Major v. Brodie Essay Example for Free

Major v. Brodie Essay Case Law Where the tax liability of an English taxpayer depended on the nature of some entity or structure which was not constituted under English law, the matter was to be determined by reference to the actual legal characteristics of that entity or structure under its own governing law. To the extent that the taxpayers liability in the instant case depended on the nature of a partnership under Scots law they were therefore entitled and bound to be taxed by reference to the actual law which governed the partnership. Moreover, under English or Scots law a trade carried on by a partnership was a trade carried on by its members and each of them. (Major v. Brodie) Any trader who bought an asset for use in his trade was the proprietor of it, and inevitably used it in part for the purpose of being its proprietor. It was, however, legally possible for him to use the asset wholly for the purposes of the trade. (Major v. Brodie) Summary The author first recites the facts of the case. Taxpayers Mr. And Mrs. Brodie were members of a partnership under the name of Skeldon Estates (SEP). The two entered into loan agreements with a finance company and advance said loans to the SEP. The balance of the loan was however applied as the firm’s contribution of capital to another partnership, W Murdoch Son, a firm engaged in the trade of farming of which it was a member. Additional loan agreements were subsequently entered into by the taxpayers, the amount of which was applied to the SEP which it used to purchase another farm for use by W Murdoch Son in its farming trade, but which was not an asset of that partnership. The taxpayers claimed tax relief under s 362(1) of the Income and Corporation Taxes Act 1988 for interest on the loans for the years 1987-88 to 1992-93 as interest on loans to defray money applied in advancing money to the Skeldon Estates partnership for the purposes of the farming trade which it carried on as a partner in W Murdoch Son. The Revenue denied relief to the taxpayers because they did not meet the requirement of s 362(1) that the money advanced be used wholly for the purposes of carrying on the trade of the partnership claiming the relief. The Revenue treated the money advanced to W Murdoch Son partnership as money advanced for the purposes of carrying on a separate trade, and not for SEP.            According to the author, the conditions of s 362(1)(b) are satisfied. The provision of the law only requires that the money be used wholly for the purposes of the trade carried on by the partnership; it does not however require that such trade be carried on by the partnership alone. In his words: â€Å"When the paragraph requires the money to be used wholly for the purposes of the trade carried on by the partnership there is no need or justification for tacitly interpolating the word alone, or some other expression having the same effect. If the trade is carried on by the partnership, and here the farming trade is carried on by Skeldon Estates partnership (as it is also carried on by Mr Henry Murdoch), it makes no difference whether it is carried on by the partnership alone or in common with any other person or persons. It should be noted that the word wholly in s 362(1)(b) goes with used. It describes how the money has to be used, not who it has to be used by.† (Major v. Brodie) For purposes of granting relief under s 362(1)(b), the trade carried on by a partnership as a member of another partnership may be considered being carried on by it wholly for the purpose of that partnership.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   The author then points to the argument of the Crown that the separate legal persona of the SEP from the taxpayers does not entitle them to relief under English law, Park J considers this untenable. First and foremost, the partnership is a Scottish partnership. It therefore has a legal persona separate and distinct from its members and the money advanced by its members can be regarded as money of the partnership, contrary to the Crown’s argument. Even if SEP was, for the sake of argument, an English partnership, the taxpayers would still be entitled to relief because when the paragraph refers to â€Å"the trade . . . carried on by the partnership,† its strict meaning in relation to an English partnership is â€Å"the trade carried on by the partners in their capacities as members of the partnership† because an English partnership does not have a separate legal persona.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   The author then discussed the case of Mac Kinlay (Inspector of Taxes) v. Arthur Young McClelland Moores Co. [1989] STC 898, which will be discussed hereunder. Background Facts Arthur Young McClelland Moores Co, is a firm of chartered accountants with over 200 partners decided that it became necessary to ask partners and employees to move from one part of the country to another to ensure that the staff was deployed to the firm’s best advantage with the firm shouldering some of the expenses. Issues The Special Commissioners, in resolving the issue involving two of the firms partners, found that the expenditure was incurred wholly and exclusively for the purposes of the firm’s business by paying regard to two and only two considerations; The conscious motives of Wilson and Cooper in agreeing to move and the motives of the partners in requesting them to do so and agreeing to contribute to the cost in accordance with the established policy. Decision It was concluded by the Court of Appeals through Lord Oliver of Aylmerton that the expenditure was not allowable due to the fact that the purpose of the partnership could not to be determined because it had a separate legal identity which allowed for the purpose of the individual partner to be ignored. The decision in this case allows a deduction to the partnership for payments to a partner for trade or professional purpose and when the payment is in return for full commercial consideration.  It may be however that in relation to a particular receipt by a partner of partnership moneys not falling under either of the above heads, his co- partners are agreeable to his retaining it without bringing it into account so that to that extent the divisible profits at the end of the year are notionally reduced by the amount retained; but this cannot alter the fact that what is retained is part of the profits which would otherwise be divisible. What is taxable is the actual not the notional profit and what has to be demonstrated if a deduction is to be allowed for tax purposes in respect of moneys paid to a partner is that it was paid exclusively for the purposes of the partnership business. As the decision states: â€Å"‘separate entity treatment only arose at the final stage when, the profits of the trade or profession having been computed and the tax in respect of each partners share in them having been worked out, that tax was assessed in one sum in the partnership name. This matter went to machinery, not to principles of liability.† Conclusion   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   The author concludes that a trade carried on by a partnership in its capacity as a member of another partnership may be considered as the trade carried on by the partnership for purposes of tax treatment and tax relief for interest payments.    References: HM Revenue and Customs, BIM38120 Wholly exclusively: partnerships: meeting a partners personal expenditure, retrieved December 3, 2006, http://www.hmrc.gov.uk/manuals/bimmanual/BIM38120.htm Mac Kinlay (Inspector of Taxes) v. Arthur Young McClelland Moores Co. [1989] STC 898. Major v. Brodie, [1998] STC 491, 70 Tax Cas 576.