Crossland v Hawkins

JurisdictionEngland & Wales
CourtCourt of Appeal
JudgeLORD JUSTICE DONOVAN,LORD JUSTICE UPJOHN
Judgment Date03 May 1961
Judgment citation (vLex)[1961] EWCA Civ J0503-2
Date03 May 1961

[1961] EWCA Civ J0503-2

In The Supreme Court of Judicature

Court of Appeal

Before:

Lord Justice Holroyd Pearce

Lord Justice Upjohn and

Lord Justice Donovan

Between
E.A. Cross Land (H.M. Inspector of Taxes)
Appellant
and
J.E. Hawkins
Respondent

The Hon. B.L. BATHURST, Q.C., and MR. E. BLANSHARD STAMP (instructed by the Solicitor of Inland Revenue, Somerset House, Strand, Houdon, W.C.2) appeared as Counsel for the Appellant.

MR. R.E. BORNEMAN Q.C., and MR. C.N. BEATTIE (instructed by Messrs Langton & Passmore, 8, Bolton Street, London, W.1) appeared as Counsel for the Respondent.

1

LORD JUSTICE HOIROYD PEARCE: I ask Lord Justice Donovan to give the first Judgment.

LORD JUSTICE DONOVAN
2

The heavy incidence of surtax on large incomes has for some time led artistes and others in the world of entertainment to adopt the device of forming a limited company which they control, and giving the company, by means of a service agreement, the right to their services. In return, the company pays the artiste some modest salary. The company then hires the artiste out to whomsoever requires his services, and itself obtains the consideration for them.

3

From its profits, the company must distribute a reasonable dividend, if it is to avoid surtax on the whole of its profits - see Section 245 of the Income Tax Act, 1952 - but it is allowed to make such reserves as are required for the maintenance and development of the business; and where the business depends on the fortunes of a particular artiste, these reserves may be considerable.

4

In this way, surtax on the whole of the artiste's earnings is reduced to surtax on the salary he gets from the company, plus such dividend as is distributed to him; and when eventually the company is wound up, the accumulated reserves of past years will come to him as capital.

5

All this is perfectly legitimate, and indeed in the case of persons whose high earnings may be short-lived, understandable. Mr. Hawkins, the present Respondent adopted such a scheme in May of 1954, using a company called Westmead Productions Limited, with a nominal capital of £100. The present Appeal is not concerned with that scheme, but it may be useful to bear its existence in mind. The service agreement in that case was to last for five years only from April, 1954 and was confined to the services Mr. Hawkins was to render in the making of three productions, being stage plays or films.

6

On the 3rd December - the same year - 1954, there being presumably additional engagements in prospect, the scheme was repeated, this time with a new company called Roehampton Productions Limited. Again the capital of the company was a nominal capital of £100, and at first two shares alone were issued to the subscribers in the Memorandum of Association, who were, it would seem, clerks in the office of the Respondent's Solicitors. The business which the company was to carry on included the purchase and sale of Real and Personal property of all kinds, and in particular copyrights: the business of Theatre and Cinema proprietors and managers: the making, production and exploitation of motion pictures, and the making of engagements with artistes and others, and the assignment of their services.

7

The service agreement with Mr. Hawkins followed within a few days, on the 10th December, 1954. It was declared to be subject to Mr. Hawkins' existing engagements with Rank Productions Limited and with the company Westmead Productions Limited, to which I have already referred. By the present agreement, the company agreed to engage Mr. Hawkins, and he agreed to serve it as an actor or writer in two stage or film productions during three years from the 10th December, 1954. It was provided, among other things, that the company could -with Mr. Hawkins' approval, which he was not unreasonably to withhold - assign or lend his services to a third party. The company was to pay Mr. Hawkins £50 a week and expenses during each week that he rendered services. Mr. Hawkins was to be entitled to refuse to render any service which he reasonably thought would be detrimental to his reputation. The agreement is exhibited to the case, and I need not abstract it further.

8

So far, the familiar pattern was followed: The Company, and not Mr. Hawkins, would receive the enviable salary for his work as an artiste, and all Mr. Hawkins would get would be £50 a week, at least until the company was wound up, and thus surtax would be reduced.

9

Mr. Borneman has strenuously contended before us that in the beginning nothing more was intended as a surtax saving operation. In particular, the settlement which followed after an interval of about three months of the shares of this company, was not contemplated from the beginning, as the Crown in one part of its argument, asked us to infer. There is no express finding in the Case Stated on this point; indeed the case is not very fully or happily stated at all, but one conclusion is obvious and not, I think, disputed. Mr. Hawkins was not going to make a present of his services, less £50 a week, to two clerks in his Solicitor's office, who on the face of things were at the beginning the only shareholders in the company. At some time he would want to have the money which had escaped surtax for himself, for example in a liquidation of the company, or to bestow it on others whom he wished to benefit, for example his family. Otherwise, the whole operation was pointless.

10

I will accept for the moment the proposition that the family settlement which followed was not decided upon at the outset; but what is important, I think, is that the eventual enjoyment by some individual or individuals of the money which had escaped surtax must have been in contemplation at the outset. Otherwise, as I say, the scheme had no rational purpose.

11

The subsequent events were theses:- At some time not specified in the case, but which I think must have been before the 31st March, 1955, the two Solicitor's clerks transferred their shares, one to the Respondent's wife and the Respondent's Accountant, to be held jointly, and one to the Accountant himself. On the 3rd March, 1955, a Mr. Beadle, who is the grandfather of the Respondent's children, made a settlement of £100 of his own money for their benefit. The Respondent's wife and his Accountant were the Trustees. The Trustees were to stand possessed of the Trust Fund upon Trust to pay the income to, or apply it for the benefit of, the children of the Respondent and Mrs. Hawkins, in such proportions as they thought fit. At the end of a Trust period defined in the settlement, the capital was to go to such of these children as were then living, in equal shares, with certain contingent remainders over. Notwithstanding these provisions, the Trustees wore empowered to appoint by Deed all or any part of the Trust property to any one or more of the beneficiaries under the settlement, either absolutely or contingently.

12

On the same day, namely on the 3rd March, 1955, the Trustees exercised this power and appointed the Trust property and its income to such of the three children of Mr. Hawkins as should attain twenty-five, and if more than one, in equal shares, absolutely. The Trustees of this settlement then used £98 of this £100 in subscribing for the ninety-eight unissued shares of Roehampton Productions Limited, which were issued to them on the same 31st March, 1955. They thus became the sole owners of the equity in this company, which had the prospect of receiving large sums under the service agreement with Mr. Hawkins. The other shareholder was the Accountant with his one share.

13

That prospect of dividend did not, however, mature for some time, during which the Trustees got nothing on their shares, but at some time during the year 1956, the company received £25,000 for the lending or assigning of Mr. Hawkins' services to somebody, to act in a film called "Fortune is a Woman". Then, on the 18th October, 1956, the company declared a dividend of £500 free of tax which went to the Trustees of the settlement. They in turn applied the bulk of this for the benefit of the Respondent's three infant children as follows:-

14

Nicholas £225

15

Andrew £153

16

Caroline £104.

17

In due course, repayment claims were submitted to the Inland Revenue by the Respondent as the children's guardian, claiming back tax deducted at source from this dividend, to the extent that the children were entitled to small income relief and personal allowances. The Inspector of Taxes opposed the claim. The General Commissioners on appeal by the Respondent allowed it; and their decision has been upheld by the learned Judge.

18

The Crown says that the income so received or enjoyed by the children under the Deed of Settlement is deemed to be the Respondent's income by virtue of Section 397 of the Income Tax Act, 1952. This reproduces Section 21 of the Finance Act, 1936, by which the growing habit of saving surtax by settling capital or income on one's children was checked. Subsection (1) and (2) of Section 397, are as follows: "(1) Where, by virtue or in consequence of any settlement to which "this Chapter applies and during the life of the settlor, any income "is paid to or for the benefit of a child of the settlor in any year "of assessment, the income shall, if at the commencement of that "year the child was an infant and unmarried, be treated for all the "purposes of this Act as the income of the settlor for that year and "not as the income of any other person. (2) This Chapter applies to "every settlement, wheresoever it was made or entered into, and "whether it was made or entered into before or after the passing of "this Act, except a settlement made or entered into before the "twenty-second day of April, nineteen hundred and thirty-six, which "immediately before that date was irrevocable."

19

Section 403 is a definition section, and provides among other...

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