Heather v P-E Consulting Group Ltd; Commissioners of Inland Revenue v P-E Consulting Group Ltd

JurisdictionEngland & Wales
Judgment Date14 July 1972
Judgment citation (vLex)[1972] EWCA Civ J0714-2
Date14 July 1972
CourtCourt of Appeal (Civil Division)
Ronald Heather (H.M. Inspector of Taxes)
P-E Conssulting Group Limited
And between
Commissioners of Inland Revenue
P-E Consulting Group Limited

[1972] EWCA Civ J0714-2


The Master of The Rolls (Lord Denning)

Lord Justice Buckley and

Lord Justice Orr.

In The Supreme Court of Judicature

Court of Appeal

Appeal by H.M. Inspector of Taxes from order of Mr. Justice "Goulding on 10th December 1971.

Mr. MICHAEL NOLAN, Q.C, and Mr. PATRICK MEDD (instructed by the Solicitor of Inland Revenue) appeared on behalf of the Appellants.

Mr. STEWART BATES, Q.C., and Mr. ANDREW THORNHILL (instructed by Messrs. Waltons & Co.) appeared on behalf of the Respondents.


The facts of this case are fully set out in the report of the Court below in 1972 2 W.L.R. 918. I need therefore only set out the salient points.


The taxpayer company, P-E Consulting Group Ltd., are management consultants. In 1962 they had a professional staff of 310, all of whom held university degrees or professional qualifications. The shares in the taxpayer company were all owned by a holding company, P-E Holdings Ltd. The shares in the holding company were owned in 1962, as to 41% by the group's pension fund and as to 59% by outside shareholders with no professional qualifications. On two occasions drastic changes in management had been made by the outside shareholders. This upset the senior professional staff. In consequence a scheme was introduced to enable the employees to obtain control. The scheme was designed to take advantage of section 54(l)(b) of the Companies Act 1948. This enables a company to provide moneys for a trust fund under which the trustees can purchase the company's own shares, or the shares of a holding company -provided always that the shares are held by or for the benefit of employees of the company. Under the scheme the taxpayer company was to pay to the trustees 10% of the consolidated profits of the group (with a minimum of €5,000 a year). The trustees were to use that fund to acquire shares in the taxpayer company and the holding company so as to gain control. The trustees were to hold the shares for the benefit of the employees. They would offer them for sale to the employees; but arrangements were made whereby, on death or retirement, the shares were bought back by the trustees or other employees. If the trust came to an end, the whole fund would be divided amongst the employees.


The Commissioners found that the objects of the scheme were broadly to be


(a) to give staff an opportunity to purchase a stake in the taxpayer company, and


(b) to remove the possibility of outside interference with the business of the company.


In pursuance of the scheme, the taxpayer company paid these sums to the trustees: €5,000 for the year 1962; €5,000 for 1963; €16,412 for 1964; €25,119 for 1965; €23,426 for 1966.


The taxpayer Company contended that these payments were revenue expenditure and were proper deductions to be made in computing the company's tax. The Crown contended that they were instalments of capital and could not be deducted, The commissioners held they were revenue expenditure and the Judge upheld them. The Crown appeal.


The question – revenue expenditure or capital expenditure -is a question which is being repeatedly asked by men of business, by accountants and by lawyers. In many cases the answer is easy: but in others it is difficult. The difficulty arises because of the nature of the question. It assumes that all expenditure can be put correctly into one category or the others but this is simply not possible. Some cases lie on the border between the two: and this border is not a line clearly marked out," it is a blurred and undefined area in which anyone can get lost. Different minds may come to different conclusions with equal propriety. It is like the border between day and night, or between red and orange. Everyone can tell the difference except in the marginal cases: and then everyone is in doubt. Each can come down either way. When these marginal cases arise, then the practitioners – be they accountants or lawyers – must of necessity put them into one category or the other, and then, by custom or by law, by practice or by precept, the border is staked out with more certainty. In this area, at least, where no decision can be said to be right or wrong, the only safe rule is to go by precedent. So the thing to do is to search through the cases and see whether the instant problem has come up before. If so, go by it. If not, go by the nearest you can find.


One of the nearest cases to this one is British Insulated and Helsby Cables Ltd. v. Atherton 1926 A.C. 205, where a large sum is provided by a company to form the nucleus of a pension fund for employees. Each year thereafter the company made annual contributions to the fund. That was a marginal case. Different minds could, and did, come to different conclusions with equal propriety. The reasoning in the House of Lords shows it. The majority (3 to 2) held that this large initial contribution was capital and not revenue expenditure; but all agreed that the annual contribution thereafter was revenue expenditure. Viscount Cave, Lord Chancellor) for the majority used a sentence which has been repeatedly quoted since:


"When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital."


In applying that case to the present, there are different views. Each can be held with equal propriety. The Commissioners thought that this case did not fall within the Atherton decision; but the Judge thought it did, or at any rate that it fell within the language of Viscount Cave, Lord Chancellor. I must say that I agree with the Commissioners. It seems to me that the purpose of these payments was to provide an incentive for the staff, to make them more contented and ready to remain in the service of the company, and also to help in the recruitment of new staff – they were annual payments too – all of which makes them more like the annual payments in Atherton's case than the nucleus fund. They were like the company's contributions to a cash profit sharing scheme and to the pension fund. They were all regarded by the taxpayer company as rewards to staff for the profits they had helped to make.


There is this difference, however, from Atherton's case. One of the objects here was to remove the possibility of outside interference with the business of the company. Does this alter the nature of the payments? I think not. Herr we have guidance from another case in the House of Lords, but it was not cited to the Judge. It is Commissioners of Inland Revenue v. Carron Co. 45 Tax Cases 18. It came from Scotland. A company had a Charter and constitution which was out of date, so much so that it was inimical to the good runnin of the company. They could not get good managers or staff. The company paid considerable sums to amend the Charter and to get rid of dissentient shareholders. Those payments were held to be revenue expenditure and not capital expenditure.


On the cases, therefore, it seems to me that the payments to the trust were revenue, and not capital expenditure. In addition, I have no doubt that the Commissioners were influenced considerably by the evidence of a distinguished accountant, Mr. Bailey of Price Waterhouses:-


"Mr. Bailey gave evidence (which we accepted) to the effect that the cost to a company in securing and retaining the services of employees was usually treated as revenue expenditure, and that as it was impossible to evaluate 'employee goodwill' it was the normal practice to write off expenditure for that purpose."


The Commissioners were entitled to give weight to that evidence of Mr. Bailey, but the Judge went further. He seems to have thought that, as a result of the decision of this Court in Odeon Associated Theatres Ltd. v. Jones (Inspector of Taxes) 1972 2 W.L.R. 331, the evidence of accountants should be treated as conclusive and that all the Commissioners or the Court would have to do would be to evaluate their evidence. And Mr. Bates submitted to us that the Odeon case had upgraded the evidence of accountants so that the Commissioners and the Courts were bound by their evidence to a greater degree than they had been in the past. I cannot agree with that for a moment. It seems to me that that case does not add to or detract from the value of accountancy evidence. The Courts have always beenassisted greatly by the evidence of accountants. Their practice should be given due weight; but the Courts have never regarded themselves as being bound by it. It would be wrong to do so. The question of what is capital and what is revenue is a question of law for the Courts. They are not to be deflected from their true course by the evidence of accountants, however eminent.


However in the end the Judge agreed with the Commissioners – as I agree with them – that the payments here were revenue and not capital expenditure.


The other question is whether these payments were "wholly and exclusively for the purposes of the company's trade" within section 137(a) of the Income Tax Act of 1952. The Crown relied particularly on an observation by Lord Reid in Morgan (H.M. Inspector of Taxes) v. Tate & Lyle Ltd. 35 Tax Cases 367 at page 421 in which he says "a change of shareholders does not interest the company as a trader, and expenditure to prevent a change of shareholders can hardly be expenditure for the purposes of the trade." That may in some circumstances be correct: but not in this case. This...

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