Lightfoot v D & J Sporting Ltd [1995] UKEAT 739_95_1910

EAT
Lightfoot v D & J Sporting Ltd
[1995] UKEAT 739_95_1910 · 1995-10-19

JUDGE HULL QC:

Mr Lightfoot was employed by the Respondents as a head gamekeeper. I say by the Respondents; they said he was first employed by one of several predecessors and that is a matter which, of course, we cannot pre-judge. But his case is that he had been employed first in April 1987 and was employed by the Respondents to this appeal, D & J Sporting Ltd, or their predecessors, from that time until his dismissal, which took place on 31 January 1995.In the year before his dismissal an idea occurred to him, or the employers, by which tax might be reduced. There was no doubt, apparently, that Mrs Lightfoot gave very substantial assistance, at various times, to Mr Lightfoot in his various tasks as head gamekeeper. The tasks included helping with the breeding programme of pheasants, partridges, ducks and so forth on the sporting estate and, apparently, the work is exceedingly heavy and exacting at times. Mrs Lightfoot helped with that, as might perhaps be expected, but far more than required by the duty of a wife to help her husband.The Tribunal were told that the arrangement which was entered into, under which something like two-thirds of his former income was paid to Mr Lightfoot and one-third to Mrs Lightfoot was, in fact, a dishonest attempt to evade Income Tax and National Insurance contributions. They looked into that as a preliminary point. They sat at Newcastle-upon-Tyne under the chairmanship of Mr Gold with two industrial members on 10 May 1995. To make clear what I am saying I will refer to their reasons.They were attended, fortunately, by Counsel on both sides and therefore the matter should have been properly put to them (and we are not saying that it was not). They recite that Mr Lightfoot was always given assistance by his wife throughout his employment by the Respondents. Mr Lightfoot received wages for his employment and those wages were solely paid to Mr Lightfoot until approximately the end of September 1994. From that time onwards, Mr Lightfoot only received part of the remuneration that was being paid for him as a gamekeeper and part also was being paid to his wife.The Tribunal finds that Mr Lightfoot approached Mr Foster - he was the employer or employer's moving spirit at the time - to ask if he could have an increase in salary, because Mr Lightfoot felt that he was being paid less than another gamekeeper working for the Respondents. The Tribunal finds that Mr Lightfoot believed that it might have been possible to apportion the wage that he was getting, so as to provide a wage for his wife and that that wage would reduce the overall amount of tax and National Insurance.The Tribunal has noted the statement, which is numbered 8 in the Respondents' bundle, being a statement of the net wage being paid to Mrs Lightfoot of £240 per month and a net wage being paid to Mr Lightfoot of £369.10 per month. His wage before this "split" had been rather less than £610 per month. At first Mrs Lightfoot, under this new arrangement, was suffering a deduction of tax at the full rate of 25%; but this was rectified. Of course, her earnings were low, and she ultimately went on to receive a gross amount, untaxed and unaffected by National Insurance deductions, of £240 per month. Mr Lightfoot did substantially enjoy an increase in the remaining part of the wage, because of the reduction in Income Tax and the reduction in National Insurance.The fact is that the proper deductions were made on the basis that his reduced income was £369.10 a month under the new arrangement. The overall reduction in the tax burden, the Tribunal finds, was something in the region of £49 per month, which was a major increase in the net income coming into the family budget.The Tribunal then refer to the authorities. They say, quite rightly, that if Mrs Lightfoot had received only a very small amount of money, a small cash payment, that might well be ignored as being a matter which was de minimis (to use the legal expression). They rightly say that that was not this case at all. They say that £240 a month was very close to the maximum amount that she could have received, as a person in employment, as a sum upon which she did not have to pay any Income Tax or National Insurance contributions."We find that £240 represents an extremely high proportion of the gross total remuneration of £610 per month"; it is just over a third of course. They were entitled to say that.
"12. We further find that Mr Lightfoot and Mr Foster were aware of what they were doing and that both of the parties knew, believed or suspected that what they were doing was illegal. They certainly should have been aware that what they were doing was illegal because they were aware the money that was being paid to Mr Lightfoot was now being substantially enhanced by the lack of deductions that were being made from it."
One would respectfully say that that paragraph contains a number of unsatisfactory statements. The transaction was not illegal merely because the parties knew that the deductions would be smaller; that is the whole idea of any legitimate tax avoidance scheme and one would say that in modern conditions, payment in some shape or form to a wife (in circumstances where she helps with the duties) is by no means uncommon or improper. Certainly, dealing with matters in my experience, in the licensed trade and in the National Trust, where of course husband and wife are often employed jointly as caretakers, or managers, it is the commonest thing in the world for a global figure to be given for the rewards of the job and for it then to be divided between them and for a bona fide assessment to be made of the share which should be paid to the wife.Furthermore, it is not satisfactory (it seems to us) in assessing the questions whether there is illegality; whether the contract is unenforceable; and whether the parties are, to use the Latin expression, in pari delicto , that is to say, equally guilty, or whether it is one of the cases in which the party who is innocent is still entitled to enforce the contract; it is not very satisfactory or, indeed, satisfactory at all, to put it the way this Tribunal did.The questions whether they knew, or believed, or suspected, that what they were doing was illegal, may be important; but and to run it together, saying that they should have been aware that what they were doing was illegal and then setting out a quite insufficient reason for saying that they should have been aware of that, seems to us to be an unsatisfactory way of putting it.Then they go on in paragraph 13:
"13. We find that from 1987 until 1994 Mr Lightfoot was employed as a gamekeeper and in the course of that employment he received a wage. There is no doubt whatsoever that Mrs Lightfoot must have offered some sort of contribution to her husband in the carrying out of his work, and it would be wrong for this Tribunal to find that she could have carried out no duties whatsoever to assist him in what must have been a very arduous job at certain times of the year particularly during the breeding seasons when Mr Lightfoot was undoubtedly working for very long hours. However up until September 1994 Mr Lightfoot was paid a wage and he suffered full statutory deductions from that wage. If initially Mrs Lightfoot had been taken on to earn a wage which may not have taxable, at the outset of Mr Lightfoot's employment, and that state of affairs had continued and she was being paid a sum of money for the contribution that she provided then that may have brought this Tribunal to a different finding."
Pausing there, that again appears to us to be a known non sequitur , something which does not follow. It is open to parties at any stage, surely, to approach each other and say "The present arrangements do not represent the reality of the situation. The situation is that both of us are working for you and we should like now to have that recognised by Mrs Lightfoot being paid a salary and Mr Lightfoot being paid a salary" and if that was done in good faith, one could see no reason whatever why that belated suggestion should make all the difference to saying whether the arrangement was lawful or not.They go on:
"However that was not the case and after approximately 7 years of employment it was suddenly planned that if Mrs Lightfoot was paid a wage it would materially reduce the amount of Income Tax and other deductions that Mr Lightfoot had erstwhile been suffering. That is to say it was a scheme that was mounted after 7 years and was mounted specifically and totally for one purpose and one purpose only which was to reduce the amount of lawful deductions that ought to have been paid to either the Inland Revenue or to the Department of Social Security."
That in terms is saying simply what could be said about every lawful tax avoidance scheme; - it was for one purpose and one purpose only; all such schemes have that purpose -to reduce the amount of lawful deductions that ought to be paid to the Inland Revenue or the Department of Social Security. If they are entered into in good faith and the Revenue is given the proper information about them, there can be no criticism of them.It may be that what the Tribunal mean is this: "The purpose was to reduce unlawfully the Income Tax and National Insurance contributions which should have been paid to the Inland Revenue and the DSS respectively", but that is not what they say. And again, therefore, that appears to us to be unsatisfactory. They conclude:
"14. ... the contract ... was tainted by illegality by reason of the alteration in its status so as to include Mrs Lightfoot as a participant who would not be suffering any deduction of tax and National Insurance."
Again, that is (with respect to the Tribunal) a completely unsatisfactory way of putting it. What they had to decide was not whether the alteration in the status showed that it was illegal, but whether, in fact, the arrangement was entered into in good faith. Was it a proper method of reducing tax, open and above board, which either had been disclosed to the Revenue, or would be disclosed to the Revenue? In that case there was nothing unlawful about it whatever and it simply copied transactions which have taken place in thousands and thousands of places, over many years, without any criticism.It could be said that there was an inconsistency; the IT1, the application to the Tribunal, referred to Mr Lightfoot as having the full wage, that is say "combining his wife's and his reward". That was a matter which they would certainly have to enquire into, but if we look at the end of our bundle, there are two P45s on page 31; one for Mrs Lightfoot recites that she has had a sum of £1,816.38 paid to her, to date, and it says that her tax to date is nil and her tax in this employment is nil and that is a document which, of course, would be shown to a new employer and will be shown to the Revenue.It is a very powerful indication that this was an above board arrangement and perfectly legal in its inception and, indeed, in its execution. Beside it is the P45 for Mr Lightfoot, showing that he was receiving a wage and that from his wage the modest amount of tax which was due, apparently, had been deducted. On the page before that, on page 30, there is a statement on D & J Sporting Ltd, the Respondents; writing paper, setting out the respective rewards of Mrs Lightfoot and Mr Lightfoot so that:
" ... This month Lynn I have to deduct 25% tax refundable when you get your tax code number. ... ."
It looks as if the entire letter was disclosed to the Revenue and there was nothing unlawful about it at all. If the reality had been (and this would have been one way of doing it) that Mr Lightfoot was paying a legitimate deductible expense in the form of a salary for his wife, then of course that would have had to be disclosed to the Revenue, and it would have been the duty of Mr Lightfoot to make a return to the Revenue saying "Although my gross wage is so much, I claim that it should be reduced by payment to my wife of a necessary sum".That would not take the Revenue by surprise, because I think every married Barrister and Solicitor and Surveyor and, probably, every married person who pays tax under Schedule D, is advised by his Accountant to arrange to pay a reasonable sum to his wife for her services, if she gives them in the profession and the sum is modest.The Revenue, of course, wish to be satisfied that it is paid and paid in good faith, but when they have satisfied themselves of that, it is allowed. It is quite different under Schedule E because that Schedule, for employed people, has always laid down a much more severe criterion. The disbursement has to be wholly, necessarily, and exclusively incurred for the purpose of the profession and the difficult word is "necessarily", so the taxpayer will have to satisfy the Revenue that it was necessary for him to pay this sum to his wife for her help in his profession. He might or might not be able to do that, but that appears to us not to be the case as the Applicant wished to put it.In those circumstances, first of all it appears to us that it may be possible to say that this is an entirely legitimate arrangement. It always is possible for a Tribunal to enquire into the matter and find, on the facts, that it is not a bona fide arrangement; that it is, in fact, unlawful. That is for them to say - what evidence they accept and what evidence they do not accept - but here this Tribunal appears to have approached the case, not adopting the correct approach, which is to enquire into the reality of the arrangement and to see whether it is, on the face of it, a lawful arrangement; but simply by approaching it on the basis that attempts to avoid tax are themselves unlawful and, secondly, not setting out sufficient findings to satisfy us that they have considered it properly and reached a proper conclusion that it was not a bona fide arrangement.We are not a Tribunal of fact; we cannot reach any conclusion on that matter and in particular we have not heard the witnesses; the matter will have to go back to a different Tribunal. We are not, in any way, preempting their findings of fact. They will have to go into the whole matter again, looking at all documents which are laid in front of them, hearing such evidence as is adduced before them and deciding for themselves whether this was a lawful and proper arrangement or whether, on the other hand, it was an unlawful arrangement.If it was an unlawful arrangement they will, of course, have to consider the authorities and decide what is the effect of that. We hope that if they say that the arrangement was unlawful they will look into the matter of the knowledge of the illegality by those concerned.The new Tribunal will approach the matter de novo and we are simply giving reasons now to show why we are allowing the appeal.