Brown v Inland Revenue Commissioners

Factual and Procedural Background

The Appellant, a solicitor practising through Firm A, routinely received significant sums of money that belonged to clients and paid those sums into a single “client current account” at a bank in The City. When that account exceeded a set threshold, the Appellant withdrew blocks of £5,000 and placed them on deposit receipt in the name “Firm A for clients.” The resulting interest was retained by the Appellant for personal use. In addition, the Appellant advanced certain clients’ funds to other clients, charging some borrowers interest while allowing or disallowing interest credits to the lenders’ accounts at the Appellant’s discretion.

For the tax years 1957-58 to 1960-61 the Respondent Commissioners assessed the deposit-receipt interest under Case III of Schedule D as unearned income and denied the Appellant “earned-income relief.” The Appellant’s objection was rejected by the General Commissioners, upheld by the Court of Session (First Division), and ultimately affirmed by the House of Lords. The present opinion represents the final appellate determination.

Legal Issues Presented

1. Whether deposit-receipt interest and differential loan interest retained by a solicitor are “immediately derived … from the carrying on or exercise” of the solicitor’s profession within the meaning of Section 525(1)(c) of the Income Tax Act 1952 and therefore qualify as “earned income.”
2. In consequence, whether the Appellant is entitled to earned-income relief under Sections 208 and 211 of the Act.

Arguments of the Parties

Appellant's Arguments

• The management and lending of clients’ funds constitute integral, systematic parts of the professional services rendered by Firm A; hence the resulting interest is remuneration for services and “earned income.”
• Custom within the Scottish legal profession—supported by guidance issued by The Professional Society—permits solicitors to retain interest on un-allocated client deposits as a general administrative charge.
• Because precise allocation of interest among numerous clients would be “substantially impracticable,” retention of the gross interest is commercially reasonable compensation for the work involved in handling client monies.

Respondent Commissioners' Arguments

• All capital on which interest accrued belonged exclusively to clients; under fiduciary principles the attendant interest likewise belonged to those clients.
• Neither professional custom nor the Society’s non-binding opinion can convert clients’ investment income into the solicitor’s professional earnings.
• No part of the disputed interest was brought into charge under Case II of Schedule D, so the statutory pre-condition for earned-income relief was absent.
• The Appellant carried on no separate trade akin to banking; lending clients’ money to other clients was outside the ordinary scope of a solicitor’s profession.

Table of Precedents Cited

Court's Reasoning and Analysis

The House of Lords treated the matter as turning on ownership of the interest rather than on abstract classifications of income. Key steps included:

• Fiduciary Principle: A solicitor holds client funds in a fiduciary capacity and may not make an unauthorised profit therefrom. Any interest earned on such funds presumptively belongs to the clients.
• Absence of Consent or Custom: The Commissioners expressly found no evidence that any client knew of, much less agreed to, the Appellant’s retention of interest. Testimony also showed the practice was “common but not universal,” falling short of a binding professional custom.
• Non-binding Professional Guidance: The opinion of The Professional Society could not override fiduciary duties or transfer property rights in the interest to the solicitor.
• Statutory Context: Section 148 of the 1952 Act taxes interest on a “recipient or person entitled.” Even if the Appellant paid tax as recipient, beneficial entitlement remained with the clients, precluding any claim that the gross interest was “immediately derived” from his profession.
• Loan-Interest Differential: The same logic applied to intra-client loans; capital and corresponding interest still belonged to clients, and discretionary credits or debits did not alter beneficial ownership.

Holding and Implications

Holding: APPEAL DISMISSED. The sums in dispute were not “immediately derived” from the Appellant’s professional activities but were the clients’ own investment income; consequently, earned-income relief was unavailable.

Implications: The decision confirms that Scottish (and by analogy UK) solicitors cannot, without explicit client authority, treat interest generated from pooled client funds as their own professional income. The ruling underscores fiduciary limits on professional practices and diminishes reliance on informal professional “customs” or guidance that conflict with fundamental trust principles.