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ICLR: Chancery Division/1972/PRITCHARD (INSPECTOR OF TAXES) v. ARUNDALE - [1972] Ch. 229

[1972] Ch. 229

[CHANCERY DIVISION]

PRITCHARD (INSPECTOR OF TAXES) v. ARUNDALE

1971 July 29, 30

Megarry J.

Revenue - Income fax - Employment - Emolument - Transfer of shares by controlling shareholder to future
employee of company - Whether emolument "therefrom" - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2
c. 10), s. 156 1 - Finance Act 1956 (4 & 5 Eliz. 2, c. 54), s. 10(1)

The taxpayer was a senior partner in a firm of chartered accountants who were auditors to a company set up
by L. Following his father's death in 1960 L had three companies to run. In 1961 on the taxpayer's advice L
formed a holding company for the three companies and made strenuous efforts to find someone to assist in
senior management.

Having proved unsuccessful L invited the taxpayer to join him. At first the taxpayer was unwilling since it
would involve abandoning his private practice. Eventually the taxpayer agreed on the footing that he would
have equal status to L and would have shares in the holding company. A tripartite agreement under seal was
executed in June 1962 between the taxpayer, the holding company and L. The taxpayer agreed to serve as
whole-time managing director for seven years from a date not later than January 1, 1963. Clause 2 provided
that in consideration of the taxpayer "agreeing to serve the company" L should transfer 4,000 shares to the
taxpayer forthwith.

The taxpayer was assessed to income tax under Schedule E on the footing that the sum of £7,000
representing the value of the shares was an emolument. The taxpayer appealed to the special
commissioners who discharged the assessment on the ground that the transfer of shares was not something
in the nature of a reward for future services. On appeal by the Crown:-

____________

[Reported by THEODORE WALLACE, ESQ., Barrister-at-Law]

1 Income Tax Act 1952, s. 156 (as amended): "Tax under this Schedule shall be charged in respect of any office or
employment on emoluments therefrom. ..."

[1972] Ch. 229 Page 230

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Held, dismissing the appeal, that the commissioners were correct to hold that the Crown had failed to show
that the transfer fell within the words of section 156 of the Income Tax Act 1952, since the transfer was not an
emolument "from" any office or employment. it was not "in the nature of a reward for services" and the
transfer was not made "in reference to" services.

Hochstrasser v. Mayes [1960] A.C. 376, H.L.(E.) applied. Bridges v. Hewitt [1957] 1 W.L.R. 674, C.A.
considered.

The following cases are referred to in the judgment:

Bridges v. Hewitt; Same v. Bearsley [1957] 1 W.L.R. 674; [1957] 2 All E.R. 281; 37 T.C. 289, C.A.

Clifford v. Turrell (1845) 14 L.J.Ch. 390.

Hochstrasser v. Mayes [1959] Ch. 22; [1958] 2 W.L.R. 982; [1958] 1 All E.R. 369; [1959] Ch. 22; [1958] 3
W.L.R. 215; [1958] 3 All E.R. 285, C.A.; [1960] A.C. 376; [1960] 2 W.L.R. 63; [1959] 3 All E.R. 817; 38
T.C. 673, H.L.(E.).

Jarrold v. Boustead [1964] 1 W.L.R. 1357; [1964] 3 All E.R. 76; 41 T.C. 701, C.A.

Laidler v. Perry [1966] A.C. 16; [1965] 2 W.L.R. 1171; [1965] 2 All E.R. 121; 42 T.C. 351, H.L.(E.).

National Insurance Co. of New Zealand Ltd. v. Espagne (1961) 105 C.L.R. 569.

Riley v. Coglan [1967] 1 W.L.R. 1300; [1968] 1 All E.R. 314; 44 T.C. 481.

Smith, Hogg & Co. Ltd. v. Black Sea and Baltic General Insurance Co. Ltd. [1940] A.C. 997; [1940] 3 All
E.R. 405, H.L.(E.).

The following additional cases were cited in argument:

Hart v. Hart (1881) 18 Ch.D. 670.

Prendergast v. Cameron [1940] A.C. 549; [1940] 2 All E.R. 35; 23 T.C. 122, H.L.(E.).

Tilley v. Wales [1943] A.C. 386; [1943] 1 All E.R. 280, H.L.(E.).

CASE STATED by the Commissioners for the Special Purposes of the Income Tax Acts.

1  1. At a meeting of the special commissioners held on April 15, 1970,

Clifford Leigh Arundale (hereinafter called "the taxpayer") appealed against an
assessment to income tax Schedule E for the year 1962-63 in the sum of £7,000.

2  2. Shortly stated the question for the commissioners' decision was

whether the sum of £7,000 representing the value of certain shares transferred to the
taxpayer under a service agreement was an emolument assessable under Schedule
E or represented a capital sum.
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The following facts were proved or admitted before the commissioners:

3  5. ... (a) The taxpayer who qualified as a chartered accountant in 1936

became a partner in Mellor, Snape & Co., a firm of chartered accountants (hereinafter
called "the firm") in 1940 and in due course a senior partner therein. During the year
under appeal the firm had branches in Manchester, Crewe and Macclesfield, and
some 60 to 70 employees. The taxpayer was the senior partner at the Macclesfield
office. (b) The taxpayer first met a Mr. W. K. Lowe (hereinafter referred to as "Mr.
Lowe") in 1946. In 1947 Mr. Lowe set up a company, W. K. Lowe & Co. Ltd.
[1972] Ch. 229 Page 231

4  (hereinafter called "the company") which carried on a trade of manufacturing

knitted fabrics and ladies' knitted clothes in Macclesfield. The firm became auditors to
the company. Over the years the taxpayer and Mr. Lowe became business associates
and close personal friends. (c) In 1960 Mr. Lowe's father died and left him a
controlling interest in a company which manufactured children's outer wear and men's
underwear. By that time Mr. Lowe had set up another company which was a knitted
goods wholesaling company called Jerseyfield Ltd. Mr. Lowe's father had run his
company in an autocratic way, and Mr. Lowe had no knowledge of his father's
business, which was entirely different from his own, and in another town. Mr. Lowe
thus found himself with three companies to control and separate businesses to
manage. (d) On the taxpayer's advice early in 1961 Mr. Lowe formed a holding
company Kenneth Lowe (Holdings) Ltd. (hereinafter called "the holding company") to
hold the shares in the three companies. Mr. Lowe held the majority of shares in the
holding company which was formed with a view to easing problems of control by
enabling the appointment of senior management which together with Mr. Lowe would
control the respective businesses of the three operating companies through the
holding company. In spite of strenuous efforts both by Mr. Lowe and the taxpayer and
despite the useof management selection consultants, it proved impossible to find
suitable senior management. (e) Thereupon Mr. Lowe invited the taxpayer to join him
to assist in running the group of companies. The taxpayer was taken by surprise and
at first demurred butlater agreed in principle to accept on the footing that he was to be
a "partner" of Mr. Lowe and not a mere employee. At the time of Mr. Lowe's offer the
taxpayer was 47 years of age, a senior partner in the firm and had family
commitments. The move from practice as a senior partner in a successful firm of
chartered accountants was a momentous one to make and, after due deliberation, the
taxpayer was prepared to make the move only on the footing that his status in the
group of companies was comparable to Mr. Lowe's and that a stake in the
shareholding of the holding company was provided for him. Mr. Lowe agreed to this
proposal. After some discussion between Mr. Lowe and the taxpayer terms were
agreed and these are embodied in the agreement dated June 19, 1962. (f) The salary
of £5,500 per annum provided for by clause 1 (3) of the agreement represented at
that time an attractive rate of remuneration for the job and was considerably in excess
of the taxpayer's earnings as a chartered accountant. (g) On October 1, 1962, the
taxpayer commenced to work for the holding company and thereafter applied himself
exclusively to learning and managing the business of knitwear manufacture. He was
in no sense a financial director, although he remained a member of the Institute of
Chartered Accountants, and all accounting matters of the business were referred to
the firm. When the taxpayer left the firm at the end of September 1962, he was repaid
his capital in the firm.

5  6. It was contended on behalf of the taxpayer: (a) that 4,000 shares in the
holding company received by the taxpayer under clause 2 of the agreement of June
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19, 1962, were an inducement to the taxpayer to give up his established position and
status in the firm of which he was a senior partner and to compensate him for the loss
of that position and status. (b) The value (which was agreed to be £7,000) of the
4,000 shares received
[1972] Ch. 229 Page 232

6  by the taxpayer constituted a capital receipt not assessable to income tax.

(c) The appeal should succeed and the assessment be discharged.

7  7. It was contended on behalf of the Crown that the value of the shares
constituted an emolument assessable upon the taxpayer under Schedule E of the
Income Tax Acts.

8  9. The commissioners who heard the appeal held that it succeeded.

"We applied the test laid down by Upjohn J. in Hochstrasser v. Mayes [1959] Ch. 22, 33: '... in my judgment,
the authorities show that to be a profit arising from the employment the payment must be made in reference
to the services the employee renders by virtue of his office, and it must be something in the nature of a
reward for services past, present or future.' Construing the agreement of June 19, 1962, in the light of the
circumstances in which it was entered into, we found that the transfer of 4,000 shares in the holding
company to the taxpayer, although connected with his proposed employment with the company, was not
something in the nature of a reward for his future services therewith. We accordingly discharged the
assessment appealed against."

The Crown appealed.

F. Heyworth Talbot Q.C. and Patrick Medd for the Crown. The shares were an emolument of the taxpayer's
employment, taxable under Schedule E at a figure representing their worth in money. The governing principle
appears in Hochstrasser v. Mayes [1959] Ch. 22, per Upjohn J. at p. 31, approved by Viscount Simonds
[1960] A.C. 376, 387, 388. The consideration moving from the taxpayer was the agreement to provide
services. Clause 2 of the agreement is conclusive in that it sets out the consideration exactly: "undertaking to
serve."

The contention that the shares were given to compensate the taxpayer for loss of his practice and status is
not borne out by the agreement. Extrinsic evidence is not admissible to contradict a written agreement.
[Reference was made to Hart v. Hart (1881) 18 Ch.D. 670.]

Even if it be permissible to give weight to the surrounding circumstances it still remains true that the
consideration was the agreement for services.

It does not matter that the benefit comes from someone other than the employer: see Bridges v. Hewitt
[1957] 1 W.L.R. 674. In that case the question was whether what was received was remuneration or a
personal gift; the majority in the Court of Appeal held it was a gift. In the present case there is no personal
element. The critical word is "therefrom" in the Income Tax Act 1952, s. 156 as amended; the majority held
that it was not an "emolument therefrom" because it was a personal gift. Morris L.J., at p. 691, considered
how far the terms of the deeds were conclusive. The rationes decidendi in Hochstrasser v. Mayes [1960] A.C.
376 all rest upon the causa causans of the payments.

Jarrold v. Boustead [1964] 1 W.L.R. 1357 is the high-water mark in the case for the taxpayer.
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[MEGARRY J. If he is paid for giving up something, must that have no relation to the period of service? Once
you get periodic payments during the period of service it is very hard to argue that it is not an emolument, but
a prior payment is more difficult.]

It is relevant to look at the matter from the employer's standpoint:

[1972] Ch. 229 Page 233

what does he pay for the services? This is a territory which is still under exploration. [Reference was made to
Riley v. Coglan [1967] 1 W.L.R. 1300 and Prendergast v. Cameron [1940] A.C. 549.] Suppose the employer
says, "I recognise that you are giving up something of value and so I will pay you more": that is clearly an
emolument. In Jarrold v. Boustead [1964] 1 W.L.R. 1357 the court decided that, looked at from the standpoint
of the payer, the payment was not for services.

Medd following. The service agreement is here the causa causans. But if one of the purposes of the
payment is a reward for further services that is enough. In Laidler v. Perry [1966] A.C. 16 the emphasis was
on the employer's viewpoint: see per Lord Reid at p. 31.

Harold Lomas for the taxpayer. It is necessary to determine if the transfer of shares was a profit arising from
an office: see per Upjohn J. in Hochstrasser v. Mayes [1959] Ch. 22, 38. One must look first at the
agreement, The remuneration is set out in clause 1 (3). That is where one finds the emoluments "therefrom"
for the purposes of Schedule E. Clause 2 is quite separate from clause 1 and is in quite general terms
relating to the undertaking to serve but not to actual performance. It can be construed as in consideration of
the taxpayer undertaking to bind himself: as a matter of construction it is necessary to take into account the
surrounding circumstances: see per Kay J. in Hart v. Hart, 18 Ch.D. 670, 692.

In Bridges v. Hewitt [1957] 1 W.L.R. 674 all that Morris L.J. was saying was that surrounding circumstances
can be relied on as a matter of construction; Jenkins L.J. merely said that the motive for the transfer of
shares was different from the benefit in fact conferred even if a gift was intended the transaction was not
completed as a gift.

The following factors are relevant: the value of the shares represented a substantial payment by someone
other than the employer: the transfer was a once and for all transaction; under the agreement the taxpayer
was paid a full remuneration for his services by the company; under the agreement the shares were to be
transferred at once although the service was not to commence until some months later and he could have
retained the shares even if he had only served for a short time.

Jarrold v. Boustead [1964] 1 W.L.R. 1357 demonstrates the importance of the findings of fact. It did not
depend on the irretrievable loss of amateur status; it was a payment made to a person about to become an
employee to compensate for a loss he would suffer by agreeing to serve. Such a payment is, of course, an
inducement to enter into a contract of service but that is not enough to make it arise from the employment.

In the present case the transfer of shares is made by Mr. Lowe, not the employer, to induce Mr. Arundale to
give up his established position in private practice and to compensate him for his loss of that position. The
headnote in Riley v. Coglan [1967] 1 W.L.R. 1300 summarises the whole crux of that case; it is clearly
distinguishable as being a payment tied to performance. Laidler v. Perry [1966] A.C. 16 was in the context of
the question of gift or remuneration. Where the donor is not the employer it is right to look at the position from
the point of view of the recipient.

The commissioners stated the correct test and made a clear finding of fact for which there was ample
evidence even on the agreement standing by itself.
[1972] Ch. 229 Page 234
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Heyworth Talbot Q.C. in reply referred to Tilley v. Wales [1943] A.C. 386.

Clause 2 expressly refers to an undertaking to serve. Where a sum is paid for future services that sum
cannot be regarded as paid otherwise than for an undertaking to render services in the future.

MEGARRY J. This is a case stated by the special commissioners. The facts are fully stated in the case, and I
propose to set forth only enough of them to make my judgment intelligible. The bone of contention consists of
4,000 shares in a company which before the special commissioners were agreed to have a value of £7,000.
The respondent, Mr. Arundale (whom I shall refer to as "the taxpayer"), was assessed for the £7,000 under
Schedule E for the year 1962-63, and the special commissioners have discharged this assessment. From
this decision the Crown appeals.

Briefly stated, the facts are that the taxpayer has been a chartered accountant since 1936, and for some
while he had been a senior partner in a firm of chartered accountants which became auditors to a company,
set up by a Mr. Lowe in 1947, which manufactured knitted fabrics and ladies' knitted clothing. The taxpayer
and Mr. Lowe became friends. By 1960, Mr. Lowe had set up another company, dealing in wholesale knitted
goods. In that year, Mr. Lowe's father died and left Mr. Lowe a controlling interest in yet another company,
dealing in children's outer wear and men's underwear. Mr. Lowe thus had three companies under his control,
and three businesses to run.

In 1961, on the advice of the taxpayer, Mr. Lowe formed a holding company for his three companies. Of the
51,000 shares in that holding company, Mr. Lowe owned all save three. With the commitments then facing
him, Mr. Lowe made strenuous efforts to find someone to assist him with what in modern phraseology is
described as senior management. When he proved wholly unsuccessful in this, he asked the taxpayer to join
him in that capacity. Initially, the taxpayer demurred. He was aged about 47 at this time, he was a senior
partner in a firm of chartered accountants, and he had family commitments. To leave his partnership would
plainly be a serious step. In the end, however, he agreed, but said that he would only move on the footing
that he had a status comparable to that of Mr. Lowe, and had some shares in the holding company.
Agreement was finally reached between them, and a tripartite agreement under seal dated June 19, 1962,
was executed. On October 1, 1962, the taxpayer started work for the company, devoting himself exclusively
to learning the business and managing the concern. His chartered accountancy partnership repaid him the
capital that he had in the partnership.

The three parties to the agreement are the company, Mr. Lowe and the taxpayer. The agreement recites,
among other things, that "Mr. Arundale" (that is the taxpayer) "has agreed to serve the company as the joint
managing director with Mr. Lowe upon the terms hereinafter contained and for the consideration hereinafter
appearing." Then, after another recital, clause 1 provides: "The company shall employ Mr. Arundale and Mr.
Arundale shall serve the company as joint managing director on the terms and subject to the conditions
following that is to say"; and there
[1972] Ch. 229 Page 235

is then a series of sub-clauses. By sub-clause (1) it is provided that the employment shall commence on a
date not later than January 1, 1963, and shall subsist, subject to the terms of the agreement, for seven years
therefrom, subject to determination. The sub-clauses further provide that Mr. Arundale shall be in the whole-
time employment of the company; and there is a restrictive clause restraining in effect competition within a
radius of 20 miles and for a period continuing for two years after the determination of the employment. Sub-
clause (3) provides that Mr. Arundale is to be entitled to an annual salary of £5,500 a year by way of
remuneration for his services. Then there is a provision for determination if Mr. Arundale becomes
incapacitated by illness or otherwise from performing his duties.
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It is clause 2 round which much of the argument before me has centred. That provides:

"In consideration of Mr. Arundale undertaking to serve the company as aforesaid Mr. Lowe shall forthwith after the
execution of this agreement transfer to Mr. Arundale 4,000 of Mr. Lowe's shares in the company."

Those are the shares in dispute; and that clause of the contract was duly acted upon. There is next, in clause
3, a somewhat lengthy and detailed option for Mr. Lowe to repurchase Mr. Arundale's shares after the
determination of Mr. Arundale's employment, the price under the option to be a fair market value, with an
arbitration clause, and so on. There is then a restriction upon Mr. Lowe disposing of his shares, a restriction
prefaced by the words: "In order to ensure that so far as may be the composition of and the shareholding in
the company shall remain unchanged." Then clause 5 provides: "For the reason that Mr. Arundale has given
up a secure livelihood to undertake employment under the company Mr. Arundale at the wish of Mr. Lowe
hereby covenants with Mr. Lowe that Mr. Arundale will effect" certain policies of assurance on his life.

The Crown's contention is that the 4,000 shares thus transferred to the taxpayer constitute an emolument
taxable under Schedule E. The taxpayer, on the other hand, contends that the shares were an inducement
for the taxpayer to give up an established position and status and to compensate him for the loss of that
position and status. It was also contended before the special commissioners that the value of the shares was
a capital receipt. [His Lordship read the commissioners' decision set out in the case stated and continued:]
The commissioners held that the taxpayer's appeal succeeded, and accordingly discharged the assessment
in question.

Schedule E, as contained in the Income Tax Act 1952, section 156, as amended by the Finance Act 1956,
section 10 (1), provides that "Tax under this Schedule shall be charged in respect of any office or
employment on emoluments therefrom which fall under one, or more than one, of the following Cases,
namely - ." There are then set out three Cases, of which Case I, dealing with persons resident and ordinarily
resident in the United Kingdom, is the relevant Case here, applying to "any emoluments for the year of
assessment." It is the word "therefrom" in section 156 that provides the central core of this case. The word
formerly appeared in
[1972] Ch. 229 Page 236

paragraph 1 of Schedule 9 to the Act of 1952, but the changes made by the Act of 1956 have resulted in it
disappearing from Schedule 9 and appearing in the revised section 156. I mention this because the leading
case on the subject, Hochstrasser v. Mayes [1960] A.C. 376, was decided on the unamended Act of 1952;
but no one has suggested that the change in drafting has made any difference in substance.

Let me take the matter by stages. First, in the Hochstrasser case, Viscount Simonds said, at p. 387:
"Upjohn J., before whom the matter first came, after a review of the relevant case law, expressed himself thus in a
passage which appears to me to sum up the law in a manner which cannot be improved upon. 'In my judgment,' he
said, 'the authorities show this, that it is a question to be answered in the light of the particular facts of every case
whether or not a particular payment is or is not a profit arising from the employment. Disregarding entirely contracts for
full consideration in money or money's worth and personal presents, in my judgment not every payment made to an
employee is necessarily made to him as a profit arising from his employment. Indeed, in my judgment, the authorities
show that to be a profit arising from the employment the payment must be made in reference to the services the
employee renders by virtue of his office, and it must be something in the nature of a reward for services past, present
or future.' In this passage the single word 'past' may be open to question, but apart from that it appears to me to be
entirely accurate."

I may at once say that the status of the word "past" is of no relevance to this case.
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Lord Radcliffe in terms agreed with Lord Simonds' reasons, although expressing his own as well; and I think
Lord Cohen and Lord Keith of Avonholm also accepted what Lord Simonds had said: see pp. 391, 395. Two
elements thus appear in the words of Upjohn J. First, the payment "must be made in reference to the
sercices the employee renders by virtue of his office," and, second, the payment "must be something in the
nature of a reward for services." It will be observed that under each limb it is the services to which the
payment must relate. True, the services must be those that the employee renders by virtue of his office or
employment: that is explicit under the first limb, and I think must apply also to the second limb. But the
connection must be not merely with the office, but with the services. If one excludes all services which are
not rendered by virtue of the office, then the question can be expressed in terms of whether the payment was
made "in reference to," and was "in the nature of a reward for," the services.

Secondly, I think the question to be tested in this way is only one question. Either the emoluments are within
the statutory word "therefrom," as explained by the cases, or they are not. At one stage in the argument, in
commenting on Bridges v. Hewitt [1957] 1 W.L.R. 674, Mr. Heyworth Talbot said that the question there was
whether the employees in the case got the shares as remuneration for services or as personal gifts. In the
Hochstrasser case, in the Court of Appeal, Parker L.J. had expressed himself in terms of any benefit in
money or money's worth
[1972] Ch. 229 Page 237

received by an employee during the course of his employment from his employer as being a taxable profit of
his employment, with two exceptions, one of which was a gift to him in his personal capacity: see [1959] Ch.
22, 54. In the House of Lords, Lord Simonds deprecated this approach, saying that it was not for the subject
to prove that his case fell within exceptions arbitrarily inferred from the statute, but for the Crown to prove
that the tax was exigible: see [1960] A.C. 376, 389. After a little discussion, I think that Mr. Heyworth Talbot
accepted that the true issue was not the twofold question whether the benefit fell within the taxable category
of remuneration for services (as it may briefly be described) or within the non-taxable category of personal
gift, but a single question, namely, whether or not it fell within the taxable category of remuneration for
services "Personal gift" is thus not a category which has to be defined or explained, but merely an example
of a transaction which will not fall within the taxable category of remuneration for services. In other words, the
question is not one of which of two strait-jackets the transaction best fits, but whether it comes within the
statutory language, or else, failing to do so, falls into the undefined residuary class of cases not caught by the
statute.

Thirdly, the questions posed by the words of Upjohn J. seem to me to be primarily questions of fact. Was the
payment in fact made "in reference to" the services? Was the payment in fact in the nature of a reward "for"
the services? As Upjohn J. said, the question "is a question to be answered in the light of the particular facts
of every case."

Fourthly, the question seems to me to be primarily one of causal connection. It is not enough merely to
demonstrate that the payment would not have been made if the taxpayer had not been an employee, for that
does not per se relate the payment to the services and show that it was to reward those services. In the
Hochstrasser case, Lord Simonds said, at p. 389:
"If in such cases as these the issue turns, as I think it does, upon whether the fact of employment is the causa causans,
or only the sine qua non, of benefit, which perhaps is only to give the natural meaning to the word 'therefrom' in the
statute, it must often be difficult to draw the line and say on which side of it a particular case falls."

Lord Cohen said, at p. 394: "The court must be satisfied that the service agreement was the causa causans
and not merely the causa sine qua non of the receipt of the profit."

Pausing there, I may perhaps be permitted to remark the resurgence in this sphere of the distinction between
causa causans and causa sine qua non, a terminology which also appears in Laidler v. Perry [1966] A.C. 16,
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32, 33, per Lord Reid. In other fields, these expressions have fallen into disfavour. Lord Wright once said of
them:
"I cannot help deprecating the use of Latin or so-called Latin phrases in this way. They only distract the mind from the
true problem which is to apply the principles of English law to the realities of the case. 'Causa causans' is supposed to
mean a cause which causes, while 'causa sine qua non' means, I suppose, a cause which does not, in the sense
material to the particular case, cause, but is merely an incident which precedes in the history or narrative of events, but
as a

[1972] Ch. 229 Page 238

cause is not in at the death, and hence is irrelevant. English law can furnish in its own language expressions which will
more fitly state the problem in any case of this type": Smith, Hogg & Co. Ltd. v. Black Sea and Baltic General Insurance
Co. Ltd. [1940] A.C. 997, 1003.

In Australia, too, in National Insurance Company of New Zealand Ltd. v. Espagne (1961) 105 C.L.R. 569,
590, Windeyer J. spoke unkindly of the expression causa causans, saying that an examination of cases in
which it was used
"makes me think that either it has no certain meaning for legal purposes, or, if it has, that its use in some cases was
catachrestic. It can be a dress for what would otherwise be a naked petitio principii."

I observe that in the Hochstrasser case [1960] A.C. 376 Lord Radcliffe and Lord Denning eschew Latin. Lord
Radcliffe, at p. 391, said that while it was not sufficient to render a payment assessable that an employee
would not have received it unless he had been an employee, "it is assessable if it has been paid to him in
return for acting as or being an employee." Lord Denning went back to the words of the statute and asked
simply whether the money received by the employee was "a 'profit' from his employment." Lord Keith of
Avonholm, who spoke after Lord Cohen, merely expressed his agreement.

Fifthly, whichever of these formulations is applied, and in whatever language, it seems to me that the
question of fact must be resolved by looking at the whole of the relevant facts. Mr. Heyworth Talbot's sheet
anchor was clause 2 of the agreement. This provided for Mr. Lowe to transfer the shares to the taxpayer, Mr.
Arundale, "In consideration of Mr. Arundale undertaking to serve the company as aforesaid." This, said Mr.
Heyworth Talbot, was conclusive: the consideration was made wholly referable to the contract to serve, and
although extrinsic evidence was admissible to determine a doubtful meaning, it could not be used to
contradict the express terms of the written agreement. His alternative submission was that even if evidence
of the surrounding circumstances was admissible, the result would be the same.

On these submissions a variety of points arose. The first, and on one view the most important, is that
consideration and causation are by no means necessarily identical. Let me assume for one moment that no
evidence is admissible to establish that there was a jot or tittle of consideration for the transfer save the
taxpayer's undertaking to serve the company. That does not seem to me to answer the question whether or
not the payment was made to the taxpayer in reference to, and as a reward for, services rendered by virtue
of his office, or in return for acting as or being an employee. If the transfer had been made for no
consideration at all, the reason for making it might still have been to reward the taxpayer for his services to
the company, and so it might be taxable. Per contra, if the real reason for making the transfer had been not
to reward him for his services, but to make him a free gift, or, as in the Hochstrasser case, to compensate
him for some loss he had already suffered (which, being past consideration, could not be valuable
consideration), then I cannot see that to make the agreement to transfer legally enforceable by expressing it
to be in consideration of his undertaking to serve the company
[1972] Ch. 229 Page 239
 11

conclusively ousts the real reason for the transfer. The terms of the agreement are entitled to be given full
weight, as part of the surrounding circumstances; but I do not think a contractual expression of consideration
is conclusively determinative of causation.

The second point is that clause 2 of the agreement does not in terms state that the undertaking to serve is
the sole consideration. lf it had provided that the transfer was to be made in consideration of the taxpayer
undertaking to serve the company "and in consideration of nothing else whatsoever," questions of extrinsic
evidence being used to contradict the express terms of the agreement might well have arisen with greater
force. But there is no such exclusionary negative, and despite Mr. Heyworth Talbot's submission to the
contrary I see no ground for implying one. At least where there is no such negative it is clear law, as the
Crown accepted, that extrinsic evidence is admissible to show that there is further consideration for a
contract than that stated on the face of it, even if it is under seal. The point is covered, I think, by passages in
the judgments of Knight Bruce V.-C. and Lord Lyndhurst L.C. in Clifford v. Turrell (1845) 14 L.J.Ch. 390, 394,
397.

The third point is that in Bridges v. Hewitt [1957] 1 W.L.R. 674, the majority in the Court of Appeal seem to
me to have gone some way towards supporting the views that I have been attempting to express. In that
case, there were deeds transferring shares to each of two directors of a company in somewhat unusual
circumstances, the deeds being expressed to be "in consideration of the covenantee continuing his present
engagement with the company" for four years. Jenkins L.J. dissented, but Morris L.J. and Sellers L.J., in
reversing Danckwerts J., held that the deeds did not of themselves negative the view that the transactions
were by way of gift, and that the shares, not being remuneration for services as directors, were not taxable.
Morris L.J. said, at p. 691:
"I agree with Danckwerts J. that evidence is not admissible to contradict the plain terms of the deeds by attempting to
show that the intentions of the parties were to give a meaning to the provisions of the deeds contrary to the words
which the deeds plainly contain. If the evidence which the commissioners regarded as admissible was received and
regarded only to the extent that it threw light on the question as to whether the appellants received remuneration for
services, then I consider that there was no objection to it. But I consider that the case must be approached on the basis
that the deeds of covenant fully mean what they state."

Sellers L.J. approached the question a little differently, but as I read p. 701 he rejects the view that had
prevailed below that the deeds had the effect of irretrievably linking up the acquisition of the shares with the
directors' services as officers of the company. That case and this are far from being on all fours, but so far as
they have territory in common, I think that the majority view provides support for the view that I take.

The fourth point is that the language of clause 2 of the agreement in this case expresses the consideration
not as being the rendering of services by the taxpayer under the contract but his "undertaking to serve the
company as aforesaid." If strong reliance is to be placed on the exact words used,
[1972] Ch. 229 Page 240

then this is language which points not to the continuous rendering of services but to the initial entering into
the obligation to serve. This has two aspects to it. First, as clause 5 shows, the taxpayer was giving up a
secure livelihood in order to undertake to serve the company in what the contract provided was to be full-time
service; and he could not do the latter without also doing the former. To that extent the concept of
compensation for loss makes this case akin to Hochstrasser, where an employee of a company who had to
move from one of the company's factories to another was compensated for the loss he incurred on the resale
of the house that he had bought soon after he went to the first of the two factories. In any case, for the
reasons that I have given, I do not think that the precise language of clause 2 or any other clause can be
decisive. If it were, the Crown might find that such a doctrine has its perils: the days of skilled draftsmen are
not past. In my judgment, the payments must be linked to the services not by mere words but by reality; and
to this, contractual obligations may contribute, perhaps substantially, but they cannot pre-empt.
 12

Before moving to the second aspect of the point, I may say that it is of some importance to observe that in
the present case the shares were being transferred on an out-and-out basis in consideration of the taxpayer
entering into a contract whereunder his employment was to commence not forthwith but within a little over six
months: the contract was dated June 19, 1962, and by clause 1 (1) the employment was to be commenced
on a date "not later than" January 1, 1963. In fact, it commenced on October 1, 1962. The taxpayer might
have died before he had rendered any services whatever to the company, and yet there is no provision for
him to return any of the consideration; and many other instances may be imagined of the taxpayer never in
fact rendering services to the company. Furthermore, it was not the employer who was transferring the
shares, but a third party, Mr. Lowe, albeit that he was in control of the company. This was a case of A
transferring shares to B in consideration of B binding himself by a contract of future employment with C, and
having to give up an established position to do so; and that seemsto me to be a far cry from a case in which
those shares could be said to have been transferred as a reward for services to the company. Where the
payment is made not by the employer but (as here) by a third party, questions of looking at the transaction
from the point of view of the employer as distinct from that of the recipient seem to me to be of little
assistance, if any: consider Laidler v. Perry [1966] A.C. 16, 32, 33.

Second, to return, as always one must, to the language of the statute, the payment must be an emolument
"from" the office or employment; and I do not think "from" means "for." In other words, the payment must be
made in reference to the services rendered under the office or employment, and as a reward for them, and
so in that sense flow "from" the office or employment; and this is not the same as a payment made "for"
undertaking the office or employment. I am not saying that merely because some benefit is, as it were, a
premium or other initial payment in return for entering into a contract of employment it is not taxable.
Remuneration for services is still remuneration for services, even if paid in a lump sum in advance. But
whereas it will normally be very difficult to demonstrate that periodical payments made by an employer to an
[1972] Ch. 229 Page 241

employee during the employment are anything but payments taxable under Schedule E, the fact that a
payment is in the form of a lump sum paid at or before the commencement of the employment is a factor
which, taken with other factors, may exclude Schedule E. If that Schedule is to apply, what the payments
must relate to, and reward, is not the mere existence of a contract of service, nor merely entering into such
contract, but the services rendered or to be rendered under the contract.

The Rugby League cases provide some illustration of this. If a Rugby Union football player receives a
"signing on" fee from a Rugby League football club, then that fee may, as in Jarrold v. Boustead [1964] 1
W.L.R. 1357, be regarded as the payment of a capital sum for the player relinquishing his amateur status for
life. But if, as in Riley v. Coglan [1967] 1 W.L.R. 1300, the sum is paid under a contract which relates it to the
services to be rendered under that contract, and requires the player to repay a proportionate part if he
becomes unable to serve the club during a specified period, the sum is taxable. In such a case, the terms of
the contract play an important part by making it plain what the realities are. The point is summarised
sufficiently in the headnote by the passage "that the sum of £500 was a running payment covering the whole
period of the contract, irrespective of when it was received and was in consideration of the taxpayer's
services, and was therefore taxable as remuneration." I do not think I need embark upon cases where what
is being given up is, unlike the Jarrold case, being given up not permanently but for a period tailored to the
duration of the contract. If a professional man in his middle years gives up his career and embarks on some
quite different activity, he is most unlikely to be able to pick up his former profession as soon as his other
activities end, for to a greater or less degree he will have grown rusty in his skills and knowledge, and will
have ceased to be in close daily contact with his professional brethren.

With these considerations in mind, and even if in some respects I am wrong, it seems to me that
nevertheless there was ample evidence upon which the special commissioners could come to the conclusion
(as they did) that the transfer of the shares was not taxable under Schedule E. It was not for the taxpayer to
establish that the transfer was a free gift, or anything else, but for the Crown to show that the transfer fell
within the statutory language imposing the liability to tax;and I think the special commissioners were quite
 13

right to hold that this had not been done. On the facts of the case, I do not think that there was an emolument
"from" any office or employment, or that any emolument was "in the nature of a reward for" services, or that
the transfer was made "in reference to" services. Nor, I may add, do I think that this decision will provide any
passport for tax-free emoluments disguised as initial lump sum inducements to enter an employment: for it is
the realities of the payments that matter, and not any disguises or labels with which they may be provided.
That being so, the appeal fails and must be dismissed.

Appeal dismissed with costs.

Solicitors: Solicitor of Inland Revenue; Baileys, Shaw and Gillett for Leak, Almond & Parkinson, Manchester.