O'Leary v McKinlay (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 07 December 1990 |
| Date | 07 December 1990 |
| Court | Chancery Division |
Chancery Division.
Vinelott J.
Mr Michael Flesch QC and Mr Philip Baker (instructed by Herbert Reeves & Co) for the taxpayer.
Mr Andrew Thornhill QC and Mr Nicholas Warren (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Bucks v Bowers (HMIT) TAX(1969) 46 TC 267
Dale v IR Commrs TAX(1952) 34 TC 468
FS Securities Ltd v IR Commrs TAX(1964) 41 TC 666
IR Commrs v Duke of Westminster ELR[1936] AC 1
Laidler v Perry (HMIT) TAX(1965) 42 TC 352
Northend (HMIT) v White & Leonard and Corbin Greener & OrsTAX(1975) 50 TC 121
Ramsay (WT) Ltd v IR Commrs ELR[1982] AC 300
Recknell v IR Commrs TAX(1952) 33 TC 201
Salisbury House Estate Ltd v Fry (HMIT) TAX(1930) 15 TC 266
White (HMIT) v Franklin TAX(1965) 42 TC 283
Income tax - Emoluments of employment - Avoidance scheme - Interest-free loan from employer to trustees of Jersey settlement for benefit of employee domiciled outside UK - Money deposited in Jersey bank and interest paid to employee - Whether trust income emolument from employment taxable under Sch. E or income from foreign possession taxable under Income and Corporation Taxes Act 1988Sch. D, Case V on a remittance basis.
This was an appeal by the taxpayer against a decision of a special commissioner that interest on a loan made by the taxpayer's employer to the trustee of a settlement for the taxpayer's benefit was an emolument of his employment taxable under Sch. E.
The taxpayer was a well-known footballer. He was domiciled in Eire but since before 1979 he had been employed by Arsenal Football Club ("the club") and was resident and ordinarily resident in the UK.
In 1979 the taxpayer wished to receive an annual sum of £28,985 in addition to his basic salary in a "tax efficient" way: that is in such a way that it would not be liable to UK tax.
An arrangement intended to achieve that result was entered into. M, an accountant practising in Eire, settled a nominal sum of £10 on the taxpayer for life with remainder to the Catholic Church in Eire. The settlement was dated 1 August 1979. The parties were M and a trust company in the Channel Islands (the trustee). The club then lent free of interest and repayable on demand the sum of £266,000 to the trustee. The trustee had wide powers of investment exercisable only with the consent of the taxpayer but it was envisaged that the sum would be invested by depositing it with a bank in Jersey ("the bank").
On the same day, 1 August 1979, the taxpayer entered into a two-year employment agreement with the club terminable at any time by mutual consent or if the club demanded repayment of the loan.
The £266,000 was placed on deposit by the trustee with the bank at a fixed rate of interest of 11 per cent maturing on 30 July 1981. After deducting the trustee's fee the yield was £28,590.
The taxpayer entered into fresh contracts with the club in similar terms in August 1981, August 1985, July 1986 and February 1987.
The taxpayer appealed against assessments to Sch. E tax for the eight years of assessment from 1979-80 and 1986-87 in respect of the interest on the money deposited with the bank. He claimed that the interest was not chargeable to tax under Sch. E as an emolument of his employment but under Income and Corporation Taxes Act 1988Sch. D, Case V as income arising from possessions out of the UK. Since he was not domiciled in the UK such income was only taxable if remitted to the UK. None had been remitted so that no tax was payable in respect of the interest.
It was common ground that the Finance Act 1966 section 66Finance Act 1976, sec. 66 [now section 160sec. 160 of the 1988 Act], which was introduced to bring into charge to tax the benefit of loans made to employees free of interest or at reduced rates, was irrelevant. That section applied only if a loan was made directly to an employee or to a relative of a defined class. It did not apply in a case where the loan was made to the trustee of a settlement under which the employee was entitled to the income.
The taxpayer submitted that the source of any profit accruing to him from the exploitation of the loan was the exploitation, not his employment. Apart from the Finance Act 1976 section 66Finance Act 1976, sec. 66, if an employer lent money to an employee or to trustees holding on trusts under which the employee had a life interest the employee was taxable if and to the extent that a quantifiable benefit was conferred on him. Any income which the taxpayer then derived from investing the money lent to him would be taxable under the appropriate Schedule, not under Sch. E as an emolument of his employment. If the loan was repayable on demand there was no quantifiable benefit on which tax could be charged under Sch. E. Therefore, if an employer lent money to an employee domiciled abroad, or to a trustee for his benefit, and the money was deposited in a foreign bank, the interest was chargeable under Income and Corporation Taxes Act 1988Sch. D, Case V and would escape tax if it were not remitted to the UK.
Held, dismissing the taxpayer's appeal:
1. The practical effect of the arrangement was that the taxpayer became entitled to receive the interest paid by the bank so long and only so long as he continued to play for the club. The scheme was set up in order to provide the taxpayer with additional income while he continued to be employed by the club under the terms of the arrangement and for no other purpose. The interest was therefore an emolument of the taxpayer's employment taxable under Sch. E.
2. If the taxpayer had been free to invest the loan in any way he chose, the source of any interest or other benefit obtained might have been regarded as the loan rather than the employment, but the terms of the loan to the trustee effectively precluded any form of investment other than a bank deposit.
1. On 17 and 18 July 1989 I, one of the special commissioners, heard the appeal of David Anthony O'Leary ("the taxpayer") against assessments to income tax under Sch. E in respect of the eight years of assessment 1979-80 to 1986-87 inclusive.
2. The question for determination was whether certain income from a large principal sum, of which income the taxpayer was the beneficial owner under the terms of a settlement made in Jersey Channel Islands on 1 August 1979, was chargeable to income tax under Sch. E as emoluments of the taxpayer's employment with Arsenal Football Club.
3. No oral evidence was tendered, but there was supplied to me a statement of agreed facts and a folder of 36 documents all admitted and agreed and a document headed "David O'Leary: summary of appellant's submissions".
4. On 9 August 1989 I gave my decision in writing, dismissing the appeal having regard to the facts and for the reasons mentioned therein. My decision having been given in principle only, the parties subsequently agreed the figures, and in consequence on 27 September 1989 I determined the appeals in the amounts set out in letters of that date sent from the office of the special commissioners of income tax to the solicitors for the taxpayers and the Inland Revenue.
5. The solicitors for the taxpayer having declared dissatisfaction and required the statement of a case for the opinion of the High Court, we the special commissioners have stated this case and I sign it accordingly. I annex hereto so as to form part hereof my decision above-mentioned.
6. The question of law for the opinion of the court is whether, on the agreed facts, the income arising under the above-mentioned settlement in the eight years of assessment under appeal constituted emoluments from taxpayer's employment by Arsenal Football Club so as to be chargeable to income tax under Sch. E.
The taxpayer appeals against income tax assessments under Sch. E in respect of the eight years of assessment 1979-80 to 1986-87, during which time he was an employee of Arsenal Football Club Ltd and was resident and ordinarily resident in the UK, but domiciled in the Republic of Ireland.
No oral evidence was tendered, but I have a statement of agreed facts, to which is appended a folder containing copies of 36 documents all admitted and agreed. My decision is based on the agreed facts, but for convenience I make the following brief summary. The taxpayer having previously been employed as a football player by the club entered into a new employment contract with the club which is dated 1 August 1979, but was apparently executed on 8 August 1979, and terminated on 31 July 1981. Subsequently on 13 August 1981, 8 August 1985, 1 July 1986, and 16 February 1987, he entered into fresh employment contracts with the club. The express or implied terms of these further contracts are sufficiently similar to the express terms of the first contract to justify my dealing primarily with the first contract, it being my view and common ground that whatever decision is arrived at in relation to the first contract covers the other four contracts also. During discussions between the taxpayer and the club prior to August 1979 the taxpayer stated that in addition to his agreed basic wages and bonuses he wished to receive an additional annual sum of £28,985 in a tax efficient manner. The advisers of the taxpayer suggested to the club an arrangement which it was hoped would have the effect that the taxpayer would receive that annual sum so that he would not be liable to income tax thereon in the UK. The club agreed to take part in the arrangement. Consequently a Mr Mulhall in practice as an accountant in the Republic of Ireland, being approached by the taxpayer's advisers, settled the nominal sum of £10 upon the taxpayer for life with a remainder over. The trustee was Hambros Channel Islands Trust Corporation Ltd, and the settlement took effect under Jersey law. I am not told who paid the costs charges and expenses of drafting and executing the settlement, but I assume it was not...
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Panesar
...the source of a payment, it is important to identify the "reality" of the source, see for example the judgment in O'Leary v McKinleyUNK ([1991] STC 42), where the fact that payment was made via a loan to trustees did not mean that it should be treated as something other than earned income. ......
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Forthright (Wales) Ltd v Davies (Inspector of Taxes)
...that Sch. F took precedence, Income and Corporation Taxes Act 1988 section 20see s. 20 of ICTA 1988. She citedO'Leary v McKinlay TAX[1991] BTC 37 in which the employer as a condition of a footballer's service made a loan to a non-resident trust under which the income was payable to a footba......
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Forthwright (Wales) Ltd v HM Inspector of Taxes, SPC 00383
...of remuneration; it was merely that Schedule F took precedence, see section 20 of the Taxes Act 1988. She cited O’Leary v McKinlay [1991] STC 42 in which the employer as a condition of a footballer’s service made a loan to a non-resident trust under which the income was payable to a footbal......
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Mrs B J Panesar v The Commissioners for Her Majesty's Revenue & Customs, TC 02359
...the source of a payment, it is important to identify the “reality” of the source, see for example the judgment in O’Leary v McKinley ([1991] STC 42), where the fact that payment was made via a 10 loan to trustees did not mean that it should be treated as something other than earned income. ......