High Court of Ireland Decisions

O'Connell (Inspector of Taxes) v. Keleghan [2002] IEHC 84 (25 July 2002)

THE HIGH COURT

REVENUE

1999 No. 351 R

BETWEEN

PATRICK J. O'CONNELL INSPECTOR OF TAXES

APPELLANT

AND

THOMAS KELEGHAN

RESPONDENT

JUDGMENT of Mr. Justice McCracken delivered the 25th day of July 2002.

1.      The background to this case is set out very fully in the judgment of Mr. Justice Murphy delivered in the Supreme Court on 16th May 2001 and the matter has been remitted to me by Order of the Supreme Court of 21st May 2001 to deal with one issue only, namely whether the assessment of liability to schedule E tax was correctly raised in relation to the year 1991/92.

2.      The Appellant's argument is that the Respondent was to be employed for a period of 18 months from 1st January 1990 to 30th June 1991, and that there was an obligation on him to work for this entire period, and that accordingly he did not become entitled to payment until 30th June 1991. In the case stated there is a finding that the Respondent's employment ended in June 1991, and therefore prima facie that is when the payment was earned. The Appellant further argues that this is confirmed by the rather complicated manner in which payment was to be made. There was a loan note given in 1990, but under its terms it could not be redeemed until 1st November 1991 at the earliest, and therefore the Respondent could not have got paid any benefit under this loan note until that date. It is further a condition of the loan note that, except in the case of death, it could not be transferred or assigned, and therefore the Respondent could not have raised any money on it prior to 1st November 1991.

3.      The Respondent on the other hand argues that the giving of the loan note in February 1990 was in effect a payment of the monies he further points to the terms of the side letter of 8th February 1990 which states that the consideration "was paid as an inducement for me to enter into the service contract", and further that if the terms of the service contract were not complied with, the consideration "will become repayable by me". They also argued that the consideration was entry into the service contract, and that the Respondent did enter into the service contract in February 1990. While he acknowledges that the loan note was not transferable, he does argue that it could be used to raise money, in other words, it could be used as security whereby monies could be advanced to the Respondent at any time after granting the loan note, and would then become repayable to the lender in November 1991 out of the proceeds of the loan note. This latter point is seriously contested by the Appellant on the basis that to borrow using the loan note as security at all would amount to an equitable assignment, which would be a breach of the conditions of the loan note. On this basis the Respondent contends that the correct year of assessment would be 1989/1990.

4.      In the alternative, the Respondent argues that the monies were not actually paid until February 1993, and therefore should not be assessed until that year. However, that argument would not seem to have any validity in the light of the provisions of Section 6 of the Finance Act 1991, which amended Section 110 of the Income Tax Act 1967 by adding a subsection, the relevant provisions of which are:-

"(2) where (apart from this subsection) emoluments from an office or employment would be for a year of assessment in which a person does not hold the office or employment, the following provisions shall apply for the purposes of subsection (1):- (a) ....

(b) If in the year concerned the office or employments is no longer held, the emoluments shall be treated as emoluments for the last year of assessment in which the office or employment was held."

5.      It seems to be quite clear under this provision that, if the relevant year of assessment would otherwise have been 1992/1993, it is to be treated as an emolument for 1991/1992, being the last year in which the office or employment was held.

6.      In Bray (Inspector of Taxes) -v- Best (1989) STC 159 at page 167 Lord Oliver said:-

"In the Court of Appeal it was said that there is a prima facie presumption that an emolument is paid "for" the year of assessment in which the payee becomes entitled to receive it. I would prefer, however, to say simply that the period to which any given payment is to be attributed is a question to be determined as one of fact in each case, depending on all the circumstances, including its source and the intention of the pay or so far as it can be gathered either from direct evidence or from the surrounding circumstances".

7.      I entirely agree with this approach, but the question then arises as to the findings or inferences to be drawn from the circumstances and from all existing documentation. In Abbot -v- Philbin 39 TC 82 it was said by Lord Reid that the test must be the nature of the right, and by Viscount Simonds that the test was whether it is something which is by its nature capable of being turned into money.

8.      In the present case the Respondent was certainly given something with a future value in February 1990 when it was agreed that he would be paid £250,000 as an inducement to enter into the service agreement, but of course he was not given the £250,000 at that time. What he was given was a loan note which provided that it could not be repayable before 1st November 1991, and therefore the earliest date at which he could receive a payment on foot of the loan note was 1st November 1991. In Abbot -v- Philbin the taxpayer was granted an option to purchase shares, which option he did not exercise in the same year that he was granted it. It was held that he was nevertheless assessable in the year the option was granted because he could have turned it into money in a number of ways and Viscount Simonds commented at page 117 that:-

"But the fact that there was no realisation in the sense of actual turning into money is irrelevant. The test is whether it is something which is by its nature capable of being turned into money."

9.      To apply this to the present case, the loan note was not transferable or assignable, and I accept that if it were used as security that would amount to an equitable assignment. In my view, looking at all the circumstances of this case, the Respondent could not see any return for the inducement offered to him until 1st November 1991 at the earliest, as he could not have raised money on foot of it and he could not have sold it. Accordingly, it seems to me that, considering the nature of the instruments involved, the correct year of assessment is the year 1991/92. I think it is irrelevant that he did not in fact redeem the loan note until 1993, as he could have turned it into money during the year 1991/1992.