Household v Grimshaw (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Date | 1945 |
| Year | 1945 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income Tax - Author - Contract with film company - Whether payment on cancellation of contract assessable.
The Appellant, an author, entered into an agreement with a film company which provided that for a minimum period of twelve weeks in each of three successive years he should render exclusive services to the company by way of writing and composing stories and other film matter. The agreement also provided that the company should have the option of acquiring at specified prices the film, etc. rights of any novels written by the Appellant and published prior to the expiration of the three years.
Services were rendered in accordance with the agreement for the first period of twelve weeks, but a few months later the company wished to terminate the contract. A deed of release was executed under which both sides were released from their obligations under the agreement, the company paying £3,000 and acquiring an option with regard to the film rights of the Appellant's next three novels.
The Appellant contended that the original agreement gave rise to a contract of employment the profits from which were assessable under Schedule E and that the payment on cancellation of the contract was, following the case of Henley v. Murray, 31 T.C. 351, not assessable as part of the profits of the employment; alternatively, that if the contract was incidental to the profession of author carried on by the Appellant the structure of the profession was radically altered by its cancellation and the payment of £3,000 was therefore a payment of a capital nature.
The Crown contended that the agreement was an engagement in the course of the Appellant's profession as author, that the cancellation of the agreement did not go to the whole structure or any substantial part of the structure of his profession, and that the payment of £3,000 was properly brought into account in computing the profits of the profession assessable under Case II.
The Special Commissioners decided that the Crown's contentions were correct.
Held, that the decision of the Commissioners was correct.
Stated under the Income Tax Act, 1952, Section 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 12th November, 1951, G.E.W. Household, hereinafter called the Appellant, appealed against an assessment for the year 1947-48 under Case II, Schedule D, in the sum of £1,500 in respect of his profession as author, on the grounds that a sum of £3,000, less agents' commission £300, received by him in the circumstances hereinafter set out in paragraphs 3 to 10 below should not be taken into account in computing the profits of his profession.
2. At the hearing of the appeal, evidence was given before us by the Appellant, who produced:
Copy of cables and correspondence with Metro-Goldwyn-Mayer British Studios, Ltd. (Exhibits A1-3);(1)
Agreement, dated 31st December, 1943, between the Appellant and Metro-Goldwyn-Mayer British Studios, Ltd. (Exhibit B);(1)
Deed of release dated 11th September, 1946 (Exhibit C).(1)
The facts found by us on that evidence, including the said documents, are set out in the following paragraphs numbered 3 to 10 inclusive.
3. The Appellant has been engaged in the profession of author continuously since the year 1936, save for the interruption necessarily caused by his service in H.M. Forces during the second World War. He began as a writer of short stories and thereafter wrote two novels before the year 1939, all of which were placed with publishers in the United Kingdom and in the United States through his literary agent. When war broke out, the Appellant joined the army, and was in due course posted for service in the Middle East, where he was serving during the year 1943 at the Headquarters Field Security Wing, Middle East Forces, and held a commission as Major. Up to this time he had had no contact with any film companies and had not sold any film rights in any of his novels or short stories.
4. On 7th July, 1943, he received from his agent a cable containing an offer from Metro-Goldwyn-Mayer British Studios, Ltd., hereinafter called Metro (Exhibit A1).(1) After an interchange of cables with his agent, the Appellant agreed to enter into a contract with Metro, on terms which were subsequently embodied in an agreement dated 31st December, 1943 (Exhibit B).(1)
(i) Under clause 2 of the said agreement, the Appellant undertook to render to Metro his exclusive services in the United Kingdom, Northern Ireland and in Europe in accordance with Metro's directions and instructions
and either alone or in conjunction or collaboration with any other person appointed by Metro in writing and composing stories treatments adaptations continuities scenarios.
(ii) The Appellant agreed to take the earliest opportunity of obtaining his release and discharge from National Service at the earliest possible date, and to report to Metro as soon as he was free to commence his services under the agreement (clause 3 (1)). From 20th July, 1943, and until the commencement of the employment, Metro was to pay the Appellant a sum of £10 a week,
in advance and on account of the purchase price of the first of the Writer's novels in respect of which Metro exercises its option.
(iii) (Clause 3 (3)).
(iv) The Appellant's employment was to commence not later than three months after the Appellant had reported that he was free to commence his services to Metro (clause 3 (4)), and the term of the employment was to be
a minimum period of twelve consecutive weeks in each of the three consecutive years commencing from the commencement of the employment.
(v) with an option to Metro to extend the period of employment in any year by not more than four weeks, following consecutively upon any of the said periods of twelve consecutive weeks (clause 4 (6)). Under clause 9, remuneration payable by Metro to the Appellant for services to be so rendered by him was at the rate of £200 per week
payable weekly during the employment.
(vi) Clauses 4 to 12 govern Metro's rights in the Appellant's writings during the several periods of 12 (with possible extension up to 16) weeks during the three consecutive years covered by the agreement. All the Appellant's literary products during the said periods belonged to Metro, who could use them in any way they chose, but were not bound to use them. During these periods the Appellant was to devote his whole time to Metro; he could do the work at home, but he had to attend at Metro's offices for conferences. During the remainder of the three years covered by the agreement (viz. not more than 40 or less than 36 weeks in each year), the Appellant was completely free to write and publish any of his writings as he pleased, save that under clause 8 (2) he was debarred from writing any literary work of any description for films, without the permission of Metro.
(vii) Finally, under clause 13, Metro had an option to acquire the right in any novel published after the date of the agreement and prior to the expiration of the period of three consecutive years, paying a sum of £6,000 for the first such novel, and according to a sliding scale laid down in clause 13 (2) for each succeeding novel.
6. The Appellant regarded this agreement as constituting him an employee of Metro as a script writer for the successive periods of twelve or up to sixteen weeks, and he did not altogether like that position. Consequently, but for the inevitable break in the exercise of his profession caused by his absence from United Kingdom on war service, he would have hesitated to accept Metro's offer. In view of that break, however, he welcomed that contract as a means of securing his financial position while he was re-establishing himself as an author after the end of the war.
7. In July, 1945, the Appellant obtained his release from the army and his agent advised Metro of the fact under the terms laid down in clause 3 (4) of the Agreement. Metro did not, however, appear to be in any hurry to begin employing the Appellant and he therefore wrote to them on 22nd September, 1945 (Exhibit A2).(1) Thereafter, his first, and in the result, his last period of employment by Metro commenced in October, 1945, and continued for the stipulated minimum period of twelve weeks. Metro asked him to write an original script and he wrote a film version of a play he had long had in mind.
8. On 1st March, 1946, the Appellant received a letter from his agent (Exhibit A3)(1), to the effect that Metro's plans had changed, and that, accordingly, they would have no work to offer the Appellant. In these circumstances, Metro desired to know the Appellant's terms for cancelling the contract and suggested a measure of the compensation for such a cancellation which Metro would be willing to pay. The Appellant was disappointed and angry at Metro's suggestion, but realised that Metro could make his life
miserable if he refused to agree to a cancellation. He consequently determined to get the best terms he could and instructed his agent accordingly. In the result, terms were eventually agreed and embodied in a Deed of Release, dated September, 1946, (Exhibit C).(1)(i) Under the said Deed of Release, the Appellant's agreement with Metro was cancelled in consideration of the payment of a sum of £3,000
in full satisfaction of all claims and demands of whatever nature and kind under the said Agreement and mutual releases.
(ii) Under the terms of the Deed of Release the Appellant, in addition to receiving the lump sum above mentioned, was relieved from any immediate liability to repay to Metro a sum of £1,168 6s.8d., advanced to him under clause 3 (3) of the original agreement on account of the purchase price of the first of the Appellant's novels in which Metro might have...
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