Connelly (C.) & Company v Wilbey
| Jurisdiction | England & Wales |
| Judgment Date | 20 August 1992 |
| Date | 20 August 1992 |
| Court | Chancery Division |
Chancery Division. Manchester District Registry.
His Honour Judge Maddocks (sitting as a High Court judge).
The taxpayer appeared in person.
Timothy Brennan (instructed by the Solicitor of Inland Revenue) for the Crown.
The following case was referred to in the judgment:
Rolls-Royce Motors Ltd v Bamford (HMIT) TAX(1976) 51 TC 319
Income tax - Stock relief - Recovery of stock relief - Dissolution of partnership - Two partners ended partnership dividing between them trade carried on from two separate offices - Whether one partner entitled to elect to retain stock relief - Finance Act 1981 schedule 9 subsec-or-para 21Finance Act 1981, Sch. 9, para. 21(1)(2)repealed by Finance Act 1988.Income tax - Sch. D - Deduction of expenditure wholly and exclusively incurred for purposes of trade - Legal fees incurred by partner in dispute with another partner - Whether fees deductible - Income and Corporation Taxes Act 1970 section 130 subsec-or-para (a)Income and Corporation Taxes Act 1970, sec. 130(a) (Income and Corporation Taxes Act 1988 section 74 subsec-or-para (a)sec. 74(a) of the 1988 Act).
This was an appeal by the taxpayer, an accountant practising alone under the name of a former partnership of which he had been a partner, against a decision of the general commissioners for Oldham upholding an assessment for recovery of stock relief. The taxpayer also appealed against the general commissioners' decision that legal fees incurred by him in a dispute with his former partner were not deductible from partnership income in the year 1983-84 under the Income and Corporation Taxes Act 1970 section 130 subsec-or-para (a)Income and Corporation Taxes Act 1970, sec. 130(a).
From 1979 the taxpayer and W were the partners in an accountancy practice. The practice was carried on from two locations in Ashton and Glossop. The taxpayer managed the Ashton office and W managed the Glossop office. Each office had its own premises, staff and clients. A single set of partnership accounts was prepared for taxation purposes.
Relations between the partners broke down and on 18 March 1982 W served two notices on the taxpayer: one to the effect that occupation of the Glossop office was to be determined forthwith (W owned the property) and the other was a dissolution notice with effect from 30 April 1982. Eventually, after negotiations, dissolution of the partnership was implemented by a deed of dissolution dated 9 June 1983. The taxpayer incurred legal expenses over the interim period. After a contribution by W, the taxpayer was left to pay £1,837.40.
The deed of dissolution provided retrospectively that W should retire from the partnership with effect from 30 April 1983 and that he should purchase from the partnership the goodwill, furniture, book debts and work in progress of the Glossop office with effect from 2 May 1983.
In 1983-84 the taxpayer was assessed for stock relief recovery under theFinance Act 1981 schedule 9 subsec-or-para 4Finance Act 1981, Sch. 9, para. 4(1) on the footing that there had been a change in the persons trading in partnership so that the trade was treated as if it had been permanently discontinued within para. 21(1). The taxpayer purported to make an election under the Finance Act 1981 schedule 9 subsec-or-para 21Finance Act 1981, Sch. 9, para. 21(2) that he should not be treated as if the trade had been permanently discontinued.
The taxpayer contended first that the partnership had to be distinguished from the trade. Both before and after W's retirement para. 21(2) was satisfied in relation to the trade at Ashton. Alternatively, he traded from both offices in partnership until W's retirement and alone from both offices thereafter until the sale of the Glossop practice came into effect on 3 May.
The taxpayer also claimed that he was entitled to deduct from his profits the legal fees incurred in his dispute with W as being expenses incurred to protect the partnership assets.
The Revenue contended that the trade carried on by the partnership was the practice of accountancy at both offices. That trade ceased andFinance Act 1981 schedule 9para. 4 of Sch. 9 applied. The taxpayer alone could not have been engaged in the original composite trade of both offices after 30 April 1983, nor did the trading stock at Ashton include the trading stock at Glossop.
Held, dismissing the taxpayer's appeal on both points:
1. The requirements of Finance Act 1981 schedule 9 subsec-or-para 21Sch. 9, para. 21(2) were not satisfied either in relation to the trade of the Ashton office alone or in relation to a single trade from both offices. Before W's retirement on 30 April 1983 there was a single trade carried on from different locations and on that date the single trade ceased and two separate trades were carried on. Nor was the stock of the Ashton office the same stock as that of the Glossop office.
2. The legal fees were incurred in a dispute between the two partners. Expenses incurred by the taxpayer to protect his interests in the partnership could not be regarded as a trading expense of the practice.
1. At a meeting of the commissioners for the general purposes of income tax for the Division of Oldham held on 19 May 1988 C Connelly & Co ("the taxpayer") appealed against the undermentioned assessments made upon them for the tax year 1983-84 under Case II of Sch. D:
| £ | |
| Accountants | 7000 |
| Accountants-stock relief recovery and balancing charge | 17,447 |
2. Shortly the questions for our determination were:
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(2) The validity of an election under Finance Act 1981 schedule 9para. 21(2) of Sch. 9 to the Finance Act 1981 relating to the transfer of unrecovered stock relief;
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(3) The amount of legal expenses to be allowed in arriving at the profits of the taxpayer's profession for the tax year 1983-84.
3. [Paragraph 3 listed the documents proved or admitted.]
4. The following facts were proved or admitted:
The taxpayer was a firm of chartered accountants, comprising two equity partners, Donald Gerard Burton (Mr Burton) and David Radcliffe Worrall (now deceased) (Mr Worrall), together with two salaried (or possible equity) partners.
The partnership was a result of a merger in April 1979 between C Connelly, chartered accountants whose practice was at Ashton-Under-Lyne, and the practice at Glossop of C Connelly & Co.
The activities of the partnership were conducted at the two offices, which, though independently run, constituted a single combined practice. Thus on a day to day basis Mr Burton ran the Ashton-Under-Lyne office and Mr Worrall ran the Glossop office: but the taxpayer was always represented to HM Inspector of Taxes as carrying on a single partnership practice, and the accounts annexed to their returns were prepared on this footing.
Relations between Mr Burton and Mr Worrall became acrimonious and resulted in litigation, involving substantial legal costs.
Of these substantial legal costs so incurred £1,837.40 went to form the bulk of the £1,980 "legal charges" which figured as a deduction in the taxpayers' profit and loss account for the period from 1 August 1982 to 30 April 1983 from which its 1983-84 tax computation proceeded.
Eventually on 30 April 1983, in pursuance of an agreement between Mr Burton and Mr Worrall the partnership practice ceased, the partnership was dissolved, and Mr Burton began to carry on as a sole practitioner the activities of the Ashton-Under-Lyne office, whilst Mr Worrall began to carry on the activities of the Glossop office as a sole practitioner under the style of Worrall...
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