Macdonald v Dextra Accessories Ltd - [2005] UKHL 47

HOUSE OF LORDS

SESSION 2005–06
[2005] UKHL 47

on appeal from: [2004] EWCA Civ 22

OPINIONS

OF THE LORDS OF APPEAL
FOR JUDGMENT IN THE CAUSE

MacDonald (Her Majesty’s Inspector of Taxes (Respondent) v. Dextra Accessories Limited (Appellants)

Appellate Committee

Lord Nicholls of Birkenhead

Lord Hoffmann
Lord Hope of Craighead
Lord Scott of Foscote
Lord Walker of Gestingthorpe

Counsel

Appellants: Respondents:

Andrew Thornhill QC Timothy Brennan QC

Jonathan Peacock QC David Ewart

Rupert Baldry (instructed by HM Revenue and Customs)

(instructed by Levy Watters)
Hearing date: 22 June 2005

ON
THURSDAY 7 JULY 2005

HOUSE OF LORDS
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE

MacDonald (Her Majesty’s Inspector of Taxes (Respondent) v.
Dextra Accessories Limited (Appellants)
[2005] UKHL 47

LORD NICHOLLS OF BIRKENHEAD
1. I have had the advantage of reading in draft the speech of my

noble and learned friend Lord Hoffmann. For the reasons he gives, with
which I agree, I would dismiss this appeal.

LORD HOFFMANN
My Lords,
2. Until 1989 the emoluments of an office or employment were taxed under Schedule E as income of the year of assessment in which they were earned. It did not matter when they were paid: see Heasman v Jordan [1954] Ch 744. On the other hand, for the purpose of computing his profits taxable under Schedule D, an employer was entitled to deduct his liability to pay emoluments to employees in the year in which, in accordance with normal accounting principles, that liability accrued.
3. Section 37 of the Finance Act 1989, which inserted new sections 202A and 202B into the Taxes Act 1988, changed the basis of Schedule E assessment from the year in which emoluments were earned to the year in which they were paid. This gave rise to the possibility of a delay in payment causing a substantial timing disparity between the year in which the emoluments were deductible by the employer and the year in which they were taxable in the hands of the employee. Particularly in a case in which employer and employee were closely associated, for example, as a company and its directors, the tax liability of the company

could be reduced without creating an immediate personal liability on the
part of the directors.

4. Section 43 of the 1989 Act was intended to deal with this

situation. It is necessary to refer only to a few subsections:

“43.(1) Subsection (2) below applies where –
(a) a calculation is made of profits or gains which are

to be charged under Schedule D and are for a period of
account ending after 5 th April 1989,
(b) relevant emoluments would (apart from that
subsection) be deducted in making the calcul ation, and

(c) the emoluments are not paid before the end of the

period of nine months beginning with the end of that
period of account.

(2) The emoluments –
(a) shall not be deducted in making the calculation mentioned in subsection (1)(a) above, but
(b) shall be…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

Continue reading Macdonald v Dextra Accessories Ltd

Details

AGLC: Macdonald v Dextra Accessories Ltd [2005] UKHL 47
Case: [2005] UKHL 47
Decision Date: 7 July 2005

CaseChat Overview and Summary

In the case of Macdonald (Her Majesty's Inspector of Taxes (Respondent) v. Dextra Accessories Limited (Appellants), the House of Lords considered whether certain payments made by the taxpayer companies to an employee benefit trust were "potential emoluments" within the meaning of section 43(11) of the Finance Act 1989. This legal dispute arose from the interpretation of the statute which aimed to prevent a disparity between the timing of when emoluments could be deducted by the employer and when they were taxable in the hands of the employee. The appellants, a group of companies founded by Mr. John Caudwell, had established an employee benefit trust and made payments to it, which the respondent argued constituted potential emoluments. The Court of Appeal had previously held that these payments were indeed potential emoluments, allowing the respondent to disallow the deductions claimed by the appellants.

The central legal issue before the House of Lords was whether the payments made by the appellants to the employee benefit trust were "potential emoluments" as defined in section 43(11) of the Finance Act 1989. The appellants contended that the payments were not potential emoluments because the trust deed indicated that the payments were made for purposes other than paying emoluments. The respondent, on the other hand, argued that the payments were potential emoluments because they could be used to pay emoluments, and hence, the deductions claimed by the appellants should be disallowed.

The House of Lords, in dismissing the appeal, held that the payments were indeed potential emoluments within the meaning of section 43(11) of the Finance Act 1989. The court agreed with the Court of Appeal's interpretation of the statutory language and reasoning. The House of Lords found that the terms of the trust deed allowed for a realistic possibility that the funds would be used to pay emoluments, thus classifying them as potential emoluments. The court also observed that the anomaly of disallowing the deductions unless the funds were used to pay emoluments had been addressed by subsequent legislation. The House of Lords concluded that the payments in question were potential emoluments, and therefore, the deductions claimed by the appellants were not allowable.

Orders