1992 P T D 1312

[House of Lords]

[(1990) 2 A C 239]

Before Lord Bridge of Harwich, Lord Brandon of Oakbrook, Lord Templeman, Lord Oliver of Aylmerton and Lord Goff of Chieveley

MACKINLAY (INSPECTOR OF TAXES)

versus

ARTHUR YOUNG MCCLELLAND MOORES & CO.

Appeal from the Court of Appeal, decided on 23/11/1989.

Income-tax---

----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).---[(1989) Ch. 454; (1988) 2 W.L.R. 1117 and (1988) 2 All ER 1 reversed].

The taxpayers 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 specified 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 L8, 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, the Court of Appeal allowed the appeal.

On appeal by the Crown:---

Held, allowing the appeal, that the sole question for determination was whether the expenditure upon the partner's removal expenses could be said to be laid out not just partly but exclusively for the purposes of the partnership business, and that was not answered simply by ascertaining what was the motive with which the move of house was undertaken; that it was an inescapable conclusion that whilst doubtless the motive for the expenditure was the desire to place the partner concerned in a better position to further the interests of the partnership, it was nevertheless necessarily and inherently intended to serve the personal interests of the partner; and that, accordingly, the expenditure in question could not be regarded as having been incurred wholly and exclusively for the purposes of the partnership's business and was not deductible in ascertaining its taxable profits.

Mallalieu v. Drummond (1983) 2 AC 861, and Heastie v. Veitch & Co. (1934) 1 KB 535, CA. considered.

(1989) Ch. 454; (1988) 2 W.L.R. 1117 and (1988) 2 All ER 1 reversed.

Bamford v. A.TA. Advertising Ltd. (1972) 1 WLR 1261; (1972) 3 All ER 535; 48 TC 359; Heastie v. Veitch & Co. (1934) 1 KB 535, CA.; Mallalieu v. Drummond (1983) 2 AC 861; (1983) 3 WLR 409; (1983) 2 All ER 1095; 57 TC 330, H.L. (E.) and Mason v. Tyson (1980) 53 TC 333 ref.

Beauchamp v. F.W. Woolworth Plc (1990) AC 478; (1989) 3 WLR 1; Bentleys, Stokes & Lowless v. Beeson (1952) 2 All ER 82, CA. British Insulated and Helsby Cables Ltd. v. Atherton (1926) AC 205, H.L. (E); Caillebotte v. Quinn (1975) 1 WLR 731; (1975) 2 All ER 412; Edwards v. Bairstow (1956) AC 14; (1955) 3 WLR 410; (1955) 3 All ER 48, H.L. (E); Edwards v. Warmsley Henshall & Co. (1968) 1 All ER 1089; 44 TC 431; Horton v. Young (1972) Ch. 157; (1971) 3 WLR 348; (1971) 3 All ER 412; 47 TC 60, CA.; Income Tax Commissioners for the City of London v. Gibbs (1942) AC 402; (1942) 1 All ER 415; 28 TC 293, H.L.(E); Inland Revenue Commissioners v. Carron Co. 1968 SC (H.L.) 47; 45 TC. 18, H.L. (SC.); Inland Revenue Commissioners v. Korner (1969) 1 WLR 554; (1969) 1 All ER 679; 45 TC 287, H.L. (SC.); Morgan v. Tate & Lyle Ltd. (1955) AC 21; (1954) 3 WLR 85; (1954) 2 All ER 413, H.L. (E); Newsom v. Robertson (1953) Ch. 7; (1952) 2 All ER 7'28; 33 TC 452 CA.; Norman v. Golder (1944) 26 TC 293, CA.; Prince v. Mapp (1970) 1 WLR 260; (1970) 1 All ER 519; 46 TC 169; Robinson v. Scott Bader Co. Ltd. (1981) 1 WLR 1135; (1981) 2 All ER 1116; 54 TC 757, CA.; Sargent v. Barnes (1978) 1 WLR 823; (1978) 2 All ER 737; Usher's Wiltshire Breweries Ltd. v. Bruce (1915) AC 433, HL (E); Watkis v. Ashford Sparkes & Harward (1985) 1 WLR 994; (1985) 2All ER 916; 58 TC 468 and Watson & Everitt v. Blunden (1933) 18 TC 402, CA. cited.

Solicitors: Solicitor of Inland Revenue; McKenna & Co.

JUDGMENT

This was an appeal by the Crown from the judgment, dated 29th January 1988 of the Court of Appeal (Slade, Balcombe and Stocker L.JJ.) (1989) Ch. 454 allowing an appeal by the taxpayers, Arthur Young McClelland Moores & Co., a firm of chartered accountants, from the judgment, dated 31st July 1987 of Vinelott J. (1986) 1 WLR 1468 allowing an appeal by way of case stated by the Crown from the decision in December 1984 of the special commissioners who had allowed an appeal by the firm against an assessment to income tax under Schedule D for the year 1981-82 in an estimated sum holding that certain expenses reimbursing removal expenses of two parnters were wholly and exclusively laid out or expended for the purpose of the profession carried on by the partners and were deductible in arriving at the taxable profits of the firm.

The facts are stated in the opinion of Lord Oliver of Aylmerton.

Christopher McCall Q.C. and Alan Moses for the Crown. This appeal raises questions of considerable importance to the Crown in relation to partnership expenses. The particular issue which it raises is whether contributions by a partnership towards removal expenses incurred by two of the partners in moving home at the request of the partnership are deductible in ascertaining the assessable profits of the partnership. The respondent seeks to go wider and raise the whole question of deductibility of expenses in general and to invite your Lordships to reconsider the decision of this House in Mallalieu v. Drummond

It is the Crown's . submission that the Special Commissioners misdirected themselves fundamentally and that their findings of fact cannot be sustained. Further, the Court of Appeal fell into almost the same error in treating the partnership as a collective entity distinct from the individual partners and as treating the payments made as if made to strangers. A second question which arises is: whether in considering the object of the payment it is possible to ignore the individual wish of the partner concerned in effecting the expense which was reimbursed and subordinate it to the collective wish of the partnership.

There are three relevant basic principles of taxation. (1) The computation of profits requires the deduction of expenses to be taken into account: Usher's Wiltshire Breweries Ltd. v. Bruce [1915] A.C. 433. (2) Profits are to be computed in accordance with the normal principles of accountancy: Beauchamp v. F.W. Woolworth Plc. [1990] A.C. 478, 489, per Lord Templeman. (3) Just as' a capital profit is not a profit for the purposes of income tax so normally the principle is that expenses are deductible if they are not of a capital nature: British Insulated and Helsby Cables Ltd. v. Atherton [1926) A.C. 205. It is necessary to state the basic principles because the statute does not state what is deductible but only what is not deductible. The provisions of section 130 of the Income and Corporation Taxes Act, 1970 are restrictive provisions. The Crown's case is that section 130(a) excludes the present payments from being deducted in computing the profits of the partnership. For the provisions relating to partnerships: see section 26(c) of the Act of 1970. This indicates that in the last resort what is being taxed is not the partnership but the individual partners.

As td the facts, both the Special Commissioners and Court of appeal relied on motive. But the Act refers to "purposes" for which the money is laid out or expended. The question that has to be asked is: for what purpose did these two partners move their respective homes from A to B? The answer must be that it was not wholly and exclusively for a professional purpose, but'' partly for personal purposes. It is not enough that they were moving for the good of the partnership: in moving they were re-establishing their private lives t and that is a private purpose, so the expenses were not exclusively for the purposes of the trade.

The following principles are -to be extracted from the authorities: (i) Paragraph (a) of section 130 raises the question whether the expenditure was laid out for the purposes of serving the interests of the trade or business, whether it was incurred as a way of earning the profits of such trade or business: Mallalieu v. Drummond [1983] 2A.C. 861, 870A, per Lord Brightman. (ii) This is a question of fact and its determination by the General or Special Commissioners can only be overturned if they have misdirected themselves: Edwards v. Bairstow [1956] A.C. 14; and Bentleys, Stokes and Lowless v. Beeson [1952] 2 All E.R. 82. (iii) The question is primarily, but not exclusively, one of subjective intent: the Bentleys, Stokes case; Robinson v. Scott Bader Co. Ltd. [1981] 1 W.L.R. 1135 and; Mallalieu v. Drummond [1983] 2 A.C. 861. As a general matter, it is necessary to enquire whether there was a purpose present even though the individual was not conscious of it: Mallalieu v. Drummond. (iv)The question revolves around purpose and not motive. (v) It is an exclusive purpose that has to be found if deduction is to be permitted. It is not enough that there was a predominant purpose.

The following cases illustrate the approach which has been taken by the Courts as to whether or not claimed business or professional expenses are deductible: Newsom v. Robertson [1953] Ch. 7; Horton v. Young [1972] Ch. 157; Sargent v. Barnes [1978] 1 W.L.R. 823; Edwards v. Warmsley Henshall & Co. (1968) 44 T.C.431; Norman v. Golder (1944) 26 T.C. 293; Prince v. Mapp [1970] 1 W.L.R. 260; Caillebotte v. Quinn [1975] 1 W.L.R. 731; Watkis v. Ashford Sparkes & Harward [19851 1 W.L.R. 994 and Mason v. Tyson (1'980) 53 T.C. 333.

Attention is drawn in particular to Newsom v. Robertson [1953] Ch. 7, which dealt with travelling expenses, for the graphic and helpful distinction drawn by Lord Denning M.R. between living expenses and business expenses. The test is not whether the expenditure is a benefit to the taxpayer, but whether the expenses claimed were living expenses or business expenses. In the present case these expenses were plainly living expenses. Compare also Mason v. Tyson: if the expenses in that case were non-deductible the same must be true here.

Mallalieu v. Drummond, [1983] 2 A.C. 861 is very pertinent in considering the present case. If the decision of the Court of Appeal is upheld then it would follow that if Miss Mallalieu had been a partner in a firm of solicitors then she would be entitled to deduct the expense she had incurred in providing herself with her professional attire but not if she had been a member of the Bar. That is the extraordinary consequence of the decision below in the present case.

The Special Commissioners fundamentally erred in asking themselves the wrong question. They considered the motives for the move by the partners. But to consider motivation is not conclusive and is not helpful.

If a motive were the correct test then Mallalieu v. Drummond [1983] 2 A.C. 861 would have been decided in favour of the taxpayer.

There is a crucial difference in law between the tax position of partners and that of their employees, which was not considered by the Special Commissioners. It is implicit in their decision that these expenses were incurred for the purposes of the partnership's profession and that any benefits received by the individual partners were only incidental to the achievement of that end. But that approach does not address the question at issue here, namely, whether these expenses were incurred wholly and exclusively for the purposes of the profession.

The judgment of Vinelott J. (1986) 1 W.L.R. 1468 came to the right decision and he was entirely right in holding that the partnership cases such as Heastie v. Veitch & Co. (1934) 1 K.B. 535 give no support to the taxpayer's argument. .

'Partnership is an entity distinct from its members. Neither as a matter of general English law nor as a matter of United Kingdom tax lawkhas a partnership a legal personality of its own distinct from that of the individual members undertaking the business of the partnership: Income Tax Commissioners for the City of London v. Gibbs (1942) A.C. 402, 413, per Viscount Simon L.C.

The first stage in assessing the profits of a trading or professional partnership to tax is to calculate the profits of the trade or profession undertaken by the individual partners. It is misleading to describe that as ascertaining "the profits of the firm". The firm is merely a collective noun used to describe all the individuals who have entered into the partnership.

In computing the profits of the trade or profession, expenses income nature not excluded by section 130 of the Act of 1970 are deducted. Payments made to a partner acting in a capacity otheranalogous to payments made to third party recipients. Heastie v. Veitch & Co. (1934) 1 K.B. 535 and Watson and Everitt v. Blunden (1933) 18 T.C. 402, are examples of payments made in return for services' rendered by a partner in a capacity other than that of partner, in the first case in the capacity of a landlord and in the second in the capacity of a practising solicitor.

The Court of Appeal looked at the reimbursements and asked what was their purpose rather than at the purposes of the partners id incurring the expenses reimbursed. The payments made to Mr. Wilson and Mr. Cooper in the present case are not analogous to payments made to a partner acting at landlord or solicitor. They were made because they were partners. In so far w the payments may be regarded 'as being in return for services they were for services rendered by Mr. Wilson and Mr. Cooper as partners. They were made to them in their capacity as partners. Accordingly, the Court of Appeal erred in distinguishing between the partnership as payer and Mr. Wilson and Mr. Cooper as recipients. The payments were made by all the partners on behalf of each other and were paid by Mr. Wilson and Mr. Cooper just as much as by all the other partners. They cannot therefore be treated as expenses at all in ascertaining the profits of the accountancy profession for tax purposes-The decision of the Court of Appeal turns on the distinction between the partnership as payer and the partners as recipients. If, as the Crown submits, the payments were not made to Mr. Wilson and Mr. Cooper in return for services rendered otherwise than as partners no such distinction can be made; as a result it is necessary to look at the purposes of the expenditure reimbursed, and not simply the purposes of the reimbursements, and the payments were therefore not deductible expenses. If the Court of Appeal is right then partnerships will be able to obtain deduction for many types of expenditure which is for the personal benefit of the partners it will be enough that the partnership was acting for its collective trading purposes, since the Court of Appeal's reasoning the individual partners purposes will be irrelevant. That cannot be right.

In conclusion, if the decision of the Court of Appeal is correct its application cannot be confined to large partnerships. The attribution of a "collective purpose" to a partnership in present circumstances is fundamentally wrong.

Andrew Park Q.C. and David Goy for the firm. The case for the partnership may be summarised as follows: (1) For the partnership to succeed; (i) the payments must have been expenses; and (ii) they must have been laid out wholly and exclusively for the purposes of the profession.

(2) A payment made by a partnership to a partner is an expense (rather than allocation of profit) if it is paid to the recipient for something done by him acting otherwise than as a partner. (3) When Mr. Wilson and Mr. Cooper relocated their domestic establishments to Southampton and Bristol they were acting otherwise than as partners. (4) The payments were made to reimburse Mr. Wilson and Mr. Cooper for part of the costs incurred in relocating their domestic establishments to Southampton and Bristol. (5) Therefore the payments were expenses.

(6) Whether an expense is wholly and exclusively laid out for the purposes of a profession is primarily a question of fact for the commissioners. (7) In this case the commissioners have found as a fact that the expense was laid out wholly and exclusively for the purposes of the profession. On the primary facts it was clearly open to them so to find. (8) This is not a case such as Mallalieu v. Drummond (1983) 2 AC 861 in which the commissioners were obliged as a matter of law to find some concurrent non-professional purpose. (9) The purposes of the profession for which (or to serve which) the expenses were laid out were to secure that Mr.Wilson should set up the Southampton office and that Mr. Cooper should manage the Bristol office. Any effects of the expenditure on Mr.Wilson and Mr.Cooper in their private capacities were incidental effects, not purposes of the expenditure; at the lowest it was open to the commissioners to regard them as merely incidental effects.

(10) It follows that the commissioners' decision was not erroneous in point of law, and the Crown's appeal should be dismissed.

This is a case concerning an entirely genuine reduction of profits brought about by an entirely genuine outlay of money solely for business reasons. The profits which the partners shared were lower than otherwise they would have been because of the outlay in question. The analogy between payments made to an employee and payments made to a partner is helpful because in respect of the wholly and exclusively test there is no distinction between a partner's relocation expenses and an employee's relocation expenses.

Heastie v. Veitch & Co. (1934) 1 K.B. 535 is authority for the proposition that at least for tax purposes it is legally possible for a partnership to incur an expense where the recipient is one of its own members. As Romer L.J. observed, "it is not true that in ascertaining the profits of a partnership no sum paid to one of the partners can ever be deducted:"

To elaborate on the foregoing proposition (2); (i) some payments by a partnership to a partner are allocations of profts. Others are not; rather they are expenses of the partnership. If they are expenses of the partnership, whether they are laid out wholly and exclusively for the purposes of the profession depends on the particular facts of the case. (ii) payments by a partnership to a partner for acting as a partner are allocations of profits. (iii) payments by a partnership to a partner by way of a reimbursement of expenses incurred by the partner in the course of the partnership business (a) are expenses of the partnership business; (b) will in almost every case pass the wholly and exclusively test. Example: the partner who goes to Edinburgh on partnership business, makes his own hotel booking and pays the hotel bill himself. The partnership reimburses him for the expense which he has met.

(iv) Payments by a partnership to a partner by way of reimbursement of expenses incurred by the partner otherwise than in the course of the partnership business fall into two categories. (a) Category 1: If the partner qualifies to receive the reimbursement by acting as a partner in the course of the partnership business, the reimbursement is within (ii), (i.e. it is an allocation of profits. Examples: (i) A partnership adopts a policy of reimbursing to its partners their costs of travelling to work. (ii) A partnership rewards a partner who has attracted a great deal of business in the year by agreeing to reimburse him his golf club subscription. (b) Category 2: If the partner qualifies to receive the reimbursement otherwise than by acting as a partner in the course of the partnership business, the reimbursement is an expense of the partnership. (But as will be seen this does not automatically mean that it is tax deductible).

Examples: (a) The example suggested by Lord Brandon of Oakbrook. A partnership requires a partner to learn French because of the growing French connection of the partnership. Now when the partner is taking his French lessons he is not acting as a partner. Nevertheless the cost of those lessons is deductible. (b) The present case.

(v) Where a payment by way of reimbursement by a partnership is within category 2 and thus is an expense of the partnership, whether it is deductible for tax purposes depends on whether the expense is or is not laid out wholly and exclusively for (that is to serve) the purposes of the partnership's profession. In that connection; (a) the circumstance that the individual partners expense which the partnership reimburses was not incurred in the course of the partnership business must place a substantial burden on the partnership in establishing on the facts that its reimbursement was an expense laid out by it wholly and exclusively for the purposes of its profession, (b). However, there is no rule of law that the burden is insurmountable. (c) It must be remembered that the purpose for (or to, serve), which the individual partner incurred his expense need not in all cases be the same as the purpose for (or to serve), which the partnership has committed itself to reimburse the expense to him.

As to the wholly and exclusively test, the partnership has to satisfy the commissioners that its policy in making the payments was wholly and exclusively to serve the interests of the profession. Further, it is conceded that in considering that test the circumstance that the recipients are also members of the body making the payment is very relevant. To elaborate. Where the decision that a trading or professional "organisation" (a deliberately neutral word) should make a payment is reached by a body of individuals one or more of whom are beneficiaries of the payment in a capacity other than as a member' or members of the body the assertion that the payment is made wholly and exclusively for the purposes of the trade or profession requires close scrutiny of the facts. This situation arises commonly where the trading or professional organisation is a company, the decision to make the payment. is made by its board of directors, and one or more of the directors are beneficiaries of the payment in other capacities, for example, 'as shareholders. The situation is in principle exactly the same where the trading or professional organisation is a partnership, the decision to make the payment is made by the partners, and one or more of the partners are beneficiaries of the payment in other capacities.

In the present case the question of fact which needs to be considered is one where a beneficiary was a member of the body which decided to make the payment has been conclusively resolved by the decision of the commissioners. In any- case, the payments were made in normal implementation of a partnership policy' which had plainly been decided upon wholly and exclusively for or to serve the purposes of the profession.

In the application of the wholly and exclusively test, there are two points to be borne in mind: (i) the distinction between the purpose of the expenditure and its incidental effect; (ii) how far is the test a subjective test depending on what was consciously present to the mind of those making the expenditure, and how far is it an objective test. It is submitted that it is predominantly a subjective test.

The purposes to serve which these items of expenditure were incurred and correspondingly in the minds of the partnership were wholly and exclusively for the purposes of the profession.

In Bentleys, Stokes and Lowless v. Beeson (1952) 2 All ER 82, it is clear that Romer L.J. was laying down a subjective test. Further, it is apparent from his judgment that he saw little difference between the words "motive" "object" and "purpose."

As to the cases; in principle the present case is indistinguishable from Heastie v. Veitch & Co. (1934) 1 K.B. 535. In Morgan v. Tate & Lyle Ltd. (1955) A.C. 21 this House took the purposes for which the expenditure there in question was laid out to be the conscious purposes of the taxpayer company. Inland Revenue Commissioners v. Carron Company (1968) 45 T.C. 18 adopted the same approach as to the purpose for the payment. In addition, the fact that in the process of accomplishing the intended professional purpose there was an incidental non-professional effect achieved does not- prevent the sum in question from being wholly and exclusively expended for the purposes of the trade. In Inland Revenue Commissioners y. Korner. (1969) 1 WLR 554, 561, the approach adopted by Lord Donovan in that case is unequivocally the same as the approach of the commissioners in the present case.

In Mallalieu v. Drummond (1983) 2 A.C. 861 Lord Brightman is directing the commissioners that they must hear evidence as to what the conscious purposes of the taxpayer were and make findings thereon. The crucial point in that case was that the taxpayer even if she had not been a barrister would have been obliged to buy clothes from time to time. But in the present case if Mr. Cooper had not been an accountant he would not have moved from Newcastle to Bristol. In Mallalieu v. Drummond the payer and the recipient were one and the same person. It was not possible to disentangle one from the other. In the case of this partnership it is possible to separate the partnership.collectively from the single partners. The purposed the payment was that of advancing the purposes of the profession. Watkis v. Ashford Sparkes and Harward (1985) 1 WLR 994 is important for its explanation of the decision in Mallalieu v. Drummond and for the fact that Nourse J. upheld the decision of the special commissioners.

In conclusion, (1) it is very important to bear clearly in mind what expense is in issue in the present case. The expense is the expense of the firm and not of the two partners. (2) The question arises;'why did the firm incur the expenses? The, answer is because the firm was contractually bound to pay it. (3) For and to serve what purpose was the firm contractually bound? It was to secure the professional benefit of the two partners working in Bristol and Southampton respectively. (4) It is accepted that when the expenditure was made it had some incidental effects: (a) the conscious purpose was not the incidental effect; (b) the serving of that secondary effect should not be regarded as a concurrent purpose of which the firm was unconscious. It follows that the decision of the special commissioners was right. Alternatively, it was a decision to which they were entitled to come on the facts found by them. The decision of Vinelott J. was wrong and the judgment of the Court of Appeal was right.

McCall Q.C. was not called upon to reply.

Their Lordships took time for consideration.

L23 November]. LORD BRIDGE OF HARWICH-- My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Oliver of Aylmerton. I agree with it and for the reasons he gives I would allow this appeal.

LORD BRANDON OF OAKBROOK-- My Lords, I understand that all your Lordships are of the opinion that this appeal should be allowed and the judgment of Vinelott J. restored. I have reached the same conclusion, but I have done so reluctantly, because I consider that the result, in so far as it involves differentiating for tax purposes between the relocation expenses of partners on the one hand and their employees on the other is neither sensible nor just.

LORD TEMPLEMA-- My Lords, 1 have had the advantage of reading in draft the opinion of my noble and learned friend, Lord Oliver of Aylmerton. I agree with it and would allow this appeal and restore the order

made by Vinelott J.

LORD OLIVER OF AYLMERTON-- My Lords, this appeal raises what, in the end, is a very short point, namely, the deductibility for the purposes of income tax payable under Schedule D, Case II of what may be conveniently described as "relocation expenses" paid out of partnership funds to two of the partners.

Schedule D, the provisions of which are to be found in section 108 of the Income and Corporation Taxes Act, 1970, charges to tax (inter alia):

"(a) the annual profits or gains arising or accruing...(ii) to any person residing in the United Kingdom from any trade, profession or vocation, whether carried on in the United Kingdom or elsewhere:"

Section 109 of the Act provides that tax under Schedule D is to be charged under seven different cases to which individual provisions are applicable. Case II being "tax in respect of any profession or vocation not contained in any other Schedule." Annual profits of a profession may be broadly and colloquially defined as the income earned by the professional activity after deducting the expenses incurred in earning it, ascertained in accordance with ordinary accountancy principles, but section 130 of the Act contains provisions restricting the types of expenditure which may be treated as deductions from annual income including the profits for computing the profits for tax purposes. It provides:

"Subject to the provisions of the Tax Acts, 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 ....:'

There is a wealth of authority regarding the application of this formula to individual items of expenditure of various kinds, but whilst the cases may be helpful as illustrations or analogues, the question in each case is the simple question of whether the facts are capable of fitting and do fit the formula. There is no very difficult issue of construction involved for it is not in doubt that the word "exclusively" is used in its ordinary and natural sense. The difficulties, such as they are, lie not in the words "wholly and exclusively" but in ascertaining whether a particular expenditure is, as a matter of fact, laid out "for" and only for the purposes of the trade or profession.

Before turning to the facts of the instant case, I ought, perhaps, to say a word about the position, both generally and in relation to income tax of partners in a firm. A partner working in the business or undertaking of the partnership is in a very different position from an employee. He has no contract of employment for he is, with his partners, an owner of the undertaking in which he is engaged and he is entitled, with his partners; to an undivided share in all the assets of the undertaking. In receiving any money or property out of the partnership funds or assets, he is to an extent receiving not only his own property but also the property of his co-partners. Every such receipt must, therefore, be brought into account in computing his share of the profits or assets. Equally of course, any expenditure which he incurs out of hi: own pocket on behalf of the partnership in the proper performance of his duties as a partner will be brought into account against his co-partners in such computation. If, with the agreement of his partners, he pays himself a "salary; this merely means that he receives an additional part of the profits before the fall to be divided between the partners in the appropriate proportions. But the "salary" remains part of the profits.

So far as concerns the assessment of partnership profits to tax, I do not think that I can improve on the analysis in the instant case of Vinelott J. (1986) 1 WLR 1468, 1474-1475, which I will both quote and adopt:

"There are, in effect, three stages. 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 Income and Corporation 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 entiteld 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 another 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 60 of the Rules applicable to Cases I and II of Schedule D) provided 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 question in the instant case is whether, at the first stage, moneys paid out of the partnership assets to a partner in order to idemnify him-against expenses incurred by him out of his own pocket otherwise than on behalf of the partnership or in the course of acting in the partnership business can be deducted at the first stage as being a payment any personal benefit from which is purely incidental or ancillary to the purposes of the firm considered as an entity separate from the recipient.

The relevant facts can be very shortly stated. The respondent firm in which there were at the material time 95 partners, is a well-known firm of chartered accountants with offices in various parts of the United Kingdom. It is impracticable, for obvious reasons, to hold regular partner meetings and the administration of the partnership is conducted by an executive committee of eight partners under the chairmanship of the senior partner. In order to deploy both partners and staff to the best advantage, it becomes necessary from time totime for the executive committee to request individual partners or members of the staff to move from one part of the country to another and the possibility that he may be requested to move is accepted by each partner as part of the firm's policy. To make this more acceptable, the executive committed has adopted a policy which, though not written into the partnership deed, is accepted by all the partners, of paying to a partner acceding to a request to move in the firm's interest a sum of relocation expenses which is equal to the aggregate of estate agents' charges, surveyors' fees, legal costs and disbursements, furniture removal charges and reasonable expenses for travel and subsistence for a maximum of three months whilst looking for a new house. In addition, there is paid a disturbance allowance of 1,000, in the case of a partner and 700 in the case of an employee by way of compensation for the incidental costs of moving such as relaying carpets or refitting curtains. In practice, both partners and employees have moved when requested and net doubt their willingness to do so has been influenced to a greater or lesser degree by the policy which I have described.

The instant appeal concerns two sums of 5,446.25 and 3,122.15 respectively paid out of the partnership funds by way of relocation expenses to two partners, Mr. Wilson and Mr. Cooper, during the accounting period 1981 82. In the case of Mr. Wilson, he had been engaged in working in the firm's London office and was asked to and did move to Southampton in-order to open and take charge of their new office in that city. It is not in dispute that he moved to Southampton only because he was asked to and that he would have preferred to stay in London. In the case of Mr. trooper he was 4sked to' and did, albeit reluctantly, move from Newcastle wherehe lived and was working, to Bristol. The special commissioner found as a fact andthis is not disputed that he would not , have agreed to move hadhis partners not, agreed in accordance withthe firm taxable profitsfor the years the claim was disallowed by the appellant inspector.The respondents appealed to the special commissioners who, on 21^st January 1985, allowed the appeal holding that the payments had one purpose and one purpose only, namely the furtherance of the interests of the partnership practice and were accordingly wholly and exclusively laid out for the purposes of the profession.In reaching his conclusion it is evident that the special commissioner were paying regard to two and only two consideration, that is to say the conscious motives of Mr. Wilson and Mr. Cooper in-agreeing to move and the motives of the partners (as represented by the executive committee) in requesting them to do so and agreeing to contribute to the cost in accordance with the established policy.They moved the commissioner held purely for business reasons and derived no personal benefit from the move which in fact eventually turned out in each case to be financially disadvantageous.Likewise the executive committee in paying the expenses was motivated solely by the consideration that it would be for the benefit of the partnership practice to have these two partners working at (and therefore living near) the offices at Southampton and Bristol respectively.

Now it is plain that in so holding the special commissioners were regarding the firm as being, as it were, an entity quite separate from the two individual partners whose initial personal expenditure was being reimbursed and looking not at all at the immediate purpose which that expenditure served--namely, the establishment of personal residences for themselves and their families--by solely at the advantages which the firm would derive from having these partners residing in their new locations. The real, indeed the only question, in, this appeal is whether that was a permissible way in which to test whether the expenditure was laid out not merely as something from which the partnership was intended to and did derive a benefit but exclusively for the purposes of the partnership practice.

The appellant having appealed to the High Court, Vinelott J., in a judgment of admirable clarity, reversed the special commissioners and allowed the appeal. It was not, he observed, seriously open to question that if Mr. Wilson and Mr. Cooper had each been sole traders (if such a description is permissible in the case of chartered accountants) and had moved their respective residences in order to 'enhance the interests of their respective professional practices, the expenditure incurred in finding a new home and moving to it could riot qualify as expenditure incurred solely for the purposes of the practices so as to permit its deduction in the computation of their professional profits as sole traders. In searching for, acquiping and moving to new residences, whatever their motives, they could not possibly be said to be acting as accountants in the course of professional practice. They would be simply individual citizens establishing private residences in places convenient to them and, as Vinelott, J. observed, the expenditure would be indistinguishable from that incurred by Mr. Mason in Mason v. Tayson (1980) 53 TC 333, in repairing and redecorating a flat above his office so that he could, if he wished, work late. In order to justify treating expenditure by an individual partner on a different footing, it was necessary in effect, to ignore any benefit .deriving from the original outlay made by him as an individual and to treat as the relevant purpose only the motive of the executive committee in making the reimbursement out of the partnership funds, from which of course the firm as such derived no benefit beyond that in securing the performance of the individual partner's services of the most convenient area. Thus the respondent's case rested before your Lordships upon the proposition that, in its relationship to individual partners, the firm can be treated as a separate legal entity in exactly the same way as if the relationship were that of employer and employee. This indeed seems to have been the basis of the judgment of the Court of Appeal, which reversed Vinelott, J. and restored the decision of the special commissioners. Slade L.J. (1989) Ch. 454, 472, stated the question for determination thus:

"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 ratio of the Court of Appeal's decision is encapsulated in passage in which, after contrasting the position of the individual sole trader, Slade L.J. continued, at pp. 473-474:

"In the second case, where the payer and the beneficiary are not the same, it is clearly possible .... 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 Commissioner, Ex pane 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 'II of Schedule D, even if not for other purposes of the Income Tax Act a partnership is regarded as an entity distinct from its members. See for example Heastie v. Veitch & Co. (1934) 1 K.B. 535, Watson and Everitt v. Bhinden (1933.) 18 T.C. 402 and Padmore v. Commissioners of Inland Revenue (1987) S.T.C. 36, 45, per Peter Gibson, J. 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.

Now there is, if I may say so respectfully, a confusion here. It is perfectly true that in Reastie v. Veitch & Co. (1934) 1 K.B. 535, 547 Romer L.J. remarked that by rule 10 of the Rules applicable to Cases I and II (now contained in section 152 of the Act) a partnership is treated for the purposes of Schedule D taxation as a separate entity from the individual partners composing the firm -- that is- et stage three of Vinelott J.'s analysis but there is nothing in that decision nor in the other cases cited by Slade L.J. to justify a conclusion that it can permissibly be so treated at stage one of the analysis in relation to sums which have been received by a partner from the partnership funds in his capacity as a partner. All that Heastie's case established was that sums received by a partner in a quite different capacity, for instance, as the landlord of premises let to the partnership or for goods supplied from an independent trade carried on by a partner, are not to be regarded as non deductible expenses simply because they are received by a person who is also a partner in the firm. But we are not concerned here with sums coming to the hands of Mr. Wilson and Mr, Cooper as a result of some wholly collateral bargain between them and the firm of Arthur Young & Co. What they received, they received as partners in the firm. The fact that they were partners and were going to continue to act as such was indeed the very justification for the receipt.

My Lords, for my part, I am unable to accept that the purpose of "the partnership;" considered as if it had a separate legal identity, and the purpose of the individual partners for whose benefit the payment enured can be segregated in this way. I cannot with respect to the Court of Appeal, resist the conclusion that they allowed themselves to be confused and led astray by a number of extraneous factors which do not, as a matter of analysis, have any legal significance. In the first place, they appear to have been influenced by the sheer size of the partnership in the instant case and to have considered that a large partnership falls in some way to be treated differently from a small partnership, so that an element of personal benefit may fall to be taken into account in the case of a small firm but ignored in the case of a large firm: see Slade L.J., at p. 474D-F. It is true that Slade L.J. rests this distinction on the ground of the greater, with which an inference of a confusion of private and collective motive may be drawn in the case of the smaller firm -- presumably on the noting that in a large firm a great many of the partners will not, in practice, know anything about the payment and therefore cannot be said to be affected by the purpose of the recipient. But there can surely be no difference in principle. Partners are partners, however numerous; and mere numbers cannot in itself justify an attribution of a "collective purpose" unjustified in the case of a small partnership.

Secondly, I cannot help feeling that some confusion has been caused simply by the mechanics by which the payments concerned in the instant case were effected. They were resolved on by the executive committee and paid out of partnership funds on the orders of the executive committee by way of reimbursement of an expenditure which the two partners had incurred out of their own pockets. Factually this makes it easier to regard the reimbursement and the expenditure reimbursed as quite separate transactions and to have regard only to the motives of the executive committee in sanctioning the reimbursement -- a reflection of Mr. Park's submissions to your Lordships. The purpose of the payment, he submits, was not to pay for the partners' removal expenses. It was to nullify the disadvantage which the partners suffered as a result of having paid those expenses themselves and the only motive for satisfying that disadvantage was to secure their concurrence in moving in the interests of the part-nership. Attractively as this submission was put, I find myself quite unable to accept this way of looking at the transactions. Indeed on this analysis the reimbursement, at the instance of the other partners, of the costs of a chauffeur-driven car to transport the senior partner to and from work in order to increase his efficiency as a working member of the firm or of the cost of a holiday in Switzerland to convalesce after an illness would qualify as deductible expenditure so long as it could be established that the "collective purpose" of the sanctioning partners was to further the partnership business. There is no warrant in statute or authority for this concept of collective purpose and I do not, for my part, find it acceptable as a matter of analysis. It can make not the slightest difference whether a partner incurs an expenditure out of his own pocket and recovers it from the partnership funds or whether he draws the money required directly from the partnership funds in the first instance -- for example, where he is enabled to draw cheques on the partnership bank account -- and his partners either expressly or by implication, agree that he need not bring the money drawn into account in ascertaining his share of the profits. There is either case only one relevant expenditure and it is the purpose of that outlay which has to be regarded.

A third factor, which, I think has led to some confusion at any rate in the minds of the special commissioners, is the initial unwillingness of Mr. Wilson and Mr. Cooper to move. I do not, for my part, see how this can possibly be 'a relevant consideration in ascertaining whether the costs of moving were exclusively for the purposes of the partnership profession. The expenditure serves the same purpose whether the partner concerned wants to move, is merely willing to move or moves with evident reluctance.

Finally, I think that a good deal of the confusion was caused in the Court of Appeal, as indeed it was before your Lordships, by an appeal to the position of employee as providing a useful analogy. Superficially the analogy is attractive as indeed is the suggestion that "the reality" of the situation renders absurd any distinction between, for instance, a senior employee and a junior partner. But, with respect, the distinction is not only legal but real. An employee has no interest in the property or profits of the firm and anything paid to him by way of additional remuneration for acting as an employee and to secure his continued loyalty to the firm cannot easily fail to be deductible as an expenditure exclusively for the purpose of the firm's business. There are, of course limits to this -- for instance, the firm cannot pay the employee's P.A.Y.E. tax for him and claim to deduct it as an expense: see Bamford v. A.TA. Advertising Ltd. (1972) 1 WLR 1261. But, in general, money laid out-in order to secure the continued loyal service of the workforce is referable solely to the business or profession in which that workforce, is employed and is accordingly deductible. The purpose to which the employee chooses to devote what he receives does not enter into the picture and one is not concerned to inquire into the connection between that purpose and the business in which the employee is employed. A partner, on the other hand, whether he be senior or junior is in a quite different position. What he receives out of the partnership funds falls to be brought into account in ascertaining his share of the profit of the firm except in so far he can demonstrate that it represents a payment to him in reimbursement of sums expended by him on partnership purposes in the carrying on of the partnership business or practice -- the example was given in the course of argument of the partner travelling to and staying in Edinburgh on the business of the firm -- or a payment entirely collateral made to him otherwise than in his capacity as a partner (as in Heastie v. Veitch & Co. (1934) 1 K.B. 535). It may be that in relation to a particular receipt by a partner of partnership moneys not falling under either of the above heads, his co-partners are agreeable to his retaining it without bringing it into account so that to that extent the divisible profits at the end of the year are notionally reduced by the amount retained but this cannot alter the fact that what is retained is part of the profits which would otherwise be divisible. What is taxable is the actual not the notional profit and what has to be demonstrated if a deduction is to be allowed for tax purposes in respect of moneys paid to a partner is that it was paid exclusively for the purposes of the parntership business.

However attractive, therefore, the employer-employee analogy may seem at first sight; it is not one from which, on alaysis, I feel that I can derive any assistance. One is, accordingly, brought back, first, last and all the time to the question whether an expenditure upon a partner's removing expenses can be said to be laid out not just partly but exclusively for the purposes of the parntership business. That cannot, in my judgment, be answered simply by ascertaining what was the motive with which the move was undertaken. It is inescapable as it seems to me that the expenditure, motivated no doubt by the fact of moving house, which in turn was motivated by the desire to put the partner concerned in a better position to further the interests of the firm, was an expenditure serving and necessarily and inherently intended to serve the personal interests of the partner in establishing his private residence for himself and his family and it cannot be said to be exclusively for the purposes of the partnership practice.

Your Lordships have been referred to what may be regarded as a decision of this House in Mallalieu v. Drummond (1983) 2 A.C. 861 and much argument has been addressed to the question whether the purpose of the particular payment falls to be ascertained objectively or by reference only to the subjective intention of the payer. For my part, I think that the difficulties suggested here are more illusory than real. The question in each case is what was the object to be served by the disbursement or expense? As was pointed out by Lord Brightman in Mallalieu's case, this cannot be answered simply by evidence of what the payer says that he intended to achieve. Some results are so inevitably and inextricably involved in particular activities that they cannot but be said to be a purpose of the activity. Miss Mallalieu's restrained and sober garb inevitably served and cannot but have been intended. to serve the purpose of preserving warmth and decency and her purpose in buying cannot but have been, in part at least, to serve that purpose whether she consciously thought about it or not. So here the payment of state agents' fees, conveyancing costs and soon, and the provision of carpets and curtains cannot but have been intended: to serve the purpose of establishing a comfortable private home for the partner concerned even though his motive in establishing a home in the particular place was to assist him in furthering the partnership interest. Nobody could say with any colour of conviction that in purchasing curtains he or his wife was acting upon partnership business. In the judgment once one escapes from what I regard as the fallacy confusing the purpose of the expenditure with the motives of the members of the executive committee (and, inferentially, of the other partners in resolving to reimburse the expenditure, the case presents very little difficulty and is, indeed, a much clearer and easier case than Mallalieus v. Drummond. For my part, I entertain no doubt that the decision of Vinelott, J. was correct and I would allow this appeal.

Lord Goff of Chieveley. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Oliver of Aylmerton. I agree with it and for the reasons he gives I wound allow this appeal.

No order as to costs.

1595/T Appeal allowed.