 in the amount of £26,364.
II. Shortly stated, the question for our decision was whether or not a sum of £2,500, being compensation received on the termination of the Respondents' appointments as registrars to two companies hereinafter mentioned, was assessable to tax.
III. James Stanley Rowland Cruickshank, the Respondents' senior partner, gave evidence before us.
IV. The following documents were proved or admitted before us:
(2) Copy letter dated 17th August 1965 from Robert Lawson & Sons (Holdings) Ltd.
(3) Copy letter dated 17th August 1965 from Unilever Ltd.
(4) Copy letter dated 2nd February 1966 from the Respondents enclosing schedule of particulars.
(5) Extract from Respondents' profit and loss accounts for years ended 31st May 1957 to 1967.
Copies of the above are annexed hereto and form part of this Case(1).
V. As a result of the evidence, both oral and documentary, adduced before us we find the following facts proved or admitted:
(a) The Respondents were a firm of advocates in Aberdeen, conducting a substantial general legal business and also acting as secretaries and/or registrars to some 30 to 40 companies.
(b) Two of the said companies were large investment trusts, for which the Respondents acted as secretaries and registrars, and also as managers.
(c) As secretaries, the Respondents dealt with board meetings and completed the various forms required by the Companies Act. As registrars, the Respondents were responsible for stock registers and preparation of dividend warrants.
(d) The Respondents were primarily law agents and secretaries, and had not set out as professional registrars. Their registrarships were incidental to their business as law agents and secretaries.
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(e) The following table shows the composition of the Respondents' income (including amounts received in respect of registrarships):
(f) Secretaries' salaries were paid without deduction of tax, as the extract from Respondents' profit and loss accounts for the years ended 31st May 1957 to 1967 produced to us showed. Apart from directors' fees, over the past ten years about half of the Respondents' receipts came from legal work and about half from work as secretaries. Certain partners held directorships in certain companies and received directors' fees, which were paid subject to deduction of tax and included in the partnership income. The Respondents' net receipts from legal fees, secretarial salaries, managerial fees, business commissions and registrars' fees were assessed to income tax under Case II of Schedule D.
(g) Apart from the said two investment companies, most of the companies for whom the Respondents acted as secretary and/or registrar were small, and the Respondents' annual fees in respect of each lay between £20 and £50.
(h) Each company accounted for its own routine expenses, which included costs of stationery, postage and telephone. The Respondents employed and paid their own legal and secretarial staff engaged on company work; they also provided and bore the cost of their own office accommodation.
(i) The Respondents' appointments as secretaries and registrars were not reviewed annually or at any other time by the board of each company. The Respondents carried on the work involved from year to year, and periodically their salaries were increased.
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(j) At some date prior to 1932 two brothers called Lawson had gone to Aberdeen to start business in a derelict factory. They had sought the help of the Respondents' then senior partner, Mr. Brander, who negotiated a bank loan of £5,000 for them. Mr. Brander nursed them along and became friendly with them. Their venture prospered and was turned into a private company,
which in about 1935 became a public company now known as Robert Lawson & Sons (Holdings) Ltd. (hereinafter called "Holdings"). The Respondents were appointed secretaries and registrars to Holdings. In 1953 the subsidiary company Robert Lawson & Sons (Dyce) Ltd. (hereinafter called "Dyce") was formed, and thereafter the Respondents acted as secretaries and registrars to both companies. There was no written agreement of appointment in either case. Salaries were fixed from time to time at board meetings. Throughout the period from 1935 until 1965 Mr. Cruickshank, the Respondents' then senior partner, was a director of Holdings. (k) In 1965 an approach was made to the directors of Holdings by Unilever Ltd. with a view to a takeover. Most of the shares in Holdings were held by the Lawson family, who were in favour of the project. At an early stage it was pointed out to the Respondents that in the event of a take-over they would be relieved of their secretaryships and registrarships, but the matter of any payment to the Respondents was not raised until a late stage. Eventually Mr. Cruickshank raised the matter with a director of Holdings, Mr. Frank Lawson, who was negotiating with Unilever Ltd., and in particular with Lord Trenchard, chairman of Wall & Sons (Meat Products) Ltd., a subsidiary of Unilever Ltd. Towards the end of the said negotiations the Respondents as secretaries had prepared draft takeover documents, leaving blank spaces where amounts of compensation could be inserted.
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(l) When the time came for the said...
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