HMRC Income Tax, Schedule D, Case I – Business carried on abroad – Control – Profits of trade – Deduction.
Under its Articles of Association the management of a Company of insurance brokers registered in England was vested in its Board of Directors in London, with powers of delegation. One of the Directors was appointed Resident Director in France, and conducted the French business of the Company from an office in Paris under a power of attorney from the Company. He attended a few Board meetings in London, though not bound to do so. He also made some reports to the other Directors, and on one or two occasions received their concurrence with his proposals, but they did not interfere with his conduct of the French business. Separate accounts of that business were kept in Paris, but the results were incorporated in the balance sheets of the Company, though no part of the French profits was ever remitted to London.
The Company contended that the control of the Paris business was in Paris and not in London, and that the profits therefrom were accordingly not assessable to Income Tax.
The Company also claimed as a deduction from its profits for Income Tax purposes, a sum of andpound;19,200 payable (by instalments) to a retiring Director in the following circumstances.
The original Directors were appointed for life so long as they held a qualifying number of shares, subject to dismissal forthwith for neglect or misconduct towards the Company. A Director so dismissed was only entitled to receive Jus salary then due and could be required to sell his shares to the other Directors at par. He would also have to surrender for cancellation certain notes issued by the Company entitling him to participate in surplus profits.
Circumstances arose in 1920 and 1921 in which the Company might possibly have been justified in dismissing one of the Directors, but, to avoid publicity injurious to the Company’s reputation, it entered into negotiation with him for his retirement He claimed andpound;50,000 compensation, but a compromise was arrived at and embodied in an agreement dated the 30th December, 1921, by which he agreed to retire from the Company, to transfer his 300 andpound;1 shares to the other Directors at par value (they were then worth considerably more) and to surrender his participating notes. The Company agreed to pay him andpound;19,200, and the Directors to pay him andpound;300 (expressed to be consideration for his shares), making together andpound;19,500 (payable in five annual instalments), which he agreed to accept in full satisfaction of all claims against the Company or the Directors.
The Special Commissioners on appeal decided against the Company on the question of the control of the French business, but in their favour on the question of the deduction of the said sum of andpound;19,200. A Case for the opinion of the High Court was demanded both by the Company and by the Crown.
Held: (1) that the control of the Company’s Paris business was with the Board of Directors in London, that their authority was not divested by the power of attorney to the Paris Director, and that the Company was accordingly assessable to Income Tax in respect of its Paris profits under Case I of Schedule D (Egyptian Hotels, Limited v. Mitchell, 6 T.C. 152 and 542, distinguished);
and (2) that the instalments of the sum of andpound;19,200 payable by the Company to the retiring Director under the agreement of the 30th December, 1921, were admissible deductions in arriving at its profits for Income Tax purposes.
Judges:
Lord Hanworth MR, Sargant, Lawrence LLJ
Citations:
[1927] EWCA Civ 1, [1927] 11 TC 372, [1927] 1 KB 719, (1927) 11 Tax Cas 372, (1927) 34 TR 2004/15
Links:
Jurisdiction:
England and Wales
Income Tax
Updated: 15 August 2022; Ref: scu.403319