Brumby v Milner (Day v Quick)

An employee’s receipt is an emolument arising from employment where the employment is the reason for making the payment. The statutory words govern this inquiry. Judicial expressions such as payment to a person in the capacity of employee may illustrate those words but must not displace them.

A capital distribution made when an employees’ profit-sharing trust is wound up is not distinguished from taxable income distributions merely because the winding-up decision released the capital. Where the sole reason for paying the recipient is that person’s employment, and no independent personal reason explains the payment, it arises from the employment and is taxable under Schedule E of the Income and Corporation Taxes Act 1970.

A company established a profit-sharing trust for its employees. Dividends on company shares held by the trustees were used to repay the company’s loan or to make annual payments to employees. After a corporate reorganisation, the company terminated the scheme. The trustees realised the assets, discharged the remaining debt and distributed the balance among employees and pensioners.

An employee received £200 and was assessed to income tax under Schedule E. The annual distributions were accepted to be taxable. The disputed question was whether the capital payment on winding up arose from the employment or from some other source.

Walton J upheld the assessment. The Court of Appeal unanimously affirmed his decision in a judgment delivered by Lord Russell of Killowen. The employee appealed to the House of Lords.

1. Appeal dismissed unanimously. Lord Wilberforce delivered the leading speech. He held that the capital payment was an emolument from the appellant’s employment and fully adopted the reasoning of the unanimous Court of Appeal. Lord Diplock agreed, Lord Edmund-Davies concurred with Lord Wilberforce, and Lord Simon of Glaisdale and Lord Kilbrandon gave concurring reasons.

2. Per Lord Wilberforce, sections 181(1) and 183(1) of the Income and Corporation Taxes Act 1970 ask whether the sum is an emolument from employment, with emoluments including a perquisite or profit. The admitted taxability of the trust’s annual distributions could not be distinguished from the capital distribution made on winding up. The latter also arose from employment.

3. Per Lord Simon, the court must focus on the statutory words rather than judicial glosses. Expressions such as payment to an employee as such, in the capacity of employee or by way of remuneration may illustrate the statute but do not replace it. The distinction between causa causans and causa sine qua non was ambiguous and of little assistance.

4. Per Lord Simon, applying Hochstrasser (Inspector of Taxes) v Mayes [1960] AC 376 and Laidler v Perry (Inspector of Taxes) [1966] AC 16, the relevant questions were whether the payment was made in respect of the recipient’s personal situation as an employee and, if not from employment, from what other source it arose. The decision to wind up the scheme did not provide such another source.

5. Per Lord Kilbrandon, the events connected with the company’s structure explained why the money became available, but they did not explain why it was paid to this recipient. The sole reason for the payment was that he was an employee. Unlike a compassionate payment prompted by the recipient’s distress, there was no independent personal reason for the distribution.

6. The Court of Appeal’s order was affirmed. The appellant was ordered to pay the respondent’s costs of the appeal.

1. House of Lords: The employee’s appeal was dismissed unanimously. The Court of Appeal’s order was affirmed, with costs.

2. Court of Appeal: The court unanimously affirmed Walton J’s decision in a judgment delivered by Lord Russell of Killowen.

3. Walton J: The judge upheld the assessment. No citation is stated in the judgment.