Tilley v Wales

A lump sum received for surrendering pension rights is not chargeable under Schedule E merely because the pension, if paid periodically, would have been taxable. It is neither pension nor profit from the office and is capital in nature.

By contrast, the part of a lump sum paid in substitution for a future reduction in salary remains a profit from the office. Where one undivided payment represents both taxable salary and non-taxable pension rights, a reasonable apportionment may be made.

A managing director had previously exchanged royalty rights for an increased salary and a ten-year pension payable when his directorship ceased. By a later agreement, he released the company from the prospective pension obligation and accepted a reduction in salary from £6,000 to £2,000 annually. The company agreed to pay £40,000 in two instalments.

The Special Commissioners held that the payment was not remuneration for services. Lawrence J reversed that decision, and the Court of Appeal dismissed the taxpayer's appeal. The central issues were whether the payment was taxable under Schedule E and whether its pension and salary elements could be apportioned.

1. Disposition. The House unanimously allowed the appeal in part and dismissed it in part. The assessments were referred back to the Commissioners for a reasonable apportionment. The salary element was assessable under Schedule E, while the pension element escaped assessment.

2. Commutation of pension. The Lord Chancellor, with whose opinion Lord Atkin and Lord Russell of Killowen concurred, held that a pension is a taxable subject matter distinct from profits arising from an office. A lump sum paid in exchange for pension rights is not taxable under Schedule E merely because the periodic pension would have been taxable. It is a capital payment substituted for recurrent income. This conclusion followed Hunter v Dewhurst, 16 Tax Cases 605. Lord Thankerton concurred. Lord Porter added that the payment was neither pension nor annuity and, on the facts, was not shown to represent deferred pay.

3. Reduction of salary. The Lord Chancellor held that the part of the payment representing the future reduction of salary retained the quality of income and was a profit from the office. Periodical salary cannot ordinarily escape assessment merely because the parties reduce future annual payments and pay a lump sum representing the difference. Cameron v Prendergast [1940] AC 549 was directly applicable. Lord Thankerton expressed the inquiry as whether the payment arose from the office and whether it was in the nature of income; both conditions were satisfied. Lord Porter agreed.

4. Apportionment. Although the agreement stated one composite consideration, the taxable and non-taxable elements could be separated. The Attorney General accepted that apportionment should occur if only one element was taxable. The Commissioners were therefore to determine, according to the best of their judgment, what constituted a reasonable allocation.

1. House of Lords: Allowed the taxpayer's appeal in part and dismissed it in part. The assessments were remitted to the Commissioners for reasonable apportionment between the taxable salary element and the non-taxable pension element.

2. Court of Appeal: Dismissed the taxpayer's appeal. The majority considered that the parties' undivided consideration could not be apportioned by the court.

3. High Court, Lawrence J: Allowed the Crown's appeal by stated case and held the whole payment assessable under Schedule E.

4. Special Commissioners: Determined that the payment was not remuneration for services rendered or to be rendered as managing director.