1992 P T D 136

[Court of Appeal]

Before Slade, Balcombe and Stocker L., JJ

MacKINLAY (INSPECTOR OF TAXES)

versus

ARTHUR YOUNG McCLELLAND MOORES & CO.

Appeal decided on 29/01/1988.

Income-tax-

Expenses of trade or profession (Schedule D)--Partnership---Computation of profits--Removal expenses incurred by partners moving to work at another partnership office---Reimbursement by partnership---Whether expenditure incurred wholly and exclusively for purposes of partnership's business---Whether deductible in computing taxable profits---Income and Corporation Taxes Act, 1970 (C.10), S.130(a)(English).

The tax-payers were the partners of a large firm of chartered accountants that operated from offices throughout England, Wales and Scotland. The partners agreed to a policy whereby certain speed domestic removal expenses incurred by partners or by employees who were required to move to work in an office in a different part of the country would be reimbursed to them. During the fiscal year 1981-82 two partners were so required to move and their removal expenses that totalled 8,568 were paid by the partnership. A Tax Inspector refused to allow a claim that the expenditure was deductible in ascertaining the profits of the partnership as being money laid out wholly and exclusively for the purposes of the business. The partnership's appeal to the special Commissioners against that refusal was upheld. The Commissioners rejected the Crown's case that such expenditure if incurred by a sole practitioner in moving his home for business purposes would not be deductible since it would be for a dual purpose - partly professional and partly domestic and that there was no difference in principle between a sole practitioner and a partner. On appeal by the Crown, Vinelott, J. upheld that submission and reversed the Commissioners' determination.

On appeal by the partnership:--

Held, allowing the appeal, that for the purposes of ascertaining its liability to income-tax on its profits a partnership was to be treated as an entity separate from its individual partners; that expenditure incurred by a partnership might be deductible in ascertaining its profits even though the recipient was one of the partners providing that such expenditure was not made to him in return for services rendered by him as a partner; that the collective purpose of the partnership in reimbursing the removal expenditure of the partners was wholly and exclusively to promote the professional business carried on by the partnership and accordingly it was not precluded from deduction for tax purposes by the provisions of section 130(a) of the Income and Corporation Taxes Act, 1970.

Heastie v. Veitch & Co. (1934) 1 KB 535, CA. and Watson and Everitt v. Blunden (1933) 18 TC 402 CA. considered.

Mallalieu v. Drummond (1983) 2 AC 861, H.L. (E.) distinguished.

Whether circumstances could exist in which removal expenses incurred by an individual trader constituted a deductible expense.

Decision of Vinelott, J. (1986) 1 W.L.R. 1468 reversed.

Callebotte v. Quinn (1975) 1 W.L.R. 731, (1975) 2 All. E.R. 412; 50 TC 222; Heastie v. Veitch & Co. (1934) 1 KB 535; 18 TC 305 CA; Hillyer v. Leeke (1976) STC 490; 51 TC 90; Mallalieu v. Drummond (1983) 2 AC 861; (1983) 3 W.L.R. 409; (1983) 2 All. E.R. 1095 H.L. (E.); Mason v. Tyson (1980) 53 TC 333; Newsom v. Robertson (1953) Ch. 7; (1952) 2 All. E.R. 728, CA.; Rex v. Inland Revenue Commissioners, Ex parte Gibbs (1940) 2 KB 615, CA.; sub-nom. Income-tax General Purposes Commissioners for City of London v. Gibbs (1942) AC 402; 24 TC 221, H.L. (E.); Watkis v. Ashford Sparkes and Harward (1985) 1 W.L.R. 994; (1985) 2 All. E.R. 916'and Watson and Everitt v. Blunden (1933) 18 TC 402, CA. ref.

Bentleys, Stokes and Lowless v. Beeson (1952) 2 All. E.R. 82; 33 TC 491, CA.; Bowden v. Russell and Russell (1965) 1 W.L.R. 711; (1965) 2 All. E.R. 258; 42 TC 301; Harrison v. Willis Bros. (1966) Ch. 619; (1966) 2 W.L.R. 183; (1965) 3 All. E.R. 753; 43 TC 61, CA.; Padmore v. Inland Revenue Commissioners (1987) STC 36 and T.C. Leaflet No. 3072 cited.

Appeal from Vinelott, J.

In December ,1984 the special commissionersallowing an anneal by the firm, Arthur Young McClelland Moores & CO., against the assessment to income tax under Schedulefor the year 1981-82 in the sum of 6,000,000, held that certain expenses reimbursing removal expenses incurred by two partners were wholly and exclusively laid out or expended for the purposes of the profession carried on by the partners and were deductible in arriving at the taxable profits of the firm. The Crown's appeal by way of case stated from that decision was allowed by Vinelott, J. and an order dated 30th October, 1986 made remitting the matter to the commissioners for the assessment to be adjusted in accordance with the judgment.

The firm appealed by a notice dated 26th November, 1986 on the grounds that (1) the judge ought not to have interfered with the decision of the special commissioners which contained no error of law and at the lowest was one to which they were entitled to come; (2) that he erred in law in regarding the receipt by the two partners of contributions by the firm towards their removal costs as benefits or advantages conferred on them as partners; (3) that it was wholly and exclusively for the purposes of the firm's profession that the firm requested those partners to move and accordingly the contributions by the firm to the cost of moving incurred by the two partners were expenses incurred by the firm wholly and exclusively for the purposes of its profession; (4) that there was no material distinction between a contribution by the firm to an employee's costs of moving at the request of the firm and a contribution by it to a partner's costs of moving at its request, and (5) that even though a partnership was not in law a person distinct from its members, nevertheless for the purpose of computing the profits of the firm liable to income-tax under Case II of Schedule (even if not for other purposes of the Taxes Acts), the firm was regarded as an entity distinct from its members.

Andrew Park Q.C. for the Firm. Alan Moses for the Crown.

Dates of hearing:10th and 11th December, 1987.

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 purpose 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 staffwere 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 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 arc, 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 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, to 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 relation 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 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 Kindom or else where " 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 totalling 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."

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 1M(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 Lards (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 sin 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 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 Bright-man, 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 Bright-man 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 Iran. 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, 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 expenditure 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 coloured 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. However, it seems that the contrary ,was only somewhat faintly argued: see for example (1986) 1 W.L.R. 1468, 1472. The judge by inference clearly concluded or assumed that such expenses would not be deductible, without explicitly stating reasons for this conclusion or assumption. In this Court Mr. Park, while again making no formal concessions to this effect, appeared again not, disposed to argue more, than somewhat faintly to the contrary.

Mr. Moses invited us to hold that the expenses incurred by an individual in moving house can never be said to have been incurred "wholly and exclusively" for business purposes. In his submission the very nature of the expenditure, as serving in part to meet a human need of the spender, would oblige the commissioners as a matter of law to hold that it was incurred at least in part for private purposes. I do not think it necessary' or desirable for us to state any such unqualified principle about hypothetical cases which are not before us. I am not, for my part, prepared to say that no cases could ever arise where such expense incurred by an individual could be deductible. Lord Bright-man in Mallalieu v. Drummond (1983) 2 A.C 861; Templeman, J. in Caillebotte v. Quinn (1975) I W.L.R. 731, 733 and Goulding, J. in Hillyer v. Leeke (1976) 51 T.C. 90 all recognised that there might be exceptional cases where expenditure on clothing could properly be said to have been incurred wholly and exclusively for the purpose of a business, even though the clothing in question while worn would confer on the wearer the incidental human benefits of warmth and decency. In a decision subsequent to Mallalieu v. Drummond, Nourse, J. in Watkis v. Ashford Sparkes and Harward (1985) I.W.L.R. 994 on rather special facts held, inter cilia, that the special commissioners were entitled to conclude that the cost of overnight accommodation for the partners in a solicitors' firm at its annual conference was wholly and exclusively incurred for business purposes and that no distinction was to be made between the cost of accommodation and meals. Conceivably in some cases the question whether expenses incurred by an individual in moving house might involve, in Lord Brightman's words, a "matter of fact and degree:" see (1983) 2 A. C.861, 875. Furthermore, distinctions might perhaps fall to be drawn between the cost of providing a house and the cost of moving to it.

Nevertheless, I accept that, in the light of Mallalieu v. Drummond if not in all cases, at least in most, the commissioners would be bound as a matter of law to hold that, whatever the tax-payer's conscious motive, the purpose of expenditure incurred by an individual in moving his belongings from a previous home to a new home must in part have been to serve a private purpose--that is to say the purpose of meeting his human need to have a properly equipped home in which to live. The translation of an actual case to a hypothetical case is not a wholly satisfactory process. In the circumstances, however, I am willing to proceed on the same assumption in favour of the Crown as did the commissioners and the judge, namely that the expenses in question in the present case would not have been deductible if incurred by an individual. The Judge, proceeding on the assumption, went on to say (1986) I W.L.R. 1468, 1474:

"The question is whether expenditure which would not have been deductible if incurred by an individual trader is deductible if incurred by partners in pursuance of a policy adopted by all the partners as one calculated to advance the interests of their firm."

In the course of dealing with this question, the judge, at pp. 1474-1475, gave a helpful description of the three stages which are in effect involved in assessing partnership profits to tax. The accuracy of this description has not been challenged in argument before us and I gratefully adopt it:

"First, the profits of the firm for an appropriate basis period must be ascertained: What has to be ascertained is the profits of the firm and not of the individual partners. That is not, I think, stated anywhere in the Income Tax Acts, but it follows necessarily from the fact that there is only one business and not a number of different businesses carried on by each of the partners. The income of the firm for the year is then treated as divided between the partners who were partners during the year to which the claim relates--the year of assessment--in one of the many senses of that word: see the proviso to section 26 of the Taxes Act 1970. That is the second stage. The tax payable is then calculated according to the circumstances of each partner--that is, after taking into account on the one hand any personal allowances, reliefs or deductions to which he is entitled and any higher rate of tax for which he is liable. The Acts do not provide for the way in which personal allowances, reliefs and deductions are to be apportioned between the partnership income and other income. I understand that in practice they are deducted from the share of the partnership income if that was the partner's main source of income. When the tax exigible in respect of each share of the partnership income has been ascertained the total tax payable is calculated. Section 152 (formerly rule 10 of the rules applicable to Cases I and II of Schedule D) provides that the total sum so calculated is to be treated as `one sum ... separate and distinct from any other tax chargeable on those persons ....and a joint assessment shall be made in the partnership name'. That is the third stage."

The authorities show clearly that, at least for the purpose of conducting the first of these stages, (1) a partnership is to be treated as an entity separate from the partners constituting the firm; (2) it is accordingly possible for a partnership to incur an expense which is deductible in ascertaining the firm's profits; even though the recipient is one of its own members. Thus, in Heastie v. Veitch & Co. (1934) 18 T.C 305 the question arose whether rent which a partnership paid to its senior partner for the occupation of its business premises was deductible in computing the firm's liability to tax under Schedule D. Finaly J. held that though the rent would be deductible if paid to an outsider, "that cannot apply where you are dealing with a partnership and where two partners, so to speak, pay and one receives." His decision was reversed by the Court of Appeal (1934) 1 KB 535. Romer LJ. accepted that, in ascertaining the profits of a partnership for tax purposes, it is not permissible to deduct payments made to a partner for "services rendered as a partner". However, he said, at pp. 546-547:

"But it is not true that in ascertaining the profits of a partnership no sum paid to one of the partners can ever be deducted. Suppose that two people are carrying on business in partnership as hotel proprietors, and it in necessary for the purpose of carrying on that business, that they should be supplied from time to time with wine, and suppose that one of the partners is carrying on a wholly independent business on his own account in the wine business and supplies wine to the partnership, it would, as it seems to me, be idle to suggest that for the purpose of ascertaining the profits of the hotel you could not deduct the sums paid to the partner who was the wine merchant. The fact that such a deduction would be permissible, is, I think, made clear by rule 10 of the rules applicable to Cases I and II which says in effect that for the purposes of taxation under Schedule D a partnership is treated as a separate entity from the individual partners composing the firm."

The application of the same principle rendered impermissible a

deduction in Watson and Everitt v. Blunden (1933) 18 T.C.402. In that case the tax-payer, who was a practising solicitor, had in partnership with others bought certain property with a view to working and developing it. He was entitled to four-ninths of the profits of the partnership and acted as its solicitor. He claimed that, in computing his profits as a solicitor, four-ninths of the profit costs should be deducted, essentially on the ground that he was to this extent paying himself Finlay J., and the Court of Appeal, rejected this contention. Romer L. J. said, at p. 410:

"It really is, if I may say so, too ridiculous to suggest that, for the purposes of assessing the profits of those two firms under Schedule D, you are going to be troubled with the partnership accounts and the rights as between the partners. For the purposes of Schedule D, the two firms are to be treated as separate entities and, so treating them, there is no difficulty at all. Treating here, therefore, the partnership carrying on this co-adventure as one entity, and the solicitor, of course, as he is, as a perfectly distinct entity, there is no trouble."

In my opinion, as Mr. Park submitted, the two last-mentioned authorities establish or illustrate two propositions. A payment made to a partner for services rendered by him to his firm in his capacity as a partner cannot be treated as an expense in ascertaining the profits of the firm for tax purposes. Conversely, however, a payment made to a partner otherwise than for services rendered to the firm in his capacity as a partner, falls to be treated as an expense; whether it passes the "wholly and exclusively" test in another matter. The judge made this comment in regard to Heastie's case (1934) I K B. 535 and Watson and Everitt's case, 18 T. C. 402, (1986) 1 W. L. R. 1468, 1476.

"Neither case lends any support to the proposition that in ascertaining the profits of the firm a benefit or advantage conferred on a partner as a partner can be treated as ancillary to the purposes attributed to the firm considered as a separate entity."

With this general statement of principle I respectfully agree. However, I do not think the relevant payments made to either of Mr. Wilson and Mr. Cooper can be regarded as payments made to him for services rendered to the partnership in his capacity as a partner. Accordingly, I think they clearly fall to be deducted in ascertaining the profits of the partnership at the first of Vinelott J.'s three stages. The question is whether section 130 precludes them from being deductible at the third stage.

The effect of section 130(a) must be to exclude as a deduction the money spent by the firm unless it can establish that such money was spent exclusively for the purposes of its profession as a firm of chartered accountants. As Lord Brightman said in Mallalieu v. Drummond (1983) 2 A.C. 861, 870:

"The words in the paragraph `expended for the purposes of the trade, profession or vocation' mean in my opinion `expended to serve the purposes of the trade, profession or vocation'... To ascertain whether the money was expended to serve the purposes of the tax-payer's business it is necessary to discover the tax-payer's `object' in making the expenditure,"

Thus, unless the tax-payer and the person benefiting from the expenditure be the same person, it is the object of the taxpayer in making the expenditure, rather than that of the beneficiary in receiving it, which has to be ascertained. Ultimately, the issue in the present case must be whether the commissioners' findings of primary fact entitled them to draw the inference that the firm's object in making the relevant expenditure was wholly and exclusively to serve the purposes of its business. The judge came to the conclusion, at p.1477:

"The authorities do not support the proposition that expenditure which in the case of an individual trader would fall to be treated as serving a dual purpose can in the case of a large partnership be treated as expenditure incurred wholly and exclusively for the benefit of the firm as a separate entity, the personal benefit or advantage of an individual partner being treated as a mere incidental effect of the expenditure."

This, as I read his judgment, was the basis on which he concluded that the commissioners' decision was insupportable in lava.

I respectfully differ from this view. While the authorities do not lend explicit support to the proposition mentioned by him, I think that none of the cases cited to us rebuts it. There appear to have been surprisingly few cases in which the Courts have ever been invited to consider the application of the "wholly and exclusively" test in the context of partnership expenditure. No case has been cited to us in which any Court higher than that of first instance has considered it since Mallallieu v. Drummond.

In my judgment, the analogy between the case of expenses incurred by a sole trader of which he is the beneficiary and the case of expenses incurred by a partnership, of which one partner is the beneficiary, is a misleading one. Section 130(a), as I have said, directs attention to the object of the spender, not the recipient. In the first of those two cases it is impossible to differentiate between the objects of the tax-payer qua spender and qua beneficiary; if in part the expenditure served his needs as a human being, then, in the light of Mallalieu v. Drummond, it may be difficult to deny that at least part of the purposes of the spender was to serve that need. In the second case, the position appears to me quite different.

In the second case, where the payer and the beneficiary are not the same, it is clearly possible, in a sense in which it was not possible in Mallalieu's case, to evaluate the objects of the payer in incurring the expenditure separately and distinctly from those of the beneficiary. Where the payer is a partnership, whether or not the recipient is one of the partners, I think that, save in a case where the nature of the expenditure speaks for itself, a proper application of section 130(a) requires the revenue to ascertain the purpose of the expenditure at least primarily by what was referred to in argument as "the collective purpose" of the partnership in incurring it.

True it is that under the general law a partnership has no legal personality of its own distinct from that of the individual partners who compose it: Rex v. Inland Revenue Commissioners, Ex parte Gibbs (1942) A. C. 402, 413, per Viscount Simon L. C. Nevertheless, in my judgment, the authorities show that, for the purpose of computing the profits of a firm liable to income -tax under Case 11 of Schedule D, even if not for other purposes of the Income Tax Acts, a partnership is regarded as an entity distinct from its members: see for example Heastie v. Veitch & Co. (1934) 1 KB 535, Watson anti Everitt v. Blunden, 18 T.C. 402 and Padmore v. Commissioners of Inland Revenue (1987) S.T.C. 36, 45, per Peter Gibson T. While the intentions and motives of individual partners may well be relevant in this context, in my judgment section 130 must correspondingly contemplate that ultimately it is the collective purpose of this notionally distinct entity which has to be ascertained.

I would reject the contention put forward to the commissioners on behalf of the Crown that, in carrying out this exercise, the firm should be regarded as 95 entities. An inquiry into the separate minds of 95 partners is not merely impractical but as inappropriate as it would be to look into the separate minds of 95 directors of a company when ascertaining the purpose of corporate expenditure--a fortiori when the right to make administrative decision has been delegated to a smaller executive body, as in the present case. In the present case there would appear to be no doubt that the collective purpose of the firm in paying the removal expenses of employees totalling 15,560, referred to in the commissioners' decision, was wholly and exclusively to promote the professional business carried on by the firm. And the Crown has so accepted. Likewise, in my judgment, if one looks at the matter in the absence of authority, the inescapable inference from the commissioners' findings of primary fact is that the collective purpose of the firm, in bearing a proportion of the removal costs of Mr. Wilson and Mr. Cooper, was wholly and exclusively to advance its professional interest. This was the inference which the Commissioner drew was there any authority or principle of law to prevent them from so finding in accordance with their view of the facts?

In any case where a partnership has made a payment to one of its partners from which he has derived an element of personal benefit and the firm subsequently seeks to claim that the money has been expended wholly and exclusively for the purposes of the partnership's trade or profession, it must be right that the revenue should view the claim with spine circumspection and scrutinise it with corresponding care. Particularly if the partnership is a small one and the benefit is of a type which serves needs of the recipient as a human being--for example, for food, clothing or habitation--it may be difficult to resist the inference that at least part of collective purpose of the expenditure was to meet that need, in other the words that the expenditure was incurred with a dual purpose. As Lord sight man put it in Mallalieu v. Drummond (1983) 2 A. C. 861, 875:

"Of course the motive of which the tax-payer is conscious is of vital significance, but it is not inevitably the only object which the commissioners are entitled to find to exist."

For my part, however, I do not accept the proposition that in such circumstances expenditure can, as a matter of law, never be said to have been incurred wholly and exclusively for the purposes of the trade or profession of the partnership. The decision of this Court in Heastie v. Veitch & Co. (1934)1 K. B_ 535 well illustrates that the mere fact that the recipient partner receives an incidental benefit from the payment in question does not by itself, and as a matter of law, prevent the payment from being deductible by virtue of section 130, if the collective purpose of the partnership in making the payment was wholly and exclusively to advance the partnership's trade or professional interests. As it happened in that case the receipt of rent did not serve the interests of the recipient as a human being. It was not therefore a Mallalieu type of case. However, where partnership expenditure is in question, I can see no difference in principle between those payments made by a partnership to a partner, otherwise than for services to the partnership, which serve in part to meet his human needs and those which do not. I repeat that, in my judgment, it is the collective purpose of the partnership as a whole which has to be ascertained. I see no reason why in principle a payment by a partnership to a partner, which happens to meet in part the human needs of the recipient, should necessarily fall foul of section 130, while other payments which confer on him incidental benefits of a different nature are not necessarily similarly disqualified from deduction in computing the partnership's profits. Everything must turn on a fair and proper assessment of the partnership's collective purpose in making the payment. If it serves in part to meet a human need of the recipient, that will merely be one factor, albeit an important one, for the revenue to take into account in carefully scrutinising the partnership's collective purpose or purposes. The situation is, in my view, quite different from that where an individual trader makes a payment which serves to meet such a need of his own. In such a case it is the very same entity who makes and receives the payment: as the decision in Mallalieu v. Drummond demonstrates, it is impossible to disregard the human benefit which he has received as recipient in ascribing to him, as payer, purposes in making the payment.

The commissioners' very careful decision can perhaps be fairly criticised on a ground forcefully submitted by Mr. Moses, namely that, though they referred in passing to the decision of the House of Lords in Mallalieu v. Drummond they did not sufficiently analyse the possible impact of that decision on the problem before them. Perhaps because it was not specifically put to them, they did not specifically deal with the point forcefully advanced by Mr. Moses in the forefront of his argument before us--namely that, in the light of Mallalieu v. Drummond the very nature of the relevant expenditure in the present case precluded the commissioners as a matter of law from finding, as they did, that the relevant expense had been incurred by the firm wholly and exclusively for the purposes of its profession. For the reasons which I have already stated, however, I do not think that this submission was well-founded. As the judge correctly stated, at p.1474:

"If a personal benefit or advantage conferred by expenditure for which a deduction is claimed can fairly be considered either as a purpose of the expenditure or as an incidental effect of expenditure incurred solely for a business or professional purpose it is for the commissioners to determine what was the purpose of the expenditure,"

In my judgment, as Mr. Park submitted, this proposition covers this case and the judge, with all respect to him, erred in interfering with the commissioners' decision. Having regard to their findings of primary fact, on the rather special facts of the case, they were in my opinion well entitled, after a close scrutiny of the facts, to draw the inference that the relevant expense had been incurred wholly and exclusively for the purposes of the firm's profession and to regard the benefits received by Mr. Wilson and Mr. Cooper as merely incidental to the achievement of those purposes. The so-called benefits, it might be added, consisted of no more than a partial indemnity against some of the costs of moves of house which they did not wish to make.

I would allow this appeal. I would set aside the order of Vinelott J. and affirm the determination of the special commissioners.

BALCOMBE L., J.---I have had the advantage of reading in draft the judgment of Slade L., J. and for the reasons which he there gives, I, too, would allow this appeal. However, for my part, I would wish to keep open for argument, in a case in which it arises directly, the question whether there could be circumstances in which removal expenses of the kind in issue in the present case would be deductible if incurred by an individual. Not withstanding the concession made by the firm before the special commissioners -- a concession about which, I note, the commissioners expressed some hesitation -- it seems to me that there may be circumstances in which it may be possible to establish that the costs of moving house may be deductible when it can be proved that the move took place only to serve the purposes of a trade, profession or vocation. While I accept that the provision of clothing, food and drink and habitation must always, in part at least, be simply to serve a human need, it seems to me that it may be possible, in appropriate circumstances, to distinguish the cost of moving house from the cost of providing a house.

STOCKER L., J: --I also agree that this appeal should be allowed for the reasons given in the judgments of Slade and Balcombe L. JJ. which I have had the benefit of reading. For my part, I share the reservations of Balcombe L. J. with regard to the position of an individual carrying on his trade or profession on his own. Having regard to the conclusions of my Lords, with which I agree, on the basis of the collective purpose of the premiership, it is unnecessary to express any concluded view with regard to the position of individual traders.

M.BA./940/T

Appeal allowed.