Between: Tilley - Appellant
And: Wales (Inspector of Taxes) - Respondent

Judges: Viscount Simon LC
Lord Atkin
Lord Thankerton
Lord Russell of Killowen

Lord Porter

Subject References:
REVENUE
INCOME TAX
ASSESSMENT
Managing director
Agreement releasing pension rights and accepting reduced salary for the future
Lump sum consideration

Legislative References:
Income Tax Act, 1918 (8 & 9 Geo. 5, c. 40) - sch. E

Judgment by:
Lord Porter

My Lords, as MacKinnon L.J. has pointed out ^[F26] your Lordships are not without assistance when considering the problem which this matter presents. In Dewhurst v. Hunter ^[F25] and Cameron v. Prendergast ^[F27] this House has at least discussed the question, and, in my view, has decided it.

By the so-called "1938" agreement the appellant received two sums of 20,000l. each and in return gave two separate considerations:

(i.)

He released the company from an obligation to pay a pension of 4000l. a year for ten years from his ceasing to be managing director; and

(ii.)

he agreed to serve the company at a reduced salary of 2000l. instead of as theretofore at 6000l. granted him by the agreement of 1937.

It was claimed for the Crown that both these two sums of 20,000l. were taxable as a profit from the directorship, but that, even if the former was not so taxable, the commutating sums paid for each were so inextricably interwoven that it was not possible to ascertain how much was paid for the one and how much for the other, and that, consequently, the subject must pay on the whole.

This was, as I understand it, the view of the majority of the Court of Appeal. MacKinnon L.J., however, though he would himself have taken the view that each item would be severally taxable, held himself bound by the principles evolved in the two cases referred to above, and, therefore, considered that any sum paid in commutation of the pension was not taxable, whereas the sum paid as a consideration for the agreement to serve on as managing director at a reduced salary was taxable. My Lords, I agree that this result follows if the remuneration can be apportioned between salary and pension. As I see it your Lordships have so decided in the cases referred to above and are bound by authority so to hold.

The Attorney-General argued that this present case differed from Dewhurst v. Hunter ^[F28] in that the sum paid in commutation of the pension rights was paid while the appellant was still serving as a director and that the sum paid in commutation of a pension to a person so serving differed from that paid in respect of a pension already due to a director whose service had come to an end. I do not feel able to accede to this argument. In my view, a sum received on the sale or surrender of pension rights is not taxable under sch. E because it is neither pension nor annuity and comes under no other heading of that section. It is in the headnotes to Dewhurst's case ^[F28] said to be exempt as being capital and not income. It is not, as I think, a pension or annuity, and, therefore, not income taxable under sch. E, but I doubt if much assistance is to be obtained by making use of the antinomy between capital and income.

The Attorney-General sought to distinguish Dewhurst v. Hunter ^[F28] on the ground that in that case the pension was not deferred pay whereas in this case it was, and admitted that if it were not the Crown would have no claim to tax. Such a contention makes it necessary to determine the grounds on which the pension was granted in the agreement of 1937. No special consideration is stated in that document. The granting of the pension apparently 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 it is not shown to be given instead of deferred pay. If so, it is admittedly not subject to tax.

Just as, in my opinion, it follows, from the reasoning in Dewhurst's case ^[F29] that any part of the two sums of 20,000l. which was paid in respect of the surrender of the pension rights is not subject to tax under sch. E, so, in consequence of the decision in Cameron v. Prendergast, ^[F30] the remaining part of that sum which was given in lieu of the surrendered payment of 4000l. as managing director is, I think, taxable as a profit from a public office.

It only remains, therefore, to see whether the sum attributable to the release of the pension can be separated from that payable for the reduction of salary. It was only faintly argued on behalf of the Crown that such a division was not possible, but it was said that there were no materials on which such a calculation could be made inasmuch as the cessation of the salary and the commencement of the pension were dependent on many unascertainable matters, among others on the appellant's choice of the time of his retirement. No doubt, there are difficulties, but the resultant figure seems no more incalculable than, say, the length of time during which an injured workman would have continued to earn wages had he not received his injury, a period difficult no doubt to ascertain, but one which has constantly to be estimated in dealing with cases of personal injury. My Lords, I agree that this appeal should be allowed in part and in part dismissed, and concur in the order suggested by the Lord Chancellor.

Appeal partly allowed.

Solicitor for appellant: R. G. Percival.

Solicitor for respondent: Solicitor of Inland Revenue.