House of Lords

Deeny and Others v Gooda Walker Ltd (in liquidation) and Others (No 2)

Albert and Others v Same

Brownrigg and Others v Same

Before Lord Goff of Chieveley, Lord Browne-Wilkinson, Lord Mustill, Lord Nicholls of Birkenhead and Lord Hoffmann

(Speeches March 7)

Lloyd's litigation - damages liable to income tax

Lloyd's damages taxable in names' hands

The damages recoverable by the Lloyd's names for the negligence of their agents constituted receipts of the names' underwriting businesses because the names carried on such businesses through their agents under the agency agreements which were contracts made in the course of the names' underwriting businesses at Lloyd's and those damages were chargeable to income tax in the names' hands under Case I of Schedule D.

The House of Lords so held dismissing an appeal by the defendants, Gooda Walker Ltd (in liquidation) and others, in three related actions, from a decision dated October 5, 1995 by a majority of the Court of Appeal (Lord Justice Simon Brown and Lord Justice Peter Gibson, Lord Justice Saville dissenting) (The Times October 19, 1995), pursuant to leave granted by the court.

The defendants' appeal from the decision dated January 11, 1995 of Mr Justice Potter (The Times January 26, 1995; [1995] STC 439) had been dismissed by the court. The judge had declared that the damages recoverable by the plaintiffs, Michael Eunan McLarnon Deeny and 3,062 others, Zaria Albert and 29 others and Paul Colin Brownrigg and 11 others, the names, would in principle be subject to income tax under Schedule D, Case I, in their hands and that such damages would not be reduced by amount of any tax saving achieved by them in connection with their Lloyd's underwriting business.

The Inland Revenue Commissioners were invited by the parties to be joined in the main action.

Mr Bernard Eder, QC, Mr Philip Baker and Mr Simon Bryan for the appellant defendants; Mr Ian Glick, QC and Mr Launcelot Henderson, QC, for the Revenue; Mr Geoffrey Vos, QC, Mr John Walters and Mr David Lord for the names.

LORD BROWNE-WILKINSON agreed that the appeal should be dismissed on the first ground relied on by Lord Hoffmann: the receipt of damages by a name constituted a receipt of his underwriting business as a member of Lloyd's within the meaning of section 171(2) of the Finance Act 1993.

Where compensation was received by a trader two questions arose: first, was the receipt of the compensation a receipt of the recipient's business and, second, was such receipt of an income or capital nature?

There was no doubt that the test propounded by Lord Justice Diplock inLondon and Thames Haven Oil Wharves Ltd v Attwooll ([1967] Ch 772, 815) correctly determined the answer to the second of those questions.

As to the first question, in the ordinary run of cases the receipt of a sum by a trader as compensation

for the failure to receive what would have been a receipt of his trade would normally demonstrate that the compensation was itself a receipt of that business.

Since it was unnecessary to decide the point in order to determine the appeal, his Lordship preferred to express no view on whether the test

propounded by Lord Justice Diplock was in all circumstances determinative of whether or not a receipt of compensation was a receipt of the taxpayer's business.

LORD HOFFMANN said that the appeal raised a narrow but important point: whether damages awarded to a member of Lloyd's in compensation for losses caused by the negligent conduct of the underwriting on his behalf were a taxable receipt of his underwriting business.

The profits of an underwriting business were taxed under Case I of Schedule D, which was applied to underwriting members of Lloyd's by section 171(2) of the 1993 Act. Section 184(1) defined "underwriting business", in relation to an underwriting member of Lloyd's, as: "... his underwriting business as a member of Lloyd's, whether carried on personally or through an underwriting agent, and does not include any other business carried on by him, and in particular, where he is himself an underwriting agent, does not include his business as such an agent..."

The relevant words in section 184(1) were "his underwriting business as a member of Lloyd's ... carried on ... through an underwriting agent..." So the question was simply whether the damages were a receipt of that business.

If it were not for the dissenting judgment of Lord Justice Saville in the Court of Appeal the question admitted only one answer. If a trader sold goods, the price of what he sold was a receipt of his trade. If the buyer had to be sued for the price, the money recovered was a receipt of the trade and the irrecoverable costs were an expense. If the buyer did not accept the goods and the trader recovered damages for non-acceptance the damages were a receipt of the trade.

What was true of goods was also true of services. If a trader employed someone to perform services for the purposes of his trade, the money which he realised from the performance of those services was a receipt of the trade.

If the employee, in breach of his legal duty, failed to perform the services, or performed them badly, so that the trader realised less money than he would have done if they had been performed properly, the employee would be liable in damages and the damages would be a receipt of the trade. In each case the receipt arose out of the trade.

Mr Eder submitted that the names' only trade at Lloyd's was writing contracts of insurance as part of one or more syndicates. It was not employing members' agents, still less suing them for compensation.

Underwriting business was what was done at syndicate level and gave rise to receipts and expenses which entered into the syndicate accounts. Those would not include damages payable by a members' agent for breach of the agency agreement. A name had to employ a members' agent as a condition of being allowed to trade at Lloyd's but the employment did not form part of that trade.

His Lordship rejected that analysis which seemed entirely artificial. Of course, the purpose of the names' business was to write insurance. The premiums, the income of the fund in which they were invested and his reinsurance recoveries would ordinarily be his only receipts.

Apart from the fact that the use of an agent was compulsory, which in the present context was neither here nor there, no difference could be seen

between the employment of agents to conduct one's underwriting business at Lloyd's and their employment in any other kind of business.

The question of whether the damages arose to the names from their underwriting businesses was thus far being considered as if it was equivalent to asking whether the damages arose from a contract made in the course of that business. That question was answered in the affirmative because the agency agreement with the members' agent was a contract made in the course of the name's underwriting business at Lloyd's.

Mr Vos submitted that that was applying too narrow a principle. In order that a receipt should arise out of a trade, it need not become payable by virtue of some pre-existing trade relationship. There need have been no previous contractual relationship between the parties at all: see Inland Revenue Commissioners v Newcastle Breweries Ltd ((1927) 12 TC 927).

Mr Vos said that a legal right to compensation for the loss of a trade receipt gave rise to a payment which by definition arose out of the trade. He relied on a statement to that effect by Lord Justice Diplock inAttwooll.

Mr Vos said that one need not concern oneself with whether the employment of the managing agent was a contract made in the course of the name's trade. The fact that the name was entitled to the damages as compensation for what would have been a revenue expense or receipt of the trade was enough to identify the damages as a trade receipt.

It was not necessary to decide whether Lord Justice Diplock's statement was applicable here. But the question had been fully argued and it was right that an opinion was expressed on it.

The Attwooll proposition was about which compensatory payments could be said to arise from the trade. It identified them as payments in compensation for what would have been revenue items in the trade. If they were not compensation for such revenue items, the question of what else they were compensation for was irrelevant. There was nothing special about compensation for a capital asset. It was no more than one kind of compensation which did not for income tax purposes arise out of the trade.

Lord Goff, Lord Mustill and Lord Nicholls agreed with dismissing the appeal only on Lord Hoffmann's first ground; Lord Mustill and Lord Nicholls agreed with the concern expressed by Lord Browne-Wilkinson on the second ground.

Solicitors: Elborne Mitchell; Solicitor, Inland Revenue; Wilde Sapte.