Brumby (Inspector of Taxes) v Milner Court of Appeal (House of Lords & Chancery Division & Civil Division)

Factual and Procedural Background

In 1963, Company A established a profit-sharing scheme to reduce dominant family shareholdings without surrendering control and to incentivise employees. A £700,000 loan was advanced to trustees who purchased Company A shares. Dividends were used either to repay the loan or, more commonly, to distribute equal annual bonuses to qualifying employees (excluding directors) aged 21 or over.

The trust deed allowed Company A to terminate the arrangement on one year’s notice, after which the net trust fund would be distributed among employees and certain pensioners. Following a 1969 merger with Company B under a new holding structure, the board concluded that the scheme was impracticable and served notice. The scheme determined in January 1971 and the trustees realised the portfolio, leaving roughly £370,000 for distribution.

Exercising their discretion, the trustees allotted differing lump sums based solely on length of service. The Appellants each received £200 (an interim £100 actually paid in June 1971). The Inland Revenue assessed the payments to income tax under Schedule E for 1971-72. The Appellants appealed.

The Special Commissioners allowed the appeals, holding that the payments stemmed from the decision to wind up the scheme rather than from employment. The Crown appealed. Judge [Walton] reversed the decision, reinstating the assessments. The Court of Appeal unanimously affirmed the High Court. The House of Lords dismissed the further appeal on 27 October 1976.

Legal Issues Presented

1. Whether lump-sum payments made to employees on termination of a profit-sharing trust are “emoluments from employment” assessable under Schedule E of the Income and Corporation Taxes Act 1970.
2. Whether the payments arose from the Appellants’ status as employees or, instead, from the employer’s decision to wind up the scheme following a corporate merger.

Arguments of the Parties

Appellant's Arguments

• The distribution represented an unforeseen windfall caused solely by the merger and termination of the scheme, not by employment.
• Fixing individual amounts by reference to years of service did not convert the sums into remuneration; it was merely a method of quantification.
• The payment should be characterised as capital in the trustees’ hands and therefore not taxable income in the employees’ hands.
• Employment was only the causa sine qua non; the causa causans was the winding-up decision, breaking the nexus with employment.

Defendant's Arguments

• The scheme—both during its life and on termination—was designed to reward employees for their services; the terminal payments were simply the final instalment of that reward.
• The payments were received solely because the recipients were employees (or qualifying pensioners) on the relevant date; no additional qualification was required.
• Motive of the trustees, the fact that Company A terminated the scheme, or that the payments were made by trustees rather than the employer, is irrelevant to Schedule E liability.
• Under Ss. 181 and 183 of the 1970 Act, any profit received “in return for acting as or being an employee” is taxable; that test is satisfied.

Table of Precedents Cited

Court's Reasoning and Analysis

High Court (Judge [Walton]). Applying ss. 181 and 183 of the 1970 Act, the court adopted Lord Radcliffe’s formulation that a payment is taxable if made “in return for acting as or being an employee.” Each recipient qualified solely by virtue of employment at a fixed date; therefore the employment, not the winding-up decision, was the operative cause. The trustees’ use of length-of-service bands did not alter the quality of the receipts.

Court of Appeal. The scheme was a single, integrated instrument for rewarding services. Terminal payments bore “the colour of reward” because (i) pensioned ex-employees—whose entitlement derived from past service—were included; (ii) employees dismissed for misconduct or incompetence before distribution were excluded, directly linking entitlement to quality of service; and (iii) the discretion to allocate indicated an evaluative, not incidental, purpose. The merger merely triggered the timing of payment; it did not supply an alternative source.

House of Lords. All five Law Lords dismissed the appeal. They held that the annual income distributions were indisputably taxable and no logical distinction could be drawn for the capital distribution. The lump sums were the final instalment of the same employment reward. Attempts to characterise the merger or trustees’ motives as a different cause failed because the only qualifying factor for receipt was employment status.

Holding and Implications

Holding: the terminal lump-sum distributions are taxable emoluments under Schedule E. The Appellants’ assessments were confirmed; appeals were dismissed at every level.

Implications: Payments to employees on the winding-up of profit-sharing or similar employee-benefit trusts will generally be treated as income arising from employment, even where motivated by corporate restructuring. The decision reinforces that the critical inquiry is whether employment is the sole qualifying condition for receipt; if so, the payment is likely to be taxable. No new legal doctrine was created, but existing Schedule E principles were clarified and firmly applied.