United Kingdom House of Lords Decisions

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of this " the Company will pay to Mr. Tilley the sum of £40,000
" by two equal instalments, the first of which shall be paid on the
" 6th April, 1938, and the second on the 6th April, 1939 .

[3] 3

tion under the contract of employment. Lord Thankerton
emphasised the further point that the payment was not in the
nature of income at all. It is true that the decision in Dewhurst's
Case was regarded and described as arising under very special
circumstances, but I think the ratio decidendi is as I have described.
Moreover, apart from previous authority, I should myself take the
view that a lump sum paid to commute a pension is in the nature
of a capital payment which is substituted for a series of recurrent
and periodic sums which partake of the nature of income.

But can the same view be taken of an arrangement made
between an employer and his servant under which, instead of the
whole or part of a periodic salary, a single amount is paid and
received in respect of the employment? Generally speaking, I
think not. An " office or employment of profit"—to use the actual
phrase in Schedule E.—necessarily involves service over a period
of time during which the office is held or the employment continues.
The ordinary way of remunerating the holder or the person
employed is to make payments to him periodically, but I cannot
think that such payments can escape the quality of income which
is necessary to attract income tax because an arrangement is made
to reduce for the future the annual payments while paying a lump
sum down to represent the difference. My view seems to me to be
supported by the decision of this House in Prendergast v. Cameron
(23 Tax Cases 122). In that case the Respondent was a Director
of a Company and was minded to resign his position and so obtain
greater ease. His fellow Directors, in the interests of the Com-
pany's success, urged him not to do so and an agreement was made
between the Company and himself under which his salary was
reduced from £1,500 to £400 per annum, but he also received
£45,000. This House decided that the £45,000 was a profit from
the Respondent's Directorship and was therefore assessable under
Schedule E. I am not myself prepared to go so far as to say, as
was said by the Master of the Rolls and Lord Justice Goddard
in the present case, that remuneration for service can never be
capital in the sense which would put it outside income tax. It is
worth pointing out that the word " remuneration " does not occur
in Schedule E. at all and it is safer to use the words of the Statute.
I prefer to limit myself to the case now under consideration, and
to say that, whatever part of the £40,000 should be regarded as the
equivalent of a drop in salary amounting to £4,000 a year, is within
the charge on profits from the office of Director.

There remains the question, which might otherwise have raised
some difficulty, whether, when capitalisation of pension is not tax-
able and a sum paid in compromise of a reduction in salary is
taxable, the £40,000 which is agreed between the parties to be the
value of the two things together can be split up. We are relieved
in the present case from deciding the point, for the Attorney
General agreed that the two sums of £20,000 each should be treated
as apportionable if the House took the view that tax was due
under one head but not under the other. Accordingly I
move that these two assessments should be referred back to
the Commissioners in order that they may determine, accord-
ing to the best of their judgment, what would be a reason-
able apportionment. So much of the two sums as should
be taken as paid in substitution for the reduction of salary should
be assessed, in the appropriate years, for tax under Schedule E.
The balance of the two sums which should be regarded as repre
senting the purchase price of the annuity should escape taxation.
I move accordingly. The Appellant should have his costs of the
Appeal to this House, and there should be no costs in the Court of
Appeal on either side.

The Lord Chancellor:

MY LORDS,

I am authorised by my noble and learned friends Lord Atkin
and Lord Russell of Killowen, to say that they concur in the
Opinion which I have just delivered.

Lord
Chancellor

Lord Atkin
Lord
Thank-
ertori

Lord
Russell of
Killowen

Lord
Porter

[4]
TILLEY

v.
WALES (INSPECTOR OF TAXES)

Lord Thankerton

MY LORDS,

The Crown claims that the sum of £40,000 paid to the Appellant
in two instalments at a year's interval under the agreement of
6th April 1938 is chargeable to income tax under Schedule E
of the Income Tax Act of 1918, as paid to him in respect of his
office of director and coming within the words of Rule I of
Schedule E, vizt, " all salaries, fees, wages, perquisites or profits
" whatsoever therefrom."

My noble and learned friend on the Woolsack has made sufficient
reference to the various agreements, and I agree that in order to
appreciate the two-fold consideration in return for which the
£40,000 was agreed to be paid, it is necessary to refer to the agree-
ment of 28th June 1937, the terms of which equally necessitate a
reference to the earlier agreement of 19th December 1921.

The Crown failed before the Special Commissioners, on the
ground that the payment of £40,000 was not made to the present
Appellant as remuneration for services rendered or to be rendered
by him in his office as a managing director of the company. On
Appeal, by stated case, Lawrence J. decided in favour of the
Crown, holding that both in form and substance the payment was
made in consideration both of the release from the company's
obligation to pay the pension and the present Appellant's agree-
ment to serve at a reduced salary of £2,000 per annum. As
regards the latter element, the learned Judge held that it was
clearly a profit from the office, and, as regards the ten-year pension,
he held that, as the pension would have been assessable under
Schedule E by virtue of section 17 of the Finance Act 1932, the
sum payable in commutation thereof was assessable under
Schedule E, and he based this finding on the decision in Short
Brothers Ltd. v. Commissioners of Inland Revenue, 12 Tax Cases,

955-

I do not feel able to accede to this argument. In my view a
sum received upon the sale or surrender of pension rights is not
taxable under Schedule E because it is neither pension nor annuity
and comes under no other heading of that section.

[7] 2

pension was granted in the 1937 Agreement. No special considera-
tion is stated in that document: the granting of the pension appar-
ently forms one of the general terms of the Agreement under which
the Appellant promises to give up his right to receive one shilling
in respect of each pound of material manufactured under his secret
process. Moreover, the pension is payable at any moment at which
he may cease to be employed as Managing Director whatever the
cause, and it is apparently payable to his personal representatives.
I cannot think that such a provision represents deferred pay. It
looks much more like a payment in lieu of the stipulated reward
for revealing the secret process. But it is unnecessary to speculate.
It is a sum paid for the release of an obligation to provide a
pension and not shown to be given instead of deferred pay. If so,
it is admittedly not subject to tax.

(25173) Wt. 8222--4 20 2/43 DL. G. 338