Newstead (HM Inspector of Taxes) v Frost
| Jurisdiction | England & Wales |
| Judgment Date | 31 January 1980 |
| Date | 31 January 1980 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income tax, Schedule D - Surtax - Whether tax-avoiding agreement by artiste resident in U.K. to share his foreign earnings with a foreign company was "a partnership" or "a device" - Whether artiste's share taxable under Case II or V - Income and Corporation Taxes Act 1970 (c 10), ss 108, 109, 122, 152 and 153.
Up to 1967-68 F, resident in the U.K. carried on the professions or vocations of (1) author and (2) television star, being assessed under Case II of Schedule D. In February 1967, on advice and with the object of avoiding tax on large future earnings from projected activities in those professions abroad, F entered into an "indenture of partnership" with LP Ltd.-a $5 Bahamian investment company, the share capital in which had been bought for the purpose by a charitable trust out of a donation by a friend of F. The said indenture (as later amended) provided that F and LP Ltd. should be partners in the businesses (a) of exploiting copyrights and interests in copyrights; (b) of television and film consultants and advisers, publicity agents and providers of publicity services throughout the world outside the U.K.; (c) of producing television programmes, films, stage plays and other entertainment and using and exploiting the services of producers, actors, directors, writers and artistes, and material and facilities which may be used for the production of television programmes, films, stage plays and other entertainments; (d) of television, films and stage advisers and agents. The indenture also provided that LP Ltd. was to manage the day-to-day operation of the business, to take five per cent. of the income profits and one per cent. of any capital profits, and to have two votes to F's one vote in case of any dispute.
Large income resulted, all originating in F's activities, while LP Ltd. contributed "administrative and secretarial experience and financial and fiscal advice". None of F's share was remitted to the U.K. Assessments were raised on F for 1969-70, 1970-71 and 1971-72 on that share as still remaining the earnings of his said professions or vocations, taxable under Case II. The General Commissioners reduced the assessments for 1969-70 and 1971-72 (and discharged that for 1970-71). The Crown appealed.
The Chancery Division, dismissing the Crown's appeal, held (1) that the business was intra vires LP Ltd., (2) that the income in question was that of a valid partnership between F and LP Ltd. to trade in exploiting F's talents; (3) that, on the authority of Colquhoun v. Brooks 2 TC 490; 14 App Cas 493, F's share
of that partnership income was income from a foreign possession and hence taxable under Case V, not Case II, so that s 122(2)(b) and (3)(b) of the Income and Corporation Taxes Act 1970 applied; (4) that F therefore escaped tax on the whole of his share of the income. The Crown appealedThe Court of Appeal, unanimously dismissing the Crown's appeal, held (1) that an artiste, when exercising his artistic skill, was exploiting it; a company could equally exploit that skill; hence an artiste and a company could carry on the business, in common, of exploiting that skill, viz., in partnership; (2) that the exploitation of F's artistic skill fell within the phrase "all kinds of financial commercial trading or other operations" in clause 3(b) of the memorandum of association of LP Ltd.; (3) that the fact that the course adopted by F could reasonably be described as a device to avoid tax was irrelevant; Finsbury Securities Ltd. v. Bishop 43 TC 591;[1966] 1 WLR 1402 and Lupton v. F.A. & A.B. Ltd. 47 TC 580; [1972] AC 634 distinguished. The Crown appealed.
The House of Lords, unanimously dismissing the Crown's appeal, held that there was a valid partnership between F and LP Ltd., for the reasons substantially those of the Court of Appeal on (1) and (2) above, and (3) because, although the agreement between F and LP Ltd. was clearly formed with the object of avoiding tax, it must also have been formed with a view of profit.
Stated under the Taxes Management Act 1970, s 56, by the Commissioners for the General Purposes of the Income Tax for the Division of Kensington for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the General Purposes of the Income Tax for the Division of Kensington held on 18, 19, 20 and 21 February 1975, David Paradine Frost (hereinafter called "the Appellant") appealed against the following assessments to income tax under Case II of Schedule D in respect of profits of the trade, business or profession of entertainer.
£ |
||
1969-70 |
30,000 |
|
1970-71 |
29,256 |
(additional) |
1971-72 |
115,398. |
2. The Appellant was represented before us by Mr. D.C. Potter Q.C. and Mr. A.E. Park and the Inland Revenue were represented by Mr. E.O. Jackson and Mrs. Stary. Evidence was given by the Appellant and by Mr. John Henry Gaffney who was, at the material time, vice-chairman of the Trust Corporation of Bahamas Ltd.
3. The following documents were produced before us and admitted or proved:-
(2) Partnership deed-Leander Enterprises dated 17 February 1967.
(3) Minutes of all partnership meetings from 17 February 1967 to 25 April 1971.
(4) Balance sheets and profit and loss accounts for the partnership from 17 February 1967 to 31 December 1972 and for Hellespont N.V. from 7 February 1968 to 31 December 1972.
(5) Bundle of correspondence with Inland Revenue between 4 August 1969 and 14 May 1974.
(6) Partnership documents re Group W. Promotion of U.K. produced programmes featuring the Appellant.
(7) Partnership documents re "The English".
(8) Partnership documents re "The Presidential Debate 1968".
(9) Partnership documents re Global Television/rights and investment agreements.
(10) Partnership documents re "The Solution to all The Worlds Problems".
(11) Partnership documents re "The David Frost Show".
(12) Partnership documents re "The Americans".
(13) Partnership documents re Tamarisk/Hellespont main agreements.
(14) Further correspondence 31 August 1966 to 13 February 1967.
(15) Standard AFTRA Engagement Contract dated 4 August 1969 (re The Merv Griffin Show).
(16) Letters of agreement dated 24 June 1969 (re interview with the Prime Minister and Mrs. Wilson).
(17) List of agreed figures (from 1964-65 to 31 December 1972).
(18) Travel itinerary.
(19) Copy memorandum and articles of association of Leander Productions Ltd. (formerly Pembina Investment Co. Ltd.).
Document number 1 is exhibited to and forms part of this Case(1). The remaining documents are not exhibited to this Case but are available for the use of the High Court.
4. Mr. Jackson on behalf of the Inland Revenue agreed that for convenience the words "partnership" and "partner" could be used throughout the proceedings provided this was not taken as an admission of the existence of a partnership in fact or in law. We use the words in this Case Stated (but not in our conclusions in clause 10) similarly as a matter of convenience. Similarly for convenience we refer throughout to the provisions of the Income & Corporation Taxes Act 1970 ("the Taxes Act") as if they were in force at all material times.
5. The following facts were proved or admitted:
(2) By 1966 the Appellant had established himself as a very successful television personality in the United Kingdom, responsible among other matters for two very successful programmes, the "Frost Report" and the "Frost Programmes". He held the controlling interest in a number of U.K. companies connected with television, films and the theatre and was also a successful author.
-
(3) Before, during and after the years under appeal the Appellant had been assessed under Schedule D, Case II, as a writer and entertainer in the U.K. and figures (apart from those which are in issue in these appeals) had been agreed on his behalf with the Revenue.
(4) In 1966 the Appellant was considering the exploitation of his talents outside the U.K. and particularly the possibility of substantial earnings in the United States. He accordingly sought advice as to the legitimate ways of reducing the tax liabilities which would ensue, indicating that he wished to remain resident in the U.K. and to be able to remit his earnings to the sterling area, if possible, while minimising tax liabilities.
-
(5) As a result he instructed London solicitors, Messrs. Harbottle and Lewis, to investigate the possibility of arrangements for partnership with a company in the Bahamas and the following events took place.
(a) 4 January 1967-Messrs. Harbottle & Lewis informed the Trust Corporation of Bahamas Ltd. (hereinafter referred to as "Trust Corporation") that the Appellant wished to proceed with a partnership agreement with a Bahamian company, and would like the name of the company to be Lysander.
(b) Messrs. Harbottle & Lewis forwarded to Trust Corporation a letter, dated 17 January 1967, addressed to it by a Mr. George Brightwell (who is a friend and colleague of the Appellant) enclosing a cheque for £350 "as an outright and unconditional gift to be used by you and your colleagues in any manner you may wish". The letter was marked "re David Frost-Lysander Enterprises". The witness John Henry Gaffney had expected such a contribution.
(c) 7 February 1967-Messrs. Harbottle & Lewis sent to Trust Corporation a draft of partnership agreement for the proposed partnership.
(d) 8 February 1967-Pembina Investment Co. Ltd. a "shell" company held by the Trust Corporation, changed its name to Leander Productions Ltd. (hereinafter referred to as "the Company").
(e) 17 February 1967-the document exhibited hereto (referred to as an indenture of partnership between the Appellant and the Company) was completed.
(6) According to document no. 1 the business of the partnership was "exploiting copyrights and interests in copyrights and in the business of television...
To continue reading
Request your trial
-
Overseas Containers (Finance) Ltd v Stoker
... ... and George Edmond Stoker (Her Majesty's Inspector of Taxes) [1989] EWCA Civ J0316-4 ... The ... In my judgment, the same considerations apply to the decision in Newstead v. Frost 53 Tax Cases 525 , a case much relied on by Mr. Thornhill. In ... ...