David Mcknight and Another v Brian Stephen Sheppard
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE NOURSE,LORD JUSTICE POTTER,LORD JUSTICE MUMMERY |
| Judgment Date | 07 May 1997 |
| Judgment citation (vLex) | [1997] EWCA Civ J0507-3 |
| Docket Number | CHRVF 96/0773/B |
| Court | Court of Appeal (Civil Division) |
| Date | 07 May 1997 |
[1997] EWCA Civ J0507-3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(REVENUE)
(Mr Justice Lightman)
Royal Courts of Justice
Strand
London WC2
Lord Justice Nourse
Lord Justice Potter
Lord Justice Mummery
CHRVF 96/0773/B
MR D GOLDBERG QC and MR H McKAY (instructed by Messrs Dunnderdale Wignall, Manchester) appeared on behalf of the Appellant Respondent Taxpayer.
MR T BRENNAN (instructed by the Solicitor of Inland Revenue) appeared on behalf of the Respondent Appellant Inspector of Taxes.
Wednesday, 7th May 1997
The question here is whether legal expenses incurred by the taxpayer in respect of disciplinary proceedings against him for alleged breaches of the rules and regulations of the Stock Exchange were wholly and exclusively expended for the purposes of his trade as a stockbroker within section 130(a) of the Income and Corporation Taxes Act 1970 and are therefore deductible in computing the amount of the profits of the trade under Case I of Schedule D.
In a written decision reserved after a three day hearing and given on 7th December 1995, one of the Special Commissioners, Mr Theodore Wallace, concluded:
"the sole object 'to be served by' the legal costs was to avoid the destruction of the taxpayer's business. The fact that his personal reputation was inevitably involved also does not make the preservation of his reputation a purpose."
The assessments having been reduced in principle, the Inspector of Taxes appealed to the High Court, where, on 14th May 1996, Mr Justice Lightman allowed his appeal. The taxpayer's further appeal to this court has given us an occasion for reminding ourselves of the limited function of the courts on appeals by way of case stated from decisions of special or general commissioners of income tax; cf. Edwards v. Bairstow [1956] AC 14. So viewed, the point at issue is a short one.
The decisions of the commissioner and the judge are reported at [1996] STC 627. The basic facts and the evidence as to purpose are rehearsed in the commissioner's decision between pp.629J and 634J and need not be repeated. It is important to emphasise that in para.35 of his decision it is stated that the accounts of the taxpayer's firm to 6 February 1987 and 7 February 1988 included legal and professional expenses of £116,972 and £109,026 respectively, of which a total of £202,246 was represented by the expenses with which this case is concerned. It has not been suggested that those expenses could not, in accordance with ordinary principles of commercial accountancy, be properly deducted from gross income in computing the amount of the profits of the taxpayer's trade; cf. Odeon Associated Theatres Ltd. v. Jones [1971] 1 WLR 442.
The evidence before the commissioner included a statement of agreed facts and an agreed bundle of documents. Both the taxpayer and a former colleague of his gave evidence under oath and were cross-examined. The most important of the findings leading to the commissioner's conclusion were the following:
"69. I find as a fact that suspension or expulsion would have destroyed the taxpayer's business. I readily accept that it was for this reason that the taxpayer incurred the very substantial legal costs. …. The legal costs in the case before me were directed at averting a threat which was more imminent than the threat of nationalisation in Tate & Lyle's case …
71. The taxpayer said that his personal reputation was not a factor in his decision to incur the legal expenses. He went further and said that he did not care about his personal reputation being solely concerned to protect his business. He was not directly challenged as to this in cross-examination.
72. While I am prepared to accept that that is the view of the taxpayer today, over nine years after he instructed the London solicitors, it does not follow that that was his real attitude at the time. … I accept that the taxpayer was less sensitive as to his personal reputation than many people. However, a person in his position would need to have been extraordinarily thick-skinned not to have experienced feelings of personal distress in such circumstances, if not for himself then for his family. As it turned out he was not suspended and his honesty was substantially vindicated by the appeal tribunal of the Securities Association.
73. I do not accept that his letter of 22 September 1986 where he said that he was appalled at the charges of making a false market was directed solely at his business reputation.
74. However, the fact that I do not accept that the taxpayer was wholly unconcerned with his personal reputation does not necessarily mean that his purpose in laying out the legal costs was not exclusively concerned with preserving his trade. Purpose and effect are not the same. …
76. It was suggested by the inspector that the taxpayer had other motives, such as to protect his other business interests, to protect his living standards and to protect his ability to provide services to the family and friends. I am satisfied, however, that those were incidental matters and were not the purpose of his expenditure.
77. I accept the evidence of the taxpayer as to his conscious motive in incurring the expenditure. …
97. Returning to the present case, it does not seem to me that commonsense requires me to conclude that one of the reasons of the taxpayer for incurring the expenditure was to protect his personal reputation. To use the words of Lord Oliver in MacKinlay v. Arthur Young McClelland Moores & Co., the sole object 'to be served by'...
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