Northend (HM Inspector of Taxes) v White & Leonard & Corbin Greener and Others
| Jurisdiction | England & Wales |
| Judgment Date | 24 February 1975 |
| Date | 24 February 1975 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income tax-Earned income relief-Solicitor-Interest on clients' deposit account - Whether immediately derived from carrying on of profession-Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), ss. 211 and 525(1)(c).
A firm of solicitors, in which B was a partner, paid certain clients' moneys received in the course of their practice into a clients' deposit account at their bank. Although the principal moneys in the account did not belong to the firm, they were entitled under the Solicitors Act 1965 to keep the interest received thereon. Where money was held for a client on which interest ought in fairness to be earned for him, the firm paid him the equivalent of the interest which would have accrued if the money had been deposited in a separate "designated" account carrying interest which belonged to the client. On appeal against assessments to income tax under Case III of Schedule D for the years 1966-67 to 1969-70 in respect of the interest on the clients' deposit account, the General Commissioners held that B was entitled to earned income relief on his share of such interest, as being immediately derived from the carrying on or exercise by him of his profession.
Held, that B was not entitled to the relief claimed, because the interest was not immediately derived from the carrying on of the practice, but from the loan to the bank on the terms that interest should be paid.
Stated under s. 56 of the Taxes Management Act 1970 by the Commissioners for the General Purposes of the Income Tax for the Division of the City of London for the opinion of the High Court of Justice.
1. At meetings of the said General Commissioners held at Gresham College, Basinghall Street, in the City of London on 15th and 17th December 1971, Messrs. White & Leonard & Corbin Greener, carrying on the profession of solicitors (hereinafter called "the firm"), appealed against assessments made upon them under Case III of Schedule D, Income Tax Act 1952, for the years 1966-67, 1967-68, 1968-69 and 1969-70 in respect of interest received. At the said meeting Mr. Charles Robert Beveridge (since deceased) appealed against the decision of H.M. Inspector of Taxes that he was not entitled to earned income relief under ss. 211 and 325(1)(c) of the Income Tax Act 1952 in respect of his share of bank interest included in the said assessments made on the firm for the said years. Mr. Charles Robert Beveridge died on 6th November 1973, and probate of his will was granted to Ella Katherine Beveridge and Robert Erskine Beveridge, the executors named therein, on 14th January 1974.
2. The question for our determination was whether the bank interest in question, which was received in the circumstances hereinafter set out, was income received by the firm from an investment or whether it was properly
to be regarded as in the nature of income earned in the carrying on by the firm of their profession as solicitors.3. The following documents were produced to us and put in evidence at the hearing and are exhibited hereto(1):
Exhibit 1. The Law Society's publication entitled "Solicitors' Accounts, Compensation Fund and Practice Rules", 2nd edn. (1970).
Exhibit 2. Letter from Barclays Bank Ltd. to Mr. C.R. Beveridge dated 21st January 1971.
Exhibit 3. Two statements, being 3A, headed "Actual Receipts and Payments of Interest" 31st March 1967 and 31st March 1968, and 3B, headed "Actual Receipts and Payments of Interest" 31st March 1969 and 31st March 1970.
Exhibit 4. Bank statements, clients' account and clients' deposit account for February 1970.
Exhibit 5. Particulars of partnership assessments on the firm-income tax, Schedule D.
4. Mr. Charles Robert Beveridge, Mr. Herbert Cecil Markwell and Sir Denys Hicks O.B.E. gave evidence before us. The evidence which we accepted is set out, together with certain admitted facts, in the following sub-paragraphs.
(i) Mr. Charles Robert Beveridge was at all material times a partner, and at the time of hearing of these appeals the senior partner, in the firm of White & Leonard & Corbin Greener, who carry on practice as solicitors at 4 St. Bride Street, Ludgate Circus, London E.C.4. The partnership was formed on 1st April 1966 by the three former partners of the firm of White & Leonard and two of the former partners of the firm of Corbin Greener & Cook.
(ii) The work undertaken by the firm is of a general nature, and is typical of the work of many firms of solicitors in general practice. In the main it consists of conveyancing, commercial work, litigation and the management of property, including rent collection and the collection of mortgage interest, and the receiving and making of a wide variety of payments on behalf of clients. Such work inevitably involves handling large sums of clients' money. The position is regulated by the Solicitors' Accounts Rules 1967 (exhibit 1, page 11). These replace the Solicitors' Accounts Rules 1945 to 1959, but there is no material difference for present purposes. Sums received on behalf of clients may be retained in hand for periods varying from one day to several months. With a turnover of clients' account of approximately £2,000,000 per annum, involving a minimum of approximately 3000 debit items and as may credit items in the firm's books, the balance on clients' account at any one time can be substantial.
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(iii) The position relating to interest earned with clients' money is regulated by s. 8 of the Solicitors Act 1965 and by the Solicitors' Accounts (Deposit Interest) Rules 1965 (exhibit 1, page 39). In regulating the firm's practice account has also been taken of the Notes for Guidance issued by the Law Society (exhibit 1, page 35). The practice of the firm in dealing with clients' money (other than trust moneys and a few minor items which are dealt with separately and are not relevant to this appeal) is and was at all material times as follows.
All clients' money is paid in the first instance into the current account designated "White and Leonard and Corbin Greener, Clients' Account" with Barclays Bank, Martins Branch, Ludgate Circus. From time to time sums are transferred from this account to a deposit account designated "White and Leonard and Corbin Greener, Clients' Deposit Account". Interest is earned by the money held in this account in accordance with the normal practice of banks, and earns interest at the London Banks' deposit interest rate from time to time, subject to 7 days' notice of withdrawal. Where money is held or received for or on account of a client on which having regard to all the circumstances (including the amount and the length of time for which the money is likely to be held) interest ought in fairness to the client to be earned for him, the firm pays to the client a sum equivalent to the interest which would have accrued for the benefit of the client if the money had been deposited in a separate designated account under rule 2 of the Solicitors' Accounts (Deposit Interest) Rules 1965 (exhibit 1, page 39). (iv) Mr. Beveridge said that he had practised as a solicitor since 1935. In 1960 he joined Messrs. White & Leonard as a partner, and became aware of their practice of putting clients' moneys on deposit, which he saw as a source of profit. After 1st April 1966, when the present firm was set up, the practice was continued as to clients' deposits; these deposits were dealt with in the firm's accounts as "interest on deposit account on sight at the bank", as a separate item from fees earned, estimated fees and commissions. Copies of the firm's accounts had been sent to the Inspector of Taxes from time to time. Up to 1969 any sums paid to the clients in lieu of interest were paid under deduction of income tax that was accounted for to the Inland Revenue. Both before and after 1969 sums paid to clients in lieu of interest were allowed as a deduction in computing the taxable profits of the firm.
(v) Beveridge said that the reasons for the large number of items appearing in the bank statements (exhibits 3A and 3B) were the normal incidents and requirements of the work which the firm had undertaken to do as solicitors for their clients. This was all work for which they charged and...
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