White v Franklin
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE WILLMER,LORD JUSTICE PEARSON,LORD JUSTICE HARMAN |
| Judgment Date | 27 January 1965 |
| Judgment citation (vLex) | [1965] EWCA Civ J0127-1 |
| Date | 27 January 1965 |
| Court | Court of Appeal |
[1965] EWCA Civ J0127-1
In The Supreme Court of Judicature
Court of Appeal
T. 70
(Revenue Paper)
Lord Justice Willmer
Lord Justice Harman
Lord Justice Pearson
MR. ALAN S. ORR, Q. C, and MR. J, RAYMOND PHILLIPS (instructed by The Solicitor of Inland Reve. ue, Somerset House, Strand, London, W. C. 2.) appeared as Counsel for the Appellant.
MR. PETER PEES (instructed by Mesrs. Gilbert Samuel & Co., 3, St. Michael's Alley, Cornhill, E. C.3.) appeared as Counsel for the Respondent.
The question raised by this appeal is whether the taxpayer, Mr. Michael Franklin, who has for a number of years been acting as assistant managing director of a company called the Wayfarers Travel Agency Limited, is entitled to claim earned income relief in respect of dividends on shares in the company which he has received, in pursuance of a settlement made on the 2nd May, 1936. By the terms of that settlement the trustees were to hold the income in trust for Mr. Franklin so: long as he should be engaged in the management of the company. The General Commissioners and, on appeal, Mr. Justice Ungoed-Thomas took the view that Mr. Franklin was entitled to earned income relief; this appeal has now been brought by the Crown against that decision.
The Wayfarers Travel Agency Limited is a company which was incorporated in 1931 to take over a travel agency business, which had previously been run in partnership by a deceased brother of Mr. Franklin (called Geeffrey) and a Mr. Geurlay. The shares of the company were held by Mr. Franklin's mother, anether brother of his (called Sydney) and Mr. Gourlay, who was appointed managing director. Mr. Franklin himself had no shares in the company, but in 1932 he was appointed assistant managing director and, as J under stand it, has acted in that capacity ever since, subject, possibly, to a break during the war years.
By the terms of the settlement of 1936 Mr. Franklin's mother and his brother Sydney transferred most of the shares which were held by then to trustees in trust in the first instance to hold the income for the benefit of Mr. Franklin for so lonnas he should be engaged in the management of the company. Failing that, the trustees were to have power to appoint the income for the benefit of all or any of the descendants of Franklin's mother who were directors or were employed in the service of the company. Failing that, the trustees were to have power to appoint the income to any directors or employees of the company or to other descendants of Mr. Franklin's mother whether employed by the company or not. Subject t: the provisions as to income, the trustees were to hold the capital in trust for the descend" ants of Mr. Franklin's mother, to be appointed ten years after Mr. Franklin himself should cease to be engaged in the management of the company; but a desire was expressed in the settlement that some shares should be appointed to Mr. Franklin or any child of his or other descendant who contributed substantially to the success of the company. Failing any such appointment, the shares were then to be held for the benefit of the descendants of Mr. Franklin's mother generally.
It seems to me that it is really only the original gift of income to Mr. Michael Franklin himself which is relevant for the purposes of this case, but I have referred to these further provisions of the settlement having regard to some of the arguments which have been addressed to us. The settleaent contai ned a number of recitals, and much reliance has been placed on recital Ho. 5 which is to this effect: "Mrs. Franklin and Sydney Franklin are respectively desirous of making provision for the benefit of Michael Franklin (who is the son of Mrs. Franklin and the brother of Sydney Franklin) and possibly other descendants of Mrs. Franklin in the manner hereinafter appearing." But having read that recital, I think it is probably only fair to go back to recital No. 4 and read that as well. It recites that "Michael Franklin is the Assistant 'Managing Director of the Company and is actively engaged in the management and direction of the business of the Company."
The Commissioners found, by paragraph 3(c) of the Case Stated, that Mr. Franklin "urged his mother and brother to give him an interest in the company"; and they went on to say: "They" — that is, the mother and brother — "wished him to remain in the company and as an inducementto him to remain an active director made a settlement dated 2nd May, 1938…". I entertain no doubt that as a practical matter the effect of the settlement was to provide an inducement or an incentive to Mr. Franklin to continue in the service of the company, and to work hard in the service of the company, since obviously the more successful the company might be, the greater would be his chance of reward by way of dividend. Apart from any dividends which he might receive under the settlement he was, of course, paid a salary — true, a small salary — as assistant managing director, and in most of the years during which he served he has also received an annual bonus. But it was found by the Commissioners, in paragraph 3(e) of the Case Stated, that he relied on the dividends as an addition to his salary and bonus.
For the purpose of earned income relief, "earned income" is defined by Section 525, sub-section (1), of the Income Tax Act, 1952, and I will read part of the provisions of that section: "Subject to the provisions of sub-section (2) of this section, in this Act, 'earned income' means, in relation to any individual — (a) any income arising in respect of any remuneration from any office or employment of profit held by the individual….". I need not read the rest of that paragraph, but the sub-section goes on: "…and (b) any income from any property which is attached to or forms part 01 the emoluments of any office or employment of profit held by the individual…".
The claim for earned income relief was put forward primarily under paragraph (a) of that sub-section, but alternatively it was submitted that there was a good claim under (b), on the basis that the shares, the subject of the settlement, were property attached to, or forming part of, the emoluments of Mr. Franklin's office as assistant. managing director. But the Commissioners and the learned Judge came to the conclusion that Mr. Franklin was entitled to his earned income relief under paragraph (a), and both of them, therefore, regarded it as unnecessary to reach any conclusion with regard to paragraph (b).
Certain things have been said to be common ground as between the parties. It is common ground that on the authorities Section 525 provides a self-contained definition of "earned income", so that it is unnecessary to look elsewhere in the statute for any further definition. It is agreed that the words "income arising in respect of any remuneration" mean income which constitutes remuneration. It is not in dispute that Mr. Franklin's employment was an office or employment of profit within the meaning of the section.
The contention for the Crown (and I think this is in substance accepted on behalf of Mr. Franklin) is that "remuneration" means reward for services rendered, or to be rendered, in the office or employment. That is important because the same test has to be applied under the ninth Schedule to the Act in determining whether any receipt by an employee falls within Schedule so as to be taxable. In those circumstances it is contended that it is highly relevant to consider the numerous authorities where questions have arisen as to whether or not receipts are taxable under Schedule E. I think it is fair to add that it seems to me, as a matter of common sense, that it would be very difficult to envisage the possibility that remuneration from an office, if it is taxable under Schedule at all, could be anything other than earned income, so that there is an obvious relation between the two subjects.
There is a considerable body of authority dealing with this question. To some of the cases we have been directly referred and others have been mentioned in passing. For the purposes of this judgment I do not think it is necessary to refer to the authorities at length, for this is one of those jases in which I think it can rightly be said that there is no real room for doubt as to what the law is. The difficulty, anot uncommon difficulty, is to apply perfectly well established principles to the particular facts of the particular case.
One of the recent cases brought to our attention was that of Wright v. Boyce, reported in 38 Tax Cases, page 160, in which the question was raised whether a huntsman was taxable on the fruits of the annual collection which was taken for his benefit amongst the members of the hunt on Boxing Day. It was held in the end that he was. I would, however, refer to the judgment delivered by Lord Justice Jenkins in that case, if only for the purpose of mentioning the prior authorities on which he himself relied. On page 170 he referred to the case of Herbert v. McQuade, 4 Tax Cases, 489, and quoted a passage from the judgment of Sir Richard Henn Collins, Master of the Rolls, which, as he said, has been very often cited. The test laid down by Sir Richard Henn Collins was "'whether, from the standpoint of the person who receives it, it'"— that is, the payment — "'accrues to him by virtue of his office.'" In the same case Lord Justice Stirling said that "'a profit accrues by reason of an office when it comes to the holder of the office as such — in that capacity —and without the fulfilment of any further or other condition on his part.'" Lord Justice Jenkins then went on to cite from the speech of Lord Cave, Lord Chancellor, in Seymour v. Reed, 11 Tax Cases, 625, as follows:" '…it must now (i think) be taken as settled that...
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