MacKinlay v Arthur Young McClelland Moores & Company

JurisdictionEngland & Wales
JudgeLord Bridge of Harwich,Lord Brandon of Oakbrook,Lord Templeman,Lord Oliver of Aylmerton,Lord Goff of Chieveley
Judgment Date23 November 1989
Judgment citation (vLex)[1989] UKHL J1123-1
Date23 November 1989
CourtHouse of Lords

[1989] UKHL J1123-1

House of Lords

Lord Bridge of Harwich

Lord Brandon of Oakbrook

Lord Templeman

Lord Oliver of Aylmerton

Lord Goff of Chieveley

Mackinlay (H.M. Inspector of Taxes)
Arthur Young McClelland Moores & Company
Lord Bridge of Harwich

My Lords,


I have had the advantage of reading in draft the speech of my noble and learned friend Lord Oliver of Aylmerton. I agree with it and for the reasons he gives I would allow this appeal.

Lord Brandon of Oakbrook

My Lords,


I understand that all your Lordships are of the opinion that this appeal should be allowed and the judgment of Vinelott J. restored. I have reached the same conclusion, but I have done so reluctantly, because I consider that the result, in so far as it involved differentiating for tax purposes between the relocation expenses of partners on the one hand and their employees on the other, is neither sensible nor just.

Lord Templeman

My Lords,


I have had the advantage of reading in draft the opinion of my noble and learned friend, Lord Oliver of Aylmerton. I agree with it and would allow this appeal and restore the order made by Vinelott J.

Lord Oliver of Aylmerton

My Lords,


This appeal raises what, in the end, is a very short point, namely, the deductibility for the purposes of income tax payable under Schedule D Case II of what may be conveniently described as "relocation expenses" paid out of partnership funds to two of the partners.


Schedule D, the provisions of which are to be found in section 108 of the Income and Corporation Taxes Act 1970, charges to tax (inter alia) "( a) the annual profits or gains arising or accruing … (ii) to any person residing in the United Kingdom from any trade, profession or vocation, whether carried on in the United Kingdom or elsewhere." Section 109 of the Act provides that tax under Schedule D is to be charged under seven different cases to which individual provisions are applicable, Case II being "tax in respect of any profession or vocation not contained in any other Schedule." Annual profits of a profession may be broadly and colloquially defined as the income earned by the professional activity after deducting the expenses incurred in earning it, ascertained in accordance with ordinary accountancy principles, but section 130 of the Act contains provisions restricting the types of expenditure which may be treated as deductions from annual income including the profits for computing the profits for tax purposes. It provides that:

"Subject to the provisions of the Tax Acts, in computing the amount of the profits or gains to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of — ( a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation, …"


There is a wealth of authority regarding the application of this formula to individual items of expenditure of various kinds, but whilst the cases may be helpful as illustrations or analogues, the question in each case is the simple question of whether the facts are capable of fitting and do fit the formula. There is no very difficult issue of construction involved, for it is not in doubt that the word "exclusively" is used in its ordinary and natural sense. The difficulties, such as they are, lie not in the words "wholly and exclusively" but in ascertaining whether a particular expenditure is, as a matter of fact, laid out "for" and only for the purposes of the trade or profession.


Before turning to the facts of the instant case, I ought, perhaps, to say a word about the position, both generally and in relation to income tax of partners in a firm. A partner working in the business or undertaking of the partnership is in a very different position from an employee. He has no contract of employment for he is, with his partners, an owner of the undertaking in which he is engaged and he is entitled, with his partners, to an undivided share in all the assets of the undertaking. In receiving any money or property out of the partnership funds or assets, he is to an extent receiving not only his own property but also the property of his co-partners. Every such receipt must, therefore, be brought into account in computing his share of the profits or assets. Equally, of course, any expenditure which he incurs out of his own pocket on behalf of the partnership in the proper performance of his duties as a partner will be brought into account against his co-partners in such computation. If, with the agreement of his partners, he pays himself a "salary," this merely means that he receives an additional part of the profits before they fall to be divided between the partners in the appropriate proportions. But the "salary" remains part of the profits.


So far as concerns the assessment of partnership profits to tax, I do not think that I can improve on the analysis in the instant case of Vinelott J. [1986] 1 W.L.R. 1468, 1474-1475 which I will both quote and adopt:

"There are, in effect, three stages. First, the profits of the firm for an appropriate basis period must be ascertained. What has to be ascertained is the profits of the firm and not of the individual partners. That is not, I think, stated anywhere in the Income Tax Acts, but it follows necessarily from the fact that there is only one business and not a number of different businesses carried on by each of the partners. The income of the firm for the year is then treated as divided between the partners who were partners during the year to which the claim relates — the year of assessment in one of the many senses of that word: see the proviso to section 26 of the Income and Corporation Taxes Act 1970. That is the second stage. The tax payable is then calculated according to the circumstances of each partner — that is, after taking into account on the one hand any personal allowances, reliefs or deductions to which he is entitled and any higher rate of tax for which he is liable. The Acts do not provide for the way in which personal allowances, reliefs and deductions are to be apportioned between the partnership income and other income. I understand that in practice they are deducted from the share of the partnership income if that was the partner's main source of income. When the tax exigible in respect of each share of the partnership income has been ascertained the total tax payable is calculated. Section 152 (formerly rule 10 of the Rules applicable to Cases I and II of Schedule D) provides that the total sum so calculated is to be treated as 'one sum … separate and distinct from any other tax chargeable on those persons … and a joint assessment shall be made in the partnership name.' That is the third stage."


The question in the instant case is whether, at the first stage, moneys paid out of the partnership assets to a partner in order to indemnify him against expenses incurred by him out of his own pocket otherwise than on behalf of the partnership or in the course of acting in the partnership business can be deducted at the first stage as being a payment any personal benefit from which is purely incidental or ancillary to the purposes of the firm considered as an entity separate from the recipient.


The relevant facts can be very shortly stated. The respondent firm, in which there were at the material time 95 partners, is a well-known firm of chartered accountants with offices in various parts of the United Kingdom. It is impracticable, for obvious reasons, to hold regular partners' meetings and the administration of the partnership is conducted by an executive committee of eight partners under the chairmanship of the senior partner. In order to deploy both partners and staff to the best advantage, it becomes necessary from time to time for the executive committee to request individual partners or members of the staff to move from one part of the country to another and the possibility that he may be requested to move is accepted by each partner as part of the firm's policy. To make this more acceptable, the executive committee has adopted a policy which, though not written into the partnership deed, is accepted by all the partners, of paying to a partner acceding to a request to move in the firm's interest a sum of relocation expenses which is equal to the aggregate of estate agents' charges, surveyors' fees, legal costs and disbursements, furniture removal charges and reasonable expenses for travel and subsistence for a maximum of three months whilst looking for a new house. In addition, there is paid a disturbance allowance of £1,000 in the case of a partner and £700 in the case of an employee by way of compensation for the incidental costs of moving such as relaying carpets or refitting curtains. In practice, both partners and employees have moved when requested and no doubt their willingness to do so has been influenced to a greater or lesser degree by the policy which I have described.


The instant appeal concerns two sums of £5,446.25 and £3,122.15 respectively paid out of the partnership funds by way of relocation expenses to two partners, Mr. Wilson and Mr. Cooper, during the accounting period 1981-82. In the case of Mr. Wilson, he had been engaged in working in the firm's London office and was asked to and did move to Southampton in order to open and take charge of their new office in that city. It is not in dispute that he moved to Southampton only because he was asked to and that he would have preferred to stay in London. In the case of Mr. Cooper, he was asked to and did, albeit reluctantly, move from Newcastle, where he...

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