MacKinlay (Inspector of Taxes) v Arthur Young McClelland Moores & Co

Factual and Procedural Background

Company A, a nationwide accountancy partnership with approximately 95 partners during the relevant accounting period (1 May 1979 – 30 April 1980), adopted an internal policy under which partners asked to relocate for business reasons would be reimbursed for defined “relocation expenses.” Two partners—Partner A (moved London → The City on the south coast) and Partner B (moved Newcastle → The City in the southwest)—claimed reimbursement totalling £8,568.40.

The Appellant, an Inspector of Taxes, disallowed deduction of those reimbursements in computing Company A’s Schedule D Case II profits for 1981–82. Company A appealed:

• Special Commissioners (January 1985): allowed the deduction, holding the expenditure was incurred wholly and exclusively for partnership purposes.
• Chancery Division (July 1986, Judge Vinelott): reversed the Commissioners and upheld the Appellant’s view.
• Court of Appeal (January 1988, Judges Slade, Balcombe & Stocker): reinstated the deduction, treating the partnership as a distinct entity whose “collective purpose” was exclusively business.
• House of Lords (November 1989): allowed the Appellant’s further appeal, restoring Judge Vinelott’s order and denying the deduction.

Legal Issues Presented

1. Whether reimbursements paid to partners for relocating their private residences are “money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation” within the meaning of Income and Corporation Taxes Act 1970, s 130(a).
2. Whether, when applying that test, a partnership may be treated as a separate “collective” entity whose business purpose can be divorced from the personal purpose of the individual partner recipient.

Arguments of the Parties

Appellant’s Arguments

• The relocation payments inherently serve a dual purpose: establishing the partners’ private homes and furthering business; the private element prevents deduction under s 130(a).
• A partnership is not, for tax purposes, a legal person separate from its partners; payments to a partner in his capacity as partner are part of profit allocation, not deductible expenses.
• Analogy with employee expenses is misplaced because an employee is not an owner of the business and amounts paid to partners cannot be equated with remuneration of staff.
• Precedents such as Mallalieu v Drummond and Newsom v Robertson demonstrate that where expenditure also meets personal needs (housing, clothing, food) it fails the exclusivity test.

Respondent’s (Company A’s) Arguments

• The partnership incurred the payments pursuant to a bona fide policy designed solely to advance its professional interests by deploying partners where most needed.
• In large firms the partners’ interests as owners can be conceptually severed from their private interests; the personal benefit was merely incidental.
• Authorities (e.g., Heastie v Veitch & Co.; Watson & Everitt v Blunden) recognise that partnerships are treated as separate entities for computing profits, allowing deduction of sums paid to partners acting “otherwise than as partners.”
• The Crown already accepts deduction of identical payments to employees; parity of reasoning should admit the partners’ payments.

Table of Precedents Cited

Court's Reasoning and Analysis

The House of Lords held that the Special Commissioners and Court of Appeal erred by isolating a supposed “collective purpose” of the partnership and ignoring the personal purpose of the recipients. Key points:

• A partner relocating and purchasing a home is inherently meeting private, domestic needs; that purpose is inseparable from any business advantage to the firm.
• Size of the partnership, existence of an executive committee, or reluctance of the partners to move are irrelevant to the legal test.
• No analogy can be drawn with employee reimbursements, because partners are proprietors; sums drawn by them are part of profit allocation unless referable to partnership business carried on by the partner qua partner.
• Therefore, relocation costs cannot be treated as money “wholly and exclusively” for partnership purposes; the duality of purpose is built-in.
• Lord Oliver emphasised that the deduction test concerns the object served by the expenditure, not merely the conscious motive asserted; some results are “so inevitably and inextricably involved” that they must be treated as purposes of the expenditure.

Holding and Implications

Holding: The House of Lords allowed the Appellant’s appeal and restored the Chancery Division’s order. The relocation reimbursements are NOT deductible in computing Company A’s Schedule D Case II profits.

Implications: Partnerships cannot deduct payments to partners for moving their private residences, even under firm-wide relocation policies. The decision re-affirms that, for s 130(a), the partnership’s purported business motive does not eclipse the inherent personal purpose served; the partnership is not a separate tax-paying entity for this analysis. The ruling narrows the scope for large professional firms to claim deductions where expenditure confers intrinsic personal benefits on partners, aligning the treatment of partners with the established approach for sole traders.