Rolfe (HM Inspector of Taxes) v Nagel
| Jurisdiction | England & Wales |
| Judgment Date | 06 October 1981 |
| Date | 06 October 1981 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
Income tax-Diamond broker-Schedule D, Case I-Whether payment received as compensation for losing client assessable as profit of trade-Income and Corporation Taxes Act 1970, ss 108(1)(a)(i) and 109(2).
N was a diamond broker. He lobbied the Diamond Trading Corporation with a view to a client becoming an "active client" and so able to purchase diamonds from them. N pursued the client's interests over three years without payment. He expected that when the client became an "active client" he would receive commissions on the client's diamond purchases.
Before the client became an "active client" he became a client of other brokers. N was aggrieved and claimed compensation against those brokers. An arbitrator was appointed whose award, by which the parties agreed to be bound (although it was accepted that N had no legal right to compensation), was that N should receive £15,000 from the other brokers.
N appealed against an assessment under Schedule D Case I, and the General Commissioners held that the sum of £15,000 did not form part of his profits as a diamond broker. They made no findings as to why it was paid. The Crown appealed.
The High Court remitted the case to the General Commissioners to make further findings. Their findings are set out in the judgment(2). The Court, allowing the Crown's appeal, held that the payment was part of N's profits or gains from his trade, being a sum paid to him as compensation for unremunerated work or for loss of anticipated profit.
Held,
Held, in the Court of Appeal, affirming the Chancery Division, that, contrary to the General Commissioners' decision, it was an inevitable conclusion from the facts that the payment, which was neither unexpected nor unsolicited, was compensation either for work done or for loss of future prospects and was therefore taxable.
Stated under the Taxes Management Act 1970, s 56, by the Commissioners for the General Purposes of the Income Tax for the Division of Holborn London for the opinion of the High Court.
1. At a meeting of the Commissioners for the General Purposes of the Income Tax for the Division of Holborn in the County of Greater London held
on 19 February 1976 William Nagel (hereinafter called "Mr. Nagel") appealed against an assessment to income tax in the sum of £12,000 made upon him under Case I of Schedule D in respect of his profits as a diamond merchant broker for the year 1969-70.2. The question for our determination was whether a sum of £15,000 paid by Hennig and Co. Ltd. ("Hennig") to Mr. Nagel was a receipt to be taken into account in computing the profits or gains of Mr. Nagel for the year ended 5 April 1969.
3. Mr. Nagel and Anthony Lionel Sober, partner in Messrs. Lubbock Fine & Co., chartered accountants, gave evidence before us.
4. The following documents were proved or admitted before us:
(a) Mr. Nagel's balance sheet and revenue account for the year ended 5 April 1969.
(b) Blank Diamond Trading Corporation ("D.T.C.") "Appointment of Broker" form.
(c) Letter of 13 November 1967 from Mr. Louis Glick to Mr. Nagel.
(d) Letter of 16 November 1967 from Mr. D. H. H. Turner of the D.T.C. to Mr. Nagel.
(e) Letter of 12 December 1967 from Mr. Louis Glick to Mr. Nagel.
(f) Letter of 27 December 1967 from Mr. Nagel to Mr. Louis Glick.
(g) Letter of 16 February 1968 from Mr. Nagel to Hennig.
(h) Letter of 19 February 1968 from Mr. Nagel to Mr. Benjamin Bonas.
The above documents are attached to and form part of this Case(1)
5. The following facts were admitted or proved:
(a) Mr. Nagel is a diamond merchant broker. He is a sole trader and taxed as such Case I of Schedule D.
(b) Mr. Nagel makes up his trading accounts to 5 April each year and during the year ended 5 April 1969 he received the sum of £15,000 from another diamond broker, Hennig, of 1 Charterhouse Street, London E.C.1.
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(c) The circumstances leading up to this payment are best understood against the background of a description of how the "Diamond Trade" operates. (1) In order to buy diamonds from the D.T.C. and its associated companies a person has to be accepted by the D.T.C. The D.T.C. will only accept a buyer if he is represented by a recognised diamond merchant broker. There are only seven or eight recognised brokers, of whom Mr. Nagel is one and Hennig is another. (2) Buyers can be classified as "potential clients" and "active clients". There are only some 200 "active clients" in total. Only "active clients" can purchase diamonds through the D.T.C. (3) A prospective buyer has first to get a recognised broker to act for him, with a view to arranging his eventual acceptance by the D.T.C. as an "active client". If the broker agrees to represent the prospective buyer it is customary for a standard "Appointment of Broker" form to be completed by the prospective buyer and for this form to be lodged with the D.T.C. Annexed hereto as document (b) is a copy of standard "Appointment of Broker" form. Once he has appointed a recognised broker
the prospective purchaser can be classified as a "potential client". (4) The role of the broker is to nurse the "potential client" towards acceptance as an "active client" by the D.T.C. In essence it is a matter of extensive lobbying by the broker before the relevant D.T.C. committee. It may take a number of years for a "potential client" to be accepted as an "active client" and indeed this may never be achieved. On average only very few "active clients" are accepted by the D.T.C. each year. The broker receives nothing unless and until the "potential client" is accepted as an "active client" and as such purchases diamonds through the D.T.C. Thereafter the broker receives a commission on purchases. (5) Very occasionally a "potential client" will change his broker. The "potential client" is free to do this although he must as a matter of courtesy obtain the consent of his "original" broker. Consent would invariably be forthcoming-indeed the "original" broker has no option-but in practice a change of brokers is a rare occurrence, not least because the D.T.C. does not approve of such changes which must be notified to the D.T.C. (d) The circumstances leading up to the payment of £15,000 by Hennig to Mr. Nagel were as follows: (1) In 1964 or thereabouts a Mr. Louis Glick ("Mr. Glick") appointed Mr. Nagel as his broker. Mr. Glick signed the standard "Appointment of Broker" from referred to in sub-para (C)(3) above. Thereafter, as explained above, Mr. Glick was a "potential client". (2) Mr. Nagel worked diligently on behalf of Mr. Glick with a view to obtaining his acceptancy by the D.T.C. as an "active client". Then in November 1967, entirely unexpectedly, Mr. Glick informed Mr. Nagel that he wished to appoint Hennig as his broker in place of Mr. Nagel. Annexed hereto as documents (c), (d), (e) and (f) is the relevant correspondence. (3) As stated above, Mr. Nagel was powerless to prevent this. He did however feel somewhat aggrieved and accordingly approached Mr. V. Prins and Mr. G. Rothschild (the senior directors in Hennig) to discuss the matter. Mr. Prins and Mr. Rothschild, as well as being business competitors of Mr. Nagel, had been long standing friends of his. (4) Accordingly, Mr. Nagel and Messrs. Prins and Rothschild (on behalf of Hennig) agreed to explain the entire position to a Mr. Bonas, another broker well-known to all of them, and to invite Mr. Bonas to decide how in fairness the matter should be resolved. Both Mr. Nagel and Hennig agreed to be bound by whatever "decision" Mr. Bonas reached, although it was accepted on both sides that Mr. Bonas's "arbitration" was to be an entirely informal one and that Mr. Nagel had no legal claim (but only a moral claim) to any sort of compensation. There is provision for arbitration under the London Diamond Club rules. However, Mr. Nagel would not have been entitled to formal compensation and in any event (having regard to his status as a broker (as opposed to a trader)) Mr. Nagel would not have been willing for this matter to have been the subject of a formal arbitration. (5) Mr. Bonas's "decision" was that whenever Mr. Glick, or any of the firms with which he was or might be in the future associated, was or were accepted by the D.T.C. as an active client or as active clients, Mr. Nagel was to receive £15,000 immediately from Hennig in lieu of damages. (See documents (g) and (h). The reference in document (g) to "D.T.C. Client Scaldia (Belgium)" concerns an entirely different matter that is not relevant to the present proceedings.)
(e) In accordance with the "decision" of Mr. Bonas Mr. Glick having been accepted by the D.T.C., Hennig paid £15,000 to Mr. Nagel in February 1969 or thereabouts.
6. It was contended on behalf of Mr. Nagel that:-
(a) the sum of £15,000 to which Mr. Nagel had no right or claim in law, did not comprise part of the annual profits or gains accruing to Mr. Nagel from his trade;
(b) the decisions in Walker v. Carnaby Harrower, Barham & Pykett 46 TC 561 and Simpson v. John Reynolds & Co. (Insurances) Ltd. 49 TC 693 cover the present case, and the decision in Scott v. Ricketts 44 TC 303 supports submission 1 above;
(c) the decision in Commissioners of Inland Revenue v.Falkirk Ice Rink Ltd. 51 TC 42 is distinguishable;
(d) the appeal should succeed and the assessment be reduced accordingly.
7. The Inspector contended that:-
(a) the sum of £15,000 arose to Mr. Nagel from his trade as a diamond merchant broker;
(b) it was a payment made in lieu of commission;
(c) it was accordingly an annual profit assessable to income tax under Case I Schedule D.
8. There were referred to us the following cases:-Blackburn v. Close Bros., Ltd. 39 TC 164;Fleming v. Bellow Machine Co., Ltd. 42 TC 308; [1965] 1 WLR 873; Scott v. Ricketts 44 TC 303; [1967] 1 WLR 828; Walker v. Carnaby Harrower, Barham & Pykett46 TC 561; [1970] 1 WLR 276; Simpson v. John...
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