Commissioners of Inland Revenue v Payne: CA 1940

The taxpayer covenanted to pay an annual sum to a company controlled by him for his life or until it was wound up. He claimed to deduct the amount of the covenant in the computation of his total income for surtax purposes. The Revenue refused his claim saying the arrangement was a revocable settlement and the income arising remained his.
Held: The Revenue was correct. There was a settlement: ‘The covenant had, apparently, no business purpose whatsoever. It was linked up with the rest of the scheme, the essential parts of which were that [the taxpayer] should put himself in such a relationship to the company that he could entirely control it by means of his voting power.’
and ‘It appears to me that the whole of what was done must be looked at; and when that is done, the true view, in my judgment, is that Mr. Walter Payne deliberately placed himself into a certain relationship to the company as part of one definite scheme, the essential heads of which could have been put down in numbered paragraphs on half a sheet of notepaper. Those were the things which it was essential that Mr. Payne should do if he wished to bring about the result desired. He did it by a combination of obtaining the control of the company, entering into the covenant, and then dealing with the company in such a way as to achieve his object. Now, if a deliberate scheme, perfectly clear cut, of that description is not an ‘arrangement’ within the meaning of the definition clause, I have difficulty myself in seeing what useful purpose was achieved by the Legislature in putting that word into the definition at all. I am clearly of opinion that, by placing himself into these relationships with the company, Mr. Walter Payne was engaged in making an ‘arrangement’ within the meaning of that clause.’


Sir Wilfrid Greene MR


(1940) 23 TC 610, [1940] EWCA 23 – 0610




England and Wales

Cited by:

CitedJones v Michael Vincent Garnett (HM Inspector of Taxes) CA 15-Dec-2005
Husband and wife had been shareholders in a company, the wife being recorded as company secretary. The company paid dividenceds to both. The husband appealed a decision that the payment to his wife was by way of a settlement and was taxable in his . .
Lists of cited by and citing cases may be incomplete.

Income Tax

Updated: 05 August 2022; Ref: scu.236561