McKnight (Inspector of Taxes) v Sheppard

JurisdictionEngland & Wales
CourtHouse of Lords
Judgment Date17 June 1999
Judgment citation (vLex)[1999] UKHL J0617-2
Date17 June 1999

[1999] UKHL J0617-2


Lord Hoffmann

Lord Mackay of Clashfern

Lord Clyde

Lord Hutton

Lord Hobhouse of Wood-borough

(Her Majesty'S Inspector of Taxes) (Appellant)

My Lords,


The respondent ("the taxpayer") is a stockbroker who in 1986–87 incurred legal expenses of some £200,000 defending himself against proceedings before the disciplinary committee of the Stock Exchange and appearing before the appeals committee. The question is whether the deduction of these expenses for the purpose of computing the taxpayer'S profits under Case I of Schedule D is excluded by section 130(a) of the Income and Corporation Taxes Act 1970 on the ground that it was not "money wholly and exclusively laid out or expended for the purposes of the trade."


The taxpayer was charged on 17 counts, of which 12 alleged gross misconduct, for which the penalty could be expulsion or suspension. He was found guilty on four charges of gross misconduct (including one finding of dishonesty) and 3 charges of ordinary misconduct. He was ordered to be suspended for 6 months. The suspension was itself suspended pending an appeal. The appeals committee confirmed two of the findings of gross misconduct (including the one involving alleged dishonesty), reduced one to ordinary misconduct and allowed the appeal against the fourth. All the findings of ordinary misconduct were affirmed. The order for suspension was set aside and fines totalling £50,000 were imposed instead. It is only fair to the taxpayer to record that in a subsequent appeal against a refusal of authorisation by the Securities Association, the appeal tribunal, chaired by Sir Godfray le Quesne Q.C., heard unchallenged oral evidence which had not been before the Stock Exchange committee and which resulted in the exoneration of the taxpayer from the imputation of dishonesty.


The taxpayer at first sought to deduct both the fines and legal expenses. The inspector disallowed both and the taxpayer appealed to the Special Commissioner. He allowed the appeal in respect of the legal expenses but not the fines. The parties appealed to the High Court where Lightman J. allowed the Revenue'S appeal against deducting the expenses and dismissed the taxpayer'S appeal against the disallowance of the fines. The taxpayer appealed against this decision on expenses but did not pursue the question of the fines. The Court of Appeal (Nourse, Potter and Mummery L.JJ.) allowed the taxpayer'S appeal and against that decision the Revenue appeal to your Lordships' House.


The Special Commissioner found that the taxpayer was a sole trader and that expulsion or a period of suspension would have destroyed his trade. He found that his exclusive purpose in laying out the legal costs was the preservation of his trade. The well-known case of Morgan v. Tate & Lyle Ltd. [1955] A.C. 21 is authority for the proposition that money spent for the purpose of preserving the trade from destruction can properly be treated as wholly and exclusively expended for the purposes of the trade within the meaning of section 130(a). The Special Commissioner so found.


My Lords, on an appeal from the Special Commissioner by way of case stated, the only question, as Nourse L.J. pointed out in the Court of Appeal, is whether, on the facts as the Commissioner found them, this conclusion was open to him as a matter of law: see Edwards v. Bairstow [1956] A.C. 14. Mr. Grabiner Q.C., who appeared for the Revenue, advanced two arguments as to why it was not.


First, he said that the facts found by the Special Commissioner led inescapably to the conclusion that the taxpayer had two purposes in paying the legal expenses. One was the preservation of his business and the other was the preservation of his personal reputation. It followed that he had a dual purpose and the trade purpose thus lacked the necessary exclusivity: see Mallalieu v. Drummond [1983] 2 A.C. 861.


I do not think that the Special Commissioner'S careful findings of fact lend support to this criticism. He recorded the taxpayer as saying in evidence that he "did not care about his personal reputation." While accepting the taxpayer as an honest witness 9 years after the event, he did not accept that this correctly reflected his attitude at the time. He said that the taxpayer would have had to be "extraordinarily thick-skinned not to have experienced feelings of personal distress" at the effect of the charges upon himself and his family. But he went on to make the following important finding:

"However, the fact that I do not accept that the taxpayer was wholly unconcerned with his personal reputation does not necessarily mean that his purpose in laying out the legal costs was not exclusively concerned with preserving his trade. Purpose and effect are not the same (see Mallalieu v. Drummond [1983] 2 A.C. 861, 870–871 per Lord Brightman)."


The Special Commissioner is here saying that although he does not accept that the taxpayer was unconcerned about the advantages which a successful defence would have for his personal reputation, he does accept that this was not the purpose for which the money was spent. The reference to Lord Brightman'S speech in Mallalieu v. Drummond [1983] 2 A.C. 861, 870–871 is illuminating. The relevant passage is as follows:

"The object of the taxpayer in making the expenditure must be distinguished from the effect of the expenditure. An expenditure may be made exclusively to serve the purposes of the business, but it may have a private advantage. The existence of that private advantage does not necessarily preclude the exclusivity of the business purpose. For example, a medical consultant has a friend in the South of France who is also his patient. He flies to the South of France for a week, staying in the home of his friend and attending professionally upon him. He seeks to recover the cost of his air fare. The question of fact will be whether the journey was undertaken solely to serve the purposes of the medical practice. This will be judged in the light of the taxpayer'S object in making the journey. The question will be answered by considering whether the stay in the South of France was a reason, however subordinate, for undertaking the journey, or was not a reason but only the effect. If a week'S stay on the Riviera was not an object of the consultant, if the consultant'S only object was to attend upon his patient, his stay on the Riviera was an unavoidable effect of the expenditure on the journey and the expenditure lies outside the prohibition in section 130."


If Lord Brightman'S consultant had said that he had given no thought at all to the pleasures of sitting on the terrace with his friend and a bottle of Côtes de Provence, his evidence might well not have been credited. But that would not be inconsistent with a finding that the only object of the journey was to...

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    ...and the expenditure lies outside the prohibition in s 130. [151]The same theme can be found in the case of McKnight (HMIT) v SheppardTAX[1999] BTC 236, where the fact that the taxpayer was found to be concerned as to his personal reputation when he incurred expenses in defending certain dis......
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8 forms
  • Chapter BIM38522
    • United Kingdom
    • Formularios de Derecho Civil, Mercantil y Registral HMRC Guidance manuals
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