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Petitioner: MacKINLAY (INSPECTOR OF TAXES) VS Respondent: ARTHUR YOUNG MCCLELLAND MOORES & CO.
Court Name: Court of Appeals Judge(s): Balcombe, Sir Christopher Slade, Stocker Title:MacKINLAY (INSPECTOR OF TAXES) vs ARTHUR YOUNG MCCLELLAND MOORES
& CO. Case No.: NOT Date of Judgment:1988-01-29 Reported As: 1991 PTD 136 Result: Ordered accordingly Judgment ' SLADE L., J.---This is an appeal by a firm now known as Arthur Young and formerly known as Arthur Young McClelland Moores & Co. From the order of Vinelott, J. Made on 30th October, 1986. He had before him an appeal from the special commissioners by way of case stated under section 56 of the Taxes Management Act, 1970. The appeal related to an assessment to income-tax made against the firm under Schedule D for the year 1981-82. For this pa: pose the assessable profits of the firm fell to be calculated by reference to the accounting period 1st May, 1979 to 30th April, 1980. Briefly, the question at issue was and is whether two sums expended by the firm as contributions to the expenses incurred by two of the partners in moving house at the request of the firm are deductible in ascertaining those profits. ' The firm is a large and well-known firm of chartered accountants. As at 30th April, 1980 it had 95 partners and about 1,400 employees, of whom about half were professionally qualified. It had 15 offices in various parts of England and Scotland. A new office was opened in Southampton in September, 1980. By the time of the period with which we are concerned a partners' meeting had become a practical impossibility and an executive committee took most of the administrative decisions needed for the smooth running of the firm. This committee consisted of an elected chairman, six elected members and one appointed member. The partners as a whole met biennially. From time to time individual partners and employees were requested to move from one part of the country to another in order to work in a different office of the firm, to ensure that the staff were deployed to the firm's best advantage. The commissioner's decision recorded: "The practice of moving partners and employees from one of the firm's offices to another commenced in about the year 1975. Within a short period of time it became the accepted policy of
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the firm that any partner or employee might be requested to move for the benefit of the firm's business. Employees of the firm who were taken into partnership were made aware of the policy at the time of their admission to partnership. Partners of the firm who became partners on the occasion of mergers were not always immediately aware of all the details of the policy on becoming partners in the firm. The policy was not a term of the partnership agreement. In an effort to make this policy palatable and acceptable to all members of the firm, the executive committee decided that the firm would make a substantial contribution to the cost of the private removal expenses of each person who was asked to move." ' The contribution was made up of three elements. These elements are set out in the decision but their details do not matter. It is not suggested that the amounts of the contributions were too generous or exceeded the expenses actually incurred by the recipients. The firm's policy of requesting partners and employees to move and of contributing to their removal costs. ("the firm's removal policy") applied equally to partners and employees of whatever grade or seniority. The commissioners found as facts: "All partners of the firm approved and agreed with the firm's removal policy. A partner would not be compelled to move if he refused after being requested to do so, but a partner who declined to move would be held in less esteem by his colleagues. We were told and we accept that his financial prospects might suffer and he would be looked upon as someone who did not have the best interests of the firm at heart. Occasionally partners would refuse to move when requested and in one or two such instances their shares of profits were affected. Employees who were requested to move could not be compelled to do so and, unlike partners, their positions in the firm would not be affected prejudicially should they refuse. On the other hand we heard no evidence concerning any instance of a refusal to move by an employee and the acceptance of such a move by an employee was likely to enhance his prospects of promotion within the firm and might lead to promotion on the occasion of the move. ' The firm accepted that as it was requesting partners and employees to move from their homes for business reasons, if would be inequitable to expect them to bear the whole cost of such removal. Indeed the firm realised that unless it bore the cost of such removals, it was most unlikely that anyone would move. ' The firm bore the cost of such removals only when the request came from the firm. Any partner or employee who wished to move from one office to another for personal reasons and was permitted to do so, bore the entire cost of such removal himself. Equally, partners and employees who moved house whilst continuing to work at the same office bore the entire cost of their removals. Occasionally a person's wish to work in a different office accorded with the wishes of the firm but if the request for such a move came from the person undertaking it, he bore the entire cost without any contribution from the firm." During the relevant accounting period the firm incurred expenditure of 8,568.40 on the relocation expenses of two partners. Of this sum, 5,446.25 was expended in connection with the removal of Mr. Wilson from London to Southampton and 3,122.14 was expended in connection with the removal of Mr. Cooper from Newcastle to Bristol. The issue on the appeal is whether the expenses totalling 8,568.40 are deductible in ascertaining the firm's profits for the relevant year. During the same accounting period the firm paid out 15,560 in connection with the moving expenses of employees who moved at the firm's request. Significantly, as the firm would submit, the Crown accepted that these expenses are deductible in ascertaining the firm's profits for the relevant period. ' The circumstances in which this expenditure arose are described in detail in the commissioners' decision. They can be stated quite shortly. At the end of 1979 Mr. Darby, the chairman of the firm and of the executive committee, asked Mr. Wilson', who was then living in London, to open a new office for the firm in Southampton and to move to Southampton on a permanent basis, on the
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understanding that the firm would bear his relocation expenses. In due course Mr. Wilson agreed to go. In January, 1980 he moved with his wife from London to a new house in Southampton. The commissioners made these findings: "Mr. Wilson would not have moved from London to Southampton in 1980 had his relocation expenses not been borne by the firm. He was financially unable to bear the cost himself and also believed that it would have been unreasonable for the firm to ask him to defray his own removal costs as he gained no immediate personal or financial advantage from the move. His links with Southampton were limited to his stay there as an undergraduate many years before and accordingly on the occasion of the move from London Mr. And Mrs. Wilson had to make a new life for themselves. From a financial point of view, in the short term Mr. Wilson suffered three disadvantages. First, his share of profit was reduced as he lost the London weighting element. Secondly, the prices of houses in Southampton increased less markedly from 1980 onwards than did those in London. Thirdly, although the firm paid out a total of 5,446 towards his removal costs, such sum did not cover the entire costs of removal: the refurbishing of the house of Southampton cost substantially more than the amount of the firm's disturbance allowance." ' Mr. Cooper's move was a long-drawn out affair. In 1976 he was working as a partner in the Newcastle office and lived in a house in Northumberland. In that year he was asked to move to Bristol to become leader of the Bristol office of the firm. At that stage he declined to accept a permanent move to Bristol, but agreed to accept secondment to Bristol for two years. He retained his Northumberland house for the time being but in November, 1976, purchased a cottage in Wiltshire, from which he commuted to Bristol, returning home to join his wife in Northumberland as often as possible. Subsequently, Mr. Darby again asked Mr. Cooper to accept a permanent move to Bristol. This time he accepted. He sold his house in Northumberland in May, 1978, bought a house in Bristol in August, 1979 and moved into it in May, 1980. The commissioners found as facts that "Mr. Cooper suffered considerable financial disadvantage as a result of his move from Newcastle to Bristol" and that "he would not have agreed to move to Bristol had the firm not agreed to contribute to his removal costs". The commissioners heard oral evidence from Mr. Darby, Mr. Wilson, Mr. Cooper and Mr. Rouse, who was not a member of the executive committee and regarded himself as a "typical mid-career partner of the firm". The commissioners accepted evidence of the four partners to the following effect: "The four partners who gave evidence before us all took the view that the firm's removal policy was beneficial to the firm and that it would be unrealistic, unfair and commercially restrictive to expect partners or staff to move in such circumstances if the firm did not pay their relocation expenses. Each witness took the view that no distinction could be drawn between partners and staff in this context and that the object of the firm in implementing and continuing the firm's removal policy was to produce a more efficient firm." ' Having made the findings of primary facts to which I have already referred, the commissioners proceeded to make what they described as "the following inferential findings of fact": "(1) Although it is not a provision of the firm's partnership agreement that the relocation expenses of partners who are requested to move by the firm shall be paid by the firm, such a state of affairs is established partnership policy of the firm and understood to be so by all the partners of the firm. (2) the relocation expenses of partners of the firm are only paid or borne by the firm if a partner moves at the firm's request rather than at his own wish. (3) Relocation expenses when paid by or on behalf of a partner are paid by the firm only within the limits of what is reasonable in amount. (4) From the point of view of the firm, its policy in requiring partners to move from time to time and bearing their relocation expenses is followed entirely for business reasons. (5) Each partner of the firm concurs in the firm's removal policy entirely for business reasons. (6) In relation to the purpose
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of the firm's relocation expenditure, the firm had the same motive when paying or bearing partners' relocation expenditure and employees' relocation expenditure." ' By virtue of section 108 of the Income and Corporation Taxes Act, 1970 (which was the taxing statute in force at the material time) tax under Schedule D falls to be charged in respect of the annual profits or gains arising or accruing "to any person residing in the United Kingdom from any trade, profession or vocation, whether carried on in the United Kingdom or elsewhere " Section 109 provides that tax under Schedule D shall be charged under a number of specified cases, of which Case II is "tax in respect of any profession or vocation not contained in any other Schedule". Section 130, so far as material, provides: "in computing the amount of the profits or gains to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of -- (a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation, (b) any disbursements or expenses of maintenance of the parties, their families or establishments, or any sums expended for any other domestic or private purposes distinct from the purposes of the trade, profession or vocation " ' Section 152 provides: "Where a trade or profession is carried on by two or more persons jointly, income-tax in respect thereof shall be computed and stated jointly, and in one sum, and shall be separate and distinct from any other tax chargeable on those persons or any of them, and a joint assessment shall be made in the partnership name." ' The commissioners held that the expenses totaling 8,568.40 reimbursed to Mr. Wilson and Mr. Cooper during the relevant year were "wholly and exclusively laid out or expended for the purposes of the profession" carried on by the partners and were therefore, deductible in arriving at the taxable profits of the firm. The commissioners in their decision, under the heading "Conclusions," having referred to sections 130(a) and (b) of the Act of 1970 said: " Mr. Wilson agreed to move to Southampton after being requested to do so. He had no personal reasons, whether social or financial, for agreeing to do so." ' A little later they said: "We have little difficulty in coming to the conclusion that Mr. Wilson moved from London to Southampton purely for business reasons. He was aware of the firm's removal policy. He approved of that policy. He could see that his move to Southampton would be for the benefit of the firm and that it was a sensible, professional and commercial decision." ' As regards Mr. Cooper they said: "We find that in Mr. Cooper's case his reasons for moving to Bristol were even more emphatically business and commercial ones than were Mr. Wilson's. In neither case would the partner concerned have agreed to move if the firm had not been willing to underwrite his removal costs and the sole motive, in each partner's mind when moving, was that such a move would be sensible and beneficial for the professional and commercial interests of the firm as a whole." ' They then considered the matter from the viewpoint of the firm as a whole, saying: "Turning now to consider the position from the aspect of the firm, it is clear that if the motives of Mr. Wilson and Mr. Cooper were entirely professional and commercial then, so also to an even greater extent, were the motives of the other partners in the firm. We accept the evidence of Mr. Rouse as typical of the motives and beliefs of those partners in the firm (such as Mr. Rouse) who had not moved at the firm's expense and who had no prospect of doing so. There was no scintilla of personal benefit to each of those partners in bearing a proportion of the cost of the removal expenses of Mr. Wilson and Mr. Cooper. In the short term each of them suffered financially. They were content however, believing such expenditure to be for the ultimate benefit of the firm's business."
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' The gist of the commissioners' ultimate conclusion is to be found in the following passage of their decision: "We, therefore, hold that whether one looks at the firm as a single entity, as we are asked to do by Mr. Park or as 95 separate entities as suggested by Mr. MacKinlay, there is no duality of purpose in connection with the expenditure on the removal expenses of Mr. Cooper and Mr. Wilson during the accounting period. The firm incurred such expenditure wholly and exclusively for the purposes of its profession and the motive of each of the partners of the firm (including both Mr. Wilson and Mr. Cooper) was similarly circumscribed. But for the fact that Mr. Wilson and Mr. Cooper were partners in the firm and committed to advancing its interests they would not have moved house. Further, we infer that given a free choice at the moment when each was asked to move, Mr. Wilson would have remained in London and Mr. Cooper, without any shadow of doubt, would have remained in Northumberland: ' The question of law posed by the case stated for the opinion of the Court -- which was answered by Vinelott, J. In the negative -- was and is whether the commissioners were correct in holding that the expenses totalling 8,568.40 were "wholly and exclusively laid out or expended for the purposes of the profession" carried on by the partners within the meaning of section 130(a) of the Act of 1970 and therefore, deductible in arriving at its taxable profits. Since there is no appeal from the commissioners on a question of fact, the issue on this appeal resolves itself to the question whether their findings of primary fact entitled them to draw the inference that this expenditure was wholly and exclusively incurred for the purposes of the firm's profession: compare Mallalieu v. Drummond (1983) 2 A C 861, 872, per Lord Brightman. ' Before the decision of the House of Lords in Mallalieu v. Drummond (1983) 2 A C 861 there was a widespread belief that, in ascertaining the purpose of expenditure, the state of mind of the spender was the only relevant factor. Thus, in Bentleys, Stokes and Lowless v. Beeson (1952) 33 TC 491 Romer L., J. Had said, at pp. 503-504: "The sole question is whether the expenditure in question was `exclusively' laid out for business purposes, that is: What was the motive or object in the mind of the two individuals responsible for the activities in question?" ' In Mallalieu v. Drummond the House of Lords decisively rejected this view of the law. That familiar case concerned the right of a female barrister in computing the profits of her profession to deduct the cost of replacing the laundering clothes suitable to be worn under her gown in Court appearances. General commissioners found as facts, inter alia, that she had an ample private wardrobe, that she would not have bought the disputed items but for the requirements of her profession and that the preservation of warmth and decency was not a consideration which crossed her mind when she bought them. Nevertheless; they found that, in incurring the expense, she had a dual purpose, namely to enable her to earn profits in her profession and to enable her to be properly clothed during the time when she was on the way to chambers or to Court and while she was thereafter engaged in her professional activity and on other occasions when she did not find it desirable that she should change out of her Court clothes. Sitting at first instance, I reversed the commissioners' decision and this Court upheld my decision, essentially on the same grounds in each case as those subsequently expressed thus by Lord Elwyn-Jones in a dissenting speech in the same case in the House of Lords (1983) 2 A C 861, 868: "It was in my view not open to the commissioners in view of their findings of fact as to the appellant's purposes to conclude that as in this case the clothing was suitable for private as well as for professional use, one of her purposes must have been to spend money on the clothing for her private use. This in my view was to disregard the evidence which they accepted as to her actual motive and purpose. This they have found was to enable her to carry on her profession. Other benefits derived from the expenditure, namely that the clothing also provided her with
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warmth and decency, were purely incidental to the carrying on of her profession in the compulsory clothing she had to wear." ' However, the majority of the House of Lords took a different view. The ratio of their decision is to be found in the following passage from the leading speech of Lord Brightman, at p. 875: "I return to the question for your Lordships' decision whether there was evidence which entitled the commissioners to reach the conclusion that the object of the tax-payer in spending this money was not only to serve the purposes of her profession, but was also to serve her private purposes of providing apparel with which to cloth herself. Slade, J. Felt driven to answer the question in favour of the tax-payer because he felt constrained by the commissioners' finding that, in effect, the only object present in the mind of the tax-payer was the requirements of her profession. The conscious motive of the tax-payer was decisive. The reasoning of the Court of Appeal was the same. What was present in the tax-payer's mind at the time of the expenditure concluded the case. ' My Lords, I find myself totally unable to accept this narrow approach. Of course Miss Mallalieu thought only of the requirements of her profession when she first bought (as a capital expense) her wardrobe of subdued clothing and, no doubt, as and when she replaced items or sent them to the launderers or the cleaners she would, if asked, have repeated that she was maintaining her wardrobe because of those requirements. It is the natural way that anyone incurring such expenditure would think and speak. But she needed clothes to travel to work and clothes to wear at work, and I think it is inescapable that one object, though not a conscious motive, was the provision of the clothing that she needed as a human being. I reject the notion that the object of a tax-payer is inevitably limited to the particular conscious motive in mind at the moment of expenditure. Of course the motive of which the tax-payer is conscious is of a vital significance, but it is not inevitably the only object which the commissioners are entitled to find to exist. In my opinion the commissioners were not only entitled to reach the conclusion that the tax-payer's object was both to serve the purposes of her profession and also to serve her personal purposes, but I myself would have found it impossible to reach any other conclusion." ' While the House of Lords in Mallalieu v. Drummond accepted that the commissioners will generally "need to look into the tax-payer's mind at the moment when the expenditure is made," they considered that no such inquiry is necessary in "obvious cases which speak for themselves:" see per Lord Brightman at p. 870. They regarded the case before them as falling into the latter category because they regarded it as inescapable that one object of the expenditure was "the provision of the clothing that [the tax- payer] needed as a human being :" see p. 875. This private and personal advantage given to her by the expenditure could not be treated as a mere incidental effect of expenditure wholly and exclusively incurred for the purpose of meeting her professional requirements. In the circumstances their Lordships considered the commissioners not only entitled but bound to conclude that her object was both to serve the purposes of her profession and also to serve her personal purposes: see p. 875. ' Such is my understanding of the ratio of the decision in Mallalieu's case. I might add that we were referred to at least three decisions in which certain expenses incurred by individuals were held not deductible for tax purposes. The first was Newsom v. Robertson (1953) Ch. 7, which concerned expenses incurred by a barrister in travelling between his home at Whipsnade and his chambers in Lincoln's Inn. The second was Mason v. Tyson (1980) 53 TC 333, which related to the expenses incurred by a chartered surveyor in repairing and redecorating a small flat over his business premises, where he slept from time to time when he had to stay late at work. The third was Hillyer v. Leeke (1976) 51 TC 90, which concerned the expenses incurred by a computer engineer in the upkeep of two ordinary civilian suits worn only when he was at work. In the light of Mallalieu's case,
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whatever the motives of the tax-payers, I doubt whether in any of those three cases it would have been open to the commissioners, as a matter of law, to find that the expended,-e in question had been incurred solely for business purposes; the nature of the expenditure would have precluded it. ' In argument before the commissioners in the present case, presumably in the light of Mallalieu v. Drummond, a concession was made on behalf of the firm and recorded thus: "It is common ground in this appeal that a sole trader incurring removal expenses such as those which we have considered in the instant case would not be entitled to claim deductions in respect of them in his trading accounts for tax purposes. It is not necessary for us to say whether we subscribe fully to this point of view but for present purposes we are content to accept that it will be correct in most cases. It is hard to imagine a set of circumstances in which a sole trader would be able to contend that his motive for moving house was wholly and exclusively for the purposes of his trade, profession or vocation. Being a single indivisible person it is a virtual certainty that his motives will be clouded by reasons other than business ones." ' It appears that before Vinelott, J. No formal concession was made that a sole trader, incurring removal expenses such as those in issue in the present case, would not be entitled to claim deductions in respect of them in his trading accounts for tax purposes.…
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