Ex gratia payment to estate agents–Whether taxable as a profit–Agents acting for builders in acquisition of land for development not appointed selling agents by purchasers of the land–Payment of £2,500 by purchasers to agents–Gift held to be taxable–Earned by past work (in acquisition of the site) which was inadequately remunerated–Revenue’s appeal successful
This was an
appeal by the Crown against a decision of the Commissioner of Inland Revenue
who had held that a payment of £2,500 made to the respondents, T F Brown and B
L Cousins (trading as Stuart Edwards), by Central &
J E Vinelott
QC and B J Davenport (instructed by the Solicitor of Inland Revenue) appeared
on behalf of the appellant; Stephen Oliver (instructed by Herbert Smith &
Co) represented the respondents.
Giving
judgment, TEMPLEMAN J said: This is a puzzling problem. The Revenue claim
income tax on a gift made to a trader in the odd circumstances which I shall
shortly narrate.
The taxpayers
are estate agents. In 1961 the estate agents acted for some builders, Lawdons
Ltd, in the purchase of a site at Croydon for development. It is the practice,
at least in Croydon, for estate agents who purchase a site for development to
be employed by the client as selling agents after the site has been developed.
The case stated does not give the reason for this custom but I apprehend it is
some-what along these lines. On the acquisition of a site for development the
purchasing client’s estate agents expend a good deal of time and trouble and
money in negotiating and finding out whether services are available, whether
planning permission is obtainable and generally in providing the information
which enables the client to decide whether to offer and, if so, how much and
what he is going to do with the property and what he is likely to make on it.
At the same time as there is all this work the purchase price for an
undeveloped site is inevitably very much lower than the value of the site when it
has been developed. Because the purchase price for the undeveloped land is low,
naturally the scale fee is low. In this case the fee only amounted to £525 and
the Commissioners found that was not a sufficiently fair remuneration for what
the estate agents did. Thus, the custom has grown up that when an estate agent
is employed to do the unremunerative work he is given the opportunity to act as
a selling agent and, with far less work, to receive the larger scale fee which
results from his acting on the sale of the block of flats or whatever is the
subject of the development. In effect the estate agent contributes his work and
skill at the start. That is part of the development project, and when the
development has been finished and the property is sold or let then he becomes
entitled to share the profits which are obtained on fruition of the
development. The custom also has the added advantage that so far as the client
is concerned he only has to pay the agent a small amount at the beginning when
he may be short of money and he pays a larger amount towards the end when the
purchase price or the premiums come rolling in.
In the present
case there was trouble in putting together the site which the estate agents
negotiated for Lawdons with neighbouring sites which were essential to overall
development. Eventually, Lawdons sold out the site which they had acquired to
another firm of builders, Central & District Properties Ltd. They
apparently did that before any development was carried out. When that happened
the estate agents applied to Central & District to be appointed sole or
joint selling agents so that they would reap the benefit of the selling
commissions which they had expected to make. Central & District had their
own agents and no doubt for good reasons refused, but they offered to make an
ex gratia payment to the estate agents, of £1,250. The estate agents protested,
both at the decision not to allow them to act as sole or joint selling agents
and at the size of the proposed ex gratia payment. Eventually in March 1967
Central & District wrote saying they would pay £2,500 when the property was
leased. The estate agents, for their part, knowing that they had no legal claim
to a penny, acquiesced. The sum of £2,500 was in fact paid by Central & District
to the estate agents in September 1970 and the Revenue now claim that this sum
of £2,500 was assessable under Schedule D as profits arising from the trade of
the estate agents.
Mr Vinelott,
who appeared for the Revenue, said it was all very simple. A payment received
by a trader in compensation for the loss of an opportunity to make a future
profit is a profit of trade, even though the payment is voluntary. Mr Oliver,
who appeared for the estate agents, submitted that the payment was not taxable
because it was not the direct product of the professional activities of the
estate agents. The payment was not a direct product of the professional
activities of the estate agents because, first, it was voluntary–although that
is not decisive–and, secondly, it was made by Central & District, and not
by Lawdons. Central & District were not under any moral or legal obligation
to make any payment; they were not under any legal or moral obligation to
appoint the estate agents as selling agents; they were simply a company making
a gift for the purposes of the company and not for the purposes of the estate
agents in order to preserve the general image of Central & District as
being reasonable builders, developers and purchasers.
Both sides
relied on authorities. In Commissioner of Taxation of the Commonwealth of
Australia v Squatting Investment Company Ltd [1954] AC 182 wool was
compulsorily acquired by the Commonwealth at prices which were fixed by
Government regulations. The Commonwealth made a large profit on the wool and
voluntarily distributed that profit to the wool growers in addition to the
price they had already received pursuant to the regulations. It was held that
this voluntary distribution was a kind of addition to the price. It was an
addition to the profits received by the wool growers and was therefore taxable
in their hands.
In the present
case the estate agents received for their work as purchasing agents of Lawdons
Ltd £525, which, as I have said, the Commissioners found was not sufficiently
fair remuneration for what they had done. The estate agents expected, but were
not in law entitled, to receive as selling agents perhaps–one does not
know–what might be described as more than sufficiently fair remuneration for
what they had to do. However that may be, for the loss of their opportunity to
obtain this additional remuneration from selling, they were eventually paid
£2,500. If the remuneration received, although through an indirect method,
corresponds to an increase in price then there is a good deal of ground in common
between the 1954 case and the present.
Next in point
of time is Severne v Dadswell, also in 1954, reported in 35 TC
649. During the war millers were bound to buy wheat from the Ministry of Food
and were bound to sell flour at controlled prices which were uneconomic, having
regard to cost and expenses. Millers who had been in business before the war
were paid by the ministry rebates on their flour and the rebates helped to make
up losses so that the total business of the millers was not uneconomic. Millers
who were not in business before the war were subject to the same restrictions
of buying and selling at controlled prices, but were not legally entitled to
any rebate. The minister made ex gratia payment to the millers who were not in
business before the war and were therefore not entitled to rebates and it was
held that these ex gratia payments were taxable. As in the Commonwealth of
Australia case, Severne v Dadswell is an illustration of an
ex gratia payment being taxable when directly referable to work which had been
carried out by the taxpayer.
Next there is Walker
v Carnaby, Harrower, Barham & Pykett (1969) 46 TC 564.
Auditors of a company were appointed annually and they were auditors of a
particular group of companies for many years. Their charges were properly and
duly paid and they were not underpaid. When, for various internal reasons the
company decided to change auditors, the original auditors were given an
unsolicited ex gratia payment of £2,567, expressed to be as solatium for the
loss of the office of auditors. That was held not to be taxable. The payment
was not attributable to any work which the auditors had done in the past nor
was it a form of compensation for any work to which they were entitled in the
future.
Then in Simpson
v John Reynolds & Co (Insurances) Ltd (1975) 49 TC 693 an insurance
company employed an insurance broker for many years. As in Walker’s
case, the broker was paid a proper fee and was not unfairly remunerated. For
internal reasons, the services of the broker became redundant. When that
happened the insurance company made an unsolicited gift of £5,000 expressed to
be as solatium for loss of office as the company’s broker in recognition of
past service to the company. Although there are various peripheral differences,
the facts are very similar to those in Walker’s case. The gift was not
attributable to any work which the taxpayer had carried out in the past.
Finally, in Murray
v Goodhews (1976) STC 128, a brewery company terminated certain
tenancies as it was entitled to do and then made the tenant ex gratia payments.
That case is complicated by the fact that the relationship between the brewery
company and the tenant was not in fact ended. The tenant was left with some
tenancies and was undoubtedly going to continue business with the brewery
company. It seems to me that different considerations may apply when the
relationship between the person making the voluntary gift and the recipient of
the gift is not being terminated, but however that may be Walton J in that case
found that it made no difference. He found that the gifts were not taxable
because they were voluntary in nature, wholly unexpected and unsolicited and
that the motives of the brewery company in making them were to acknowledge its
long and friendly relations with the taxpayer company and to maintain its
goodwill and image in the brewing industry. That is another example of a case
where a gift, not taxable, was not attributable to any work which had been done
in the past.
Mr Vinelott
for the Revenue informed me that it was possible that the Revenue might seek in
some higher court to question the soundness of the principles animating the
three modern cases–Walker’s case, Simpson’s case and Murray
v Goodhews. However, as far as I am concerned, Walker’s case was
approved by Simpson’s case, both are binding on me, and Murray v Goodhews,
so far as it follows the path indicated by the first two cases, is likewise
binding.
As a result of
all the authorities it seems to me that the broad line of distinction so far as
taxability on this kind of voluntary gift is concerned is a distinction which
takes its origin in the question of whether the payment is attributable to
specific work carried out by the recipient. If work is carried out then the
payment, although voluntary, is made because payment has been earned. If the
payment does not relate to specific past work, then the payment is made, not
because payment has been earned by work, but because the payment is intended
for a deserving recipient. If the payment relates to work, then although the
recipient may not be legally entitled, if he has a moral claim the payment is a
receipt by him and a profit of his trade. When the payment is earned by work
which has not been paid for or has not been adequately paid for, then the
payment has the quality of an income receipt liable to tax. On the other hand,
if payment is not earned but is deserved, it is not income. If the recipient
has been paid in full for past work, but the person making the gift wishes to
acknowledge the past conduct of the recipient or to give some token of regret
at the termination of a business association and to acknowledge the fact that
this termination of business association will not be entirely welcome to the
recipient either for financial or other reasons, the payment is not earned but
is deserved. It is not taxable. In the old days a railwayman earned £5 a week
and he was thought to deserve a gold watch when he retired after 30 years’
service. Similarly, in these days an auditor earns his annual fees and charges,
but nevertheless may deserve a gift when he ceases to be appointed an auditor
after serving the company for a number of years.
In determining
whether a gift is earned, and therefore taxable, or deserved and therefore not
taxable, the test seems to me to be to inquire whether the gift can be referred
to the work of the recipient or whether it can be referred to the conduct of
the recipient. In supplying the answer to this question there are indications
to be observed which are summarised in the judgment of Russell LJ in Simpson
v John Reynolds & Co (Insurances) Ltd, to which I
have already referred, at p 712 D.
The first
indication to which the learned Lord Justice referred was whether the gift was
wholly unexpected and unsolicited. The answer to this question provides some
evidence as to whether the gift is earned or deserved, because if the gift is
unexpected and unsolicited it would normally follow that it does not relate to
any particular work of the recipient, and has been deserved but not earned. A
trader who feels that he has earned something, legally or morally, will hardly
find payment unexpected. Similarly, a trader who feels that he has worked and
earned something will not feel any difficulty in soliciting payment. So far as
that indication is concerned, the payment in the present case was not
unexpected and was solicited in the sense that when Central & District
refused to appoint the estate agents to be their selling agents the estate
agents protested both at the decision and at the size of the proposed payment;
namely, £1,250. They procured an increase to £2,500. No doubt one of the
reasons they sought an increase was that they felt it was unfair, having regard
to what they had done to get the site bought in the first place, even though the
person they were dealing with was not the client for whom they had acted
originally.
Secondly, a
matter of signficance is whether payment is made after the business connection
has ceased. Although Mr Vinelott said that perhaps the business connection
could be renewed, payment in the present case was made after the business
connection had been severed by Central & District or, rather, after they
had refused to start a business connection.
The third
indication is whether the gift was in recognition of past services rendered to
the client company over a long period, although not because those past services
were considered to have been inadequately remunerated. That is an indication
which looks at the conduct of the recipient and not at the work of the
recipient. In the present case the gift was not made in recognition of the
conduct of the estate agents at all. Payment was, although indirectly, due to
the fact that the estate agents had been inadequately remunerated for their
past work.
The fourth
indication is whether the gift was made as a consolation for the fact that
those remunerative services were no longer to be performed by the taxpayer for
the donor. That cannot apply in the present case.
Fifthly, it is
relevant that at a future date a business connection might be renewed. That has
no application in the present case. Stamp LJ at page 713 made much the same
comments on the indications as to whether a gift is a profit of trade and
therefore taxable or not.
In the present
case it seems to me that the gift was plainly earned and not merely deserved.
It was earned because the gift was compensation for the loss of an opportunity
to earn selling profits and the estate agents were morally entitled to that
opportunity because their past services as purchasing agents had been
inadequately remunerated. The gift was not unexpected and was not unsolicited.
The gift was in fact–although via Central & District–ultimately referable
to the work which the estate agents had carried out in the acquisition of the
site. It was not referable to their conduct towards the original purchasers or
towards Central & District.
I think the
matter could be tested in this way, that if Central & District had said to
the estate agents "Why do you think you are entitled to anything from
us?" the answer would have been
"We are not legally entitled, but morally
was inadequately remunerated. We were led to expect something more from it. You
are the successor, you have taken over the site and thus to some extent inherit
the benefit of our work and therefore not legally but morally we look to you to
pay us something." They looked
because of the work they had carried out and they did not look in vain. Mr
Oliver for the estate agents, without actually conceding the point, agreed that
if Lawdons had retained the site and then for good or bad reasons decided not
to employ the estate agents as selling agents but made a payment of £2,500 by
way of gift, then it would be very difficult to say that the gift was not
referable to the work and therefore was not taxable. He says it makes all the
difference that the payment was actually made not by the original client
Lawdons but by Central & District, who simply bought the site from Lawdons
at the price it was then worth and without getting the benefit of the fact that
the estate agents had not been properly remunerated by Lawdons.
In my
judgment, the important question is not who pays the gift but whether the
estate agents had earned the gift by virtue of work which had been carried out
or whether they had deserved the gift. Earning in this sense cannot mean a
legal obligation, because it is the nature of a gift that there is no legal
obligation. If they earned a gift, then the gift is taxable, no matter who pays
it. On the other hand, if they deserved a gift then the gift is not taxable no
matter who paid it. Once one comes to the conclusion that in the present case
the estate agents earned the gift, they were entitled to look to somebody for
some remuneration for their work which had been inadequately paid for in the
first instance, then it follows that the £2,500 is taxable whether it was paid
by Lawdons or by Central & District. I conclude, therefore, that the £2,500
was a taxable payment.
On behalf of
the taxpayer it was then sought to put forward the argument that the assessment
which has been made in the present case cannot be upheld because it relates to
the wrong year. It relates to the year 1966 and 1967. There are various
possible dates for the year in which this profit might have been assessed. The
first date is 1961—-or round about 1961–when the estate agents actually did the
work which eventually resulted in their obtaining this payment of £2,500. That
is probably not right because they do not earn the right to act as selling
agents, but only the expectation. The next date which has been chosen is
1966/67 when the agents were promised £2,500 by Central & District.
Although the payment was not to be made until the property was leased and
although there was no binding legal obligation and something might have
happened, in fact £2,500 was paid as a result of the promise. Then it appears
from the case stated that some time after 1966 there was an amalgamation
between the then partners in the estate agents’ firm and some other partners
and that might have led to a cessation of the original trade, and after that
one of the partners died and there may have been another cessation of trade.
When a trade ceases, if there is still outstanding some asset which has not
been collected and which may not be collected, then in that year the accounts
must be adjusted in order to make sure that the asset is brought into the tax
net because it is impossible to assess anybody for any year after the trade has
ceased. If all these various dates had been canvassed it seems to me that there
could have been a lot more evidence about the exact circumstances of the
payment and about the exact result of any cessation of trade or date of
cessation of trade. In fact, what happened was that the Revenue served an
assessment for 1966/1967. Before the Commissioners, the taxpayers, apart from
submitting that the £2,500 was not taxable, put forward the submission that, if
taxable, the sum formed part of the profits for 1970/71, which was the date
when the money was paid. In the course of argument, the case states, the taxpayers
withdrew their contention that the sum formed part of the profits for 1970/71,
if it was taxable at all. Since the hearing, the ability of the Revenue to put
in an assessment for 1970/71 in respect of this sum has become time-barred.
It seems to me
in those circumstances that the taxpayer is not entitled in this court to take
any point about the date of the assessment. If he had not withdrawn the
contention about 1970/71 the Revenue would have been able to put on a
protective assessment for that year. If there had been any conflict as between
those two dates–if there was any argument that it ought to be some other
date–then evidence could have been called. No doubt what happened was that as
between 1966/67 and the two proposed dates of cessation it did not matter very
much which date was chosen or which date was the right date. Probably the tax
would have been much the same. However that may be, it seems to me that if a
point is taken on the date of the assessment and that point might require either
further evidence or might prompt the Commissioners to put in fresh assessments,
and before the Commissioners the battle is joined on two dates only, and then
in effect there is what appears to be almost an agreement accepting the date
put forward by the Revenue, it is not right that when the matter goes to this
court the taxpayer should be able to argue in favour of other dates which have
not been canvassed before the Commissioners. If that were not so, it seems to
me that notwithstanding anything that the taxpayer says en route or
notwithstanding what happens before the Commissioners the Revenue must play
safe and shower the unfortunate taxpayer with a number of alternative
assessments. In this case there would have been not less than five to make
quite sure that if the amount is taxable it does not escape taxation, because
of the absence of a piece of paper fastening it to one year instead of another
year. In the present case I do not think it would be right to allow the
taxpayer to take a point about the date of the assessment. I did hear argument
as to what was the right date, in theory. I heard that de bene esse, and
it seems to me that there is a good deal to be said for the accuracy of the
assessment for 1966/67 and so there is no great harm done anyway.
As far as the
assessable year is concerned, it does not seem to me that the taxpayer is
entitled to resist payment on those grounds and so far as the substance is
concerned, it seems to me that this case is distinguishable in particular from
the Walker v Carnaby case because in the present case, unlike Walker
v Carnaby, the payment was referable to work which the estate agents had
carried out for which they had been inadequately remunerated. That in turn,
then, led to a moral claim to be appointed selling agents and that in turn led
to £2,500 being paid. The Commissioners were persuaded that the facts in the
present case were indistinguishable from those in Walker v Carnaby. For
the reasons I have already given, in what is I think a difficult field, I have
come to the conclusion that the case is and ought to be distinguished from Walker
v Carnaby and the result is that the appeal is allowed and the
assessment shall be restored.
Appeal allowed and case remitted to the
Commissioners to determine the amount of the assessment for 1966/67 in default
of agreement. Respondents to pay the appellant’s costs, the costs to be taxed,
if not agreed, by the taxing master on the common fund basis.
