Evans v Pearce
| Jurisdiction | England & Wales |
| Judgment Date | 22 November 1973 |
| Date | 22 November 1973 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income tax-Earned income relief - Accountant - Agreement with proprietors of company that dividends on its shares should belong to them and him in agreed proportions and he should give professional advice-Whether earned income relief due-Income and Corporation Taxes Act 1970 (c. 10), s. 530(1).
The Appellant was an accountant. In March 1967 three brothers for whom he acted, and who between them owned the share capital of a trading company, entered into an agreement between themselves and the Appellant that the shares should be held in the joint names of the brothers and that the dividends thereon should belong to the respective parties in such proportions as should be unanimously agreed, or failing such agreement first in paying to the Appellant £100 per annum (less income tax) or such other sum as should from time to time be agreed. The agreement also provided that the Appellant should give professional advice. In the material period he received thereunder £500 per annum under deduction of tax.
The Appellant claimed earned income relief in respect of the payments so received for the years 1968-69 to 1970-71. On appeal, it was contended for the Crown that he held no office or employment under the agreement, and that what he was entitled to was a share of the dividends referred to therein, which was chargeable to tax not under Schedule D but under Schedule F; alternatively, that if the payments were chargeable under Schedule D they were not immediately derived by him from the carrying on of his profession. The General Commissioners dismissed the appeal.
Held, that the payments
(1) were dividends and
(2) were therefore not immediately derived by the Appellant from the carrying on of his profession.
F.S. Securities Ltd. v. Commissioners of Inland Revenue 41 T.C. 666; [1969] 1 W.L.R. 742 and Bucks v. Bowers 46 T.C. 267; [1970] Ch. 431 followed.
Stated by the Commissioners for the General Purposes of the Income Tax for the Division of Chelsea in the County of London pursuant to s. 56 of the Taxes Management Act 1970 for the opinion of the High Court of Justice.
1. At a meeting of the said Commissioners at Westminster Council House, Marylebone Road, London, N.W.1 on 18th July 1972, Ancrum Francis Evans (hereinafter called "the Appellant") appealed against income tax assessments made on him under Case II of Schedule D in respect of profits from his profession as chartered accountant practising under the name of Rutherfords, as follows:
£ |
||||||||
1968-69 |
… |
… |
… |
… |
… |
… |
… |
2000 |
1969-70 |
… |
… |
… |
… |
… |
… |
… |
1000 |
1970-71 |
… |
… |
… |
… |
… |
… |
… |
3500 |
1971-72 |
… |
… |
… |
… |
… |
… |
… |
4000 |
The Appellant further appealed under s. 42(3) of the Taxes Management Act 1970 against the refusal of H.M. Inspector of Taxes to allow earned income relief on certain payments received by the Appellant in the tax years 1965-66 to 1970-71.
2. The questions for our determination were as follows:
(a) Whether the Appellant was entitled to earned income relief in respect of certain payments received by him from a partnership hereinafter referred to for convenience as "the C.R.A.G.'s partnership" in the tax years 1955-56 to 1970-71;
(b) whether the said payments should be included in the accounts of the Appellant's accountancy practice as professional receipts; and
(c) whether the amounts of the said payments were to be measured by the actual amounts received or by the gross amounts from which tax had been deducted before payment to the Appellant.
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(d) The Appellant did not proceed with question (d) on page 4 of the statement of facts not in dispute, to which we make further reference below.)
(a) The facts were not in dispute, and were summarised in a statement of facts not in dispute which, together with copies of the documents referred to herein(1), is annexed to and forms part of this Case.
(b) The said documents were:
A partnership deed dated 13th March 1967 (exhibit 1).
A letter dated 19th August 1967 from the Appellant to H.M. Inspector of Taxes (exhibit 2).
A letter dated 3rd October 1968 from the Appellant to H.M. Inspector of Taxes, together with sundry minutes and correspondence (exhibit 3).
An income statement for the period ended 5th April 1966 (exhibit 4).
A bundle of certificates of deduction of income tax (exhibit 5).
A bundle of accounts of the Appellant's practice (exhibit 6).
A letter dated 26th August 1970 from the Appellant to H.M. Inspector of Taxes, enclosing a copy of the decision of the Special Commissioners in the case of Clifford Anthony Della-Porta and others (exhibit 7).
4. It was contended by the Appellant:
(i) that the quality of the payment depends on its character in the hands of the recipient and not on the circumstances of the payer or the source of the payment;
(ii) that the effect of the partnership deed (exhibit 1) was to sever the identity of the income from the pool of money available to the partnership out of which the payment for his services was made;
(iii) that the payments the Appellant received were related to the services he performed for the partnership (see exhibit 3), and that they arose out of the performance of those services and were therefore earned income;
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(iv) that the said payments did not differ in character from any other payments that the Appellant received in the course of carrying on his profession as accountant; it was conceded, however, that a distinction might be made between the £100 provided under the deed and the additional remuneration voted by the partners;
(v) that the appeal against the Inspector's refusal of earned income relief on the said payments should be allowed;
(vi) that s. 108, Income and Corporation Taxes Act 1970, requires earnings of a vocation to be chargeable under Schedule D, and items of income which have been taxed at source are not excluded by the section from such computation of profits under Schedule D, and indeed, in practice, royalty income is so treated;
(vii) that the said payments were "profits or gains arising…from any… profession", and should therefore be included in the Appellant's professional accounts and in the income tax assessments arising therefrom;
(viii) that the correct sums so to be included were the gross sums before deduction of tax.
5. It was contended on behalf of H.M. Inspector of Taxes:
(i) that, in order to qualify for earned income relief, income must not only be charged under Schedule D and be derived from the carrying on of a trade or profession, but must be immediately derived therefrom;
(ii) that the Appellant's entitlement to payment under the deed (exhibit 1) arose by virtue of the deed, and was therefore not payment for work done by him;
(iii) that what the Appellant had truly acquired under the deed was an investment giving rise to dividends, which, at all events since 6th April 1966, were chargeable to tax under Schedule F and not under Schedule D;
(iv) alternatively, that if the payments were chargeable to tax under Schedule D, they were not immediately derived from the carrying on of the Appellant's profession;
(v) that no earned income relief was due in respect of the said payments, and that the appeal against the refusal of relief should be dismissed;
(vi) that, if the payments were not properly to be treated as earned income, they should be excluded altogether from the computations of the Appellant's professional income chargeable under Case II of Schedule D;
(vii) that, if...
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Lawrance v Ridsdale's Executrix
...liability of the partners to the retired partner". Finally, I notice a group of three cases-Bucks v.Bowers 46 T.C. 267; Evans v. Pearce (1973) 49 T.C. 120; and Northend v. White & Leonard & Corbin Greener(1) [1975] S.T.C. 317-in all of which it was held that earned income relief was not ava......
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Lawrance (HM Inspector of Taxes) v Ridsdale's Executrix
...liability of the partners to the retired partner". Finally, I notice a group of three cases-Bucks v.Bowers 46 T.C. 267; Evans v. Pearce (1973) 49 T.C. 120; and Northend v. White & Leonard & Corbin Greener(1) [1975] S.T.C. 317-in all of which it was held that earned income relief was not ava......