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United Kingdom Special Commissioners of Income Tax Decisions
You are here: BAILII >> Databases >> United Kingdom Special Commissioners of Income Tax Decisions >> Gross Klein & Co v HM Inspector of Taxes [2005] UKSPC SPC00463 (01 March 2005)
URL: http://www.bailii.org/uk/cases/UKSPC/2005/SPC00463.html
Cite as: [2005] UKSPC SPC463, [2005] UKSPC SPC00463
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- This is an appeal by Gross Klein & Co against partnership assessments for as long ago as 1987-88, 1988-89, 1990-90 and 1990-91 when the preceding year basis applied, and the allocation of the assessments among the partners (I record that it is common ground that partnership assessments for all years before these have been settled by s 54 agreements). It is essentially a dispute between the partners rather than a dispute with the Inspector. Following a preliminary hearing I gave leave to Mr Reynolds, a former partner, to argue 7 points. Mr Gross and Mr Klein ("the Other Partners") and the Inspector are content with the assessments and allocation and they have replied to Mr Reynolds' points.
- The Other Partners and Mr Reynolds and entered into a partnership as chartered accountants from 1 February 1983. The partners fell out in about 1990 and Mr Reynolds left. Litigation followed and I was shown a schedule of legal issues said to have been determined by Master Barratt on 21 and 22 March 1994, and on 18 and 19 July 1994. I understand that he requested the parties to try to settle the action but negotiations broke down. Heads of agreement were initialled by all parties at some time but are undated. I understand that the action has been stayed.
- As an initial issue Mr Gross on behalf of the Other
Partners raised res judicata and issue estoppel. He cited Coflixip v Stolt
Offshore MS Ltd [2004] EWCA Civ 213 :
"41 At 105D-E [of Arnold] Lord Keith said that issue estoppel:
'may arise where a particular issue forming a necessary ingredient in a cause of action has been litigated and decided and in subsequent proceedings between the same parties involving a different cause of action to which the same issue is relevant one of the parties seeks to re-open that issue.'
- Estoppel per rem judicatam also extends to some types of abuse of process. Thus, at 104F, Lord Keith said:
'Cause of action estoppel extends also to points which might have been but were not raised and decided in the earlier proceedings for the purpose of establishing or negativing the existence of a cause of action'
- Lord Keith went on to explain what he had in mind in a little more detail at 104F-105B:
'In Henderson v Henderson (1843) 3 hare 100, 114-115, Sir James Wigram V.-C. expressed the matter thus:
'In trying this question, I believe I state the rule of the court correctly, when I say, that where a given matter becomes the subject of litigation in, and of adjudication by, a court of competent jurisdiction, the court requires the parties to the litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matters which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, expect in special cases, not only to points upon which the court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time.'…"
- Mr Gross contended that all disputed points were
open to Mr Reynolds to take in the previous litigation and he should not be
allowed to go over the same ground in the guise of a tax dispute. He
apologised for not having researched the law more fully but he is not a lawyer
and had limited time available. I said I would look at the subject further
myself before giving a decision, which I have done. I consider he has a good
point in principle but not one that is applicable on the facts. The Master
gave no final determination of the dispute as is clear by his requesting that
the parties attempted to settle. As there is no judgment there can be no
estoppel. Mr Reynolds' act of withdrawing from the action is not a decision. I
therefore turn to consider Mr Reynolds' points.
Profit adjustment
- For reasons that I need not go into the partners
agreed a profit adjustment from the normal one for the year ended 6 April 1990
so that Mr Reynolds receives an additional £6,327.15. Without the profit
adjustment the results would have been:
Total Gross Klein Ladhani Reynolds Salaries 70299 17236 10330 27175 15558 Percentage shares 63207 32868 20858 9481 Total 133506 50104 31188 27175 25039 The Other Partners effected the profit adjustment by first adjusting the profit shares so that all partners received an additional profit share such that the additional profit share for Mr Reynolds represented 15% (his profit share) of a total amount, and the Other Partners received their profit shares of this total amount. The Other Partners then reduced their salaries by the same total amount in the proportions in which they shares profits between them. They contended that one could not make an increase in Mr Reynolds' salary as this would merely reduce his profit shares. The result is as shown below:
Total Gross Klein Ladhani Reynolds Profit percentage 63206 32867 20858 27175 9481 Profit adjustment 42181 21934 13919 6327 Adjusted profit shares 105387 54801 34777 27175 15807 Salaries 70298 17236 10330 27175 15558 Salary adjustment -42181 -25805 -16376 Adjusted salaries 28118 -8567 -6046 27175 15558 Total 133505 46234 28731 27175 31366 When applied to the 1989-90 assessment, this method gives the following result:
Salaries 28118 -8567 -6046 27175 15558 Profit shares 161811 84142 53397 24272 Total 189929 75575 47351 27175 39830 - Mr Reynolds contends that the adjustment should have
been made simply by adjusting the profit-sharing ratios, as shown below:
Total Gross Klein Ladhani Reynolds Salaries 70298 17236 10330 27175 15558 Percentage shares 63207 32868 20858 9481 Profit adjustment -3872 -2455 6327 Total 133505 46232 28733 27175 31366 When applied to the 1989-90 assessment, this method gives the following result:
Salaries 70298 17236 10330 27175 15558 Profit shares 119630 62208 39478 17945 Total 189928 79444 49808 27175 33503 - The difference in the result is that Reynolds pays
tax on an additional £6,327 under the Other Partners' method, which is what
one would expect. In my view therefore their method is to be preferred, even
though it creates the unusual negative salaries, but these are only a method
of arriving at the allocation of profits.
Benefits to Mr Ladhani
- At the preliminary hearing there was some discussion
about whether Mr Ladhani was a partner was a sole practitioner in another
parallel firm but none of the parties suggested how this made any difference
to the final figures. I therefore directed that Mr Reynolds could not argue
the question of whether there were different partnerships. Accordingly for the
purpose of this appeal Mr Ladhani is a partner with a fixed share in the
Appellant partnership (as was the case in Stekel v Ellice [1973] 1 All
ER 465), which is how all parties have treated him in the figures above. Mr
Reynolds questions whether he and the Other Partners should pay tax on
disallowed car expenses relating to Mr Ladhani. I consider that Mr Reynolds is
really trying to treat Mr Ladhani as an employee who is held out as a partner,
in which case benefits in kind would be relevant. However, since as a result
of my previous direction he is a true partner with a fixed, rather than a
variable, share, the question of benefits in kind do not arise. This is solely
a matter of how the partners have agreed to share profits and is not an issue
for me.
Interest on tax overpaid and reduction in Mr Reynolds' salary
- Mr Reynolds disputes the validity of two clauses in
the heads of agreement made between the partners relating to the dissolution
of the partnership either on the ground that he did not have full information
or that the Other Partners had not carried out its terms. I am afraid that the
validity of an agreement is not a matter for me, particularly so when the
agreement provides for arbitration.
Determination
- I therefore dismiss the appeal and determine the
assessments and allocation of profits to the partners in the following agreed
figures. So far as personal allowances are concerned, Mr Reynolds has provided
them to the Inspector and the Other Parties in a letter received by the
Inspector on 12 May 2004, and the Inspector has the figures for his MIRAS
payments.
1987-88 1988-89 1989-90 1990-91 Mr Gross 65711 81190 79462 129464 Mr Klein 41039 50979 49820 79376 Mr Reynolds 22896 33701 40952 nil (The figures for 1989-90 are slightly different from the ones quoted above, which were based on the return, as they contain later adjustments.)
J F AVERY JONES
SPECIAL COMMISSIONER
Release Date: 1 March 2005
SC 3016/98
Authorities referred to in skeletons and not referred to in the decision:
R (Nahar) v Secretary of State for Work and Pensions [2001] EWHC Admin 1049
Stancliffe Stone Co Ltd v Peak District National Park Authority [2004] EWHC 1475
Thrasyvoulou v Secretary of State for the Environment [1990] 2 AC 273
SPC00465
PARTNERSHIP – method of making profit adjustment when the preceding year basis applied – other questions on which there is no jurisdiction – appeal dismissed
THE SPECIAL COMMISSIONERS
GROSS KLEIN & CO Appellant
- and -
MRS R F BRAISBY
(HM INSPECTOR OF TAXES) Respondent
Special Commissioner: DR JOHN F AVERY JONES CBE
Sitting in public in London on 16 February 2005
Howard Gross FCA FCCA CTA and Anthony Klein FCA FCCA (partners) in person; James Reynolds (former partner) in person assisted by Jack Harris FCA and by his son Paul Reynolds for the Appellant
Clive Greenlagh and Henry Asenso, HM Inspectors of Taxes, for the Respondent
© CROWN COPYRIGHT 2005
DECISION