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We act for a client who operates a golf retail business from a shop located in the grounds of a London golf club. The shop premises are owned by the club and our client has operated the business from the property on a self-employed basis over the past 25 years, mainly as a service for the club members.
Our client is neither a member of the club nor an employee. The whole of the profits generated from the business has been subject to Schedule D liability assessed on our client.
We act for a client who operates a golf retail business from a shop located in the grounds of a London golf club. The shop premises are owned by the club and our client has operated the business from the property on a self-employed basis over the past 25 years, mainly as a service for the club members.
Our client is neither a member of the club nor an employee. The whole of the profits generated from the business has been subject to Schedule D liability assessed on our client.
As a mark of appreciation for operating the business over the past 25 years, the club recently arranged a tournament between its members and invited them to make voluntary donations to our client.
These donations, made at the discretion of the members, totalled approximately £10,000.
Bearing in mind that our client is neither an employee nor a member of the club, we are wondering whether the proceeds will be subject to taxation.
(Query T16,101) - Oddball.
'Oddball's' emphasis on the fact that his client is not an employee does not necessarily hold good upon challenge - which could mean a quarter of a century's Schedule D status being reviewed as a worst scenario if the tournament went ahead as a testimonial, as the header suggests. Such matches, etc. are normally arranged by the employing club for professional sportspeople and the proceeds taxable under the terms of the employee's agreement, usually at the end of a number of years service and subject to a minimum payment guaranteed by the club. Exceptions might be on compassionate grounds where permanent injuries may have forced early 'retirement' (and not within the terms of agreement) or a collection arranged at such a match where there is no expectancy nor entitlement to the receipts. In the case of Reed v Seymour HL 1927, 11 TC 625, it was held that such payments were in the nature of a personal gift rather than a reward for services rendered and neither assessable under Schedule E nor Schedule D, Case VI as the Revenue contended. Conversely, another (cricketing) case decided that collections for meritorious performances were profits arising from the employment (Moorhouse v Dooland CA 1954, 36 TC 1).
As a self-employed person, it must be established that 'Oddball's' client did not receive the proceeds as a reward for services rendered over the years in the nature of his trade, it being a rather large tip nonetheless. Rather than an appreciation for running the business over the years, it would have helped the cause if the entry forms for the tournament had indicated that the proceeds would be to the 'testimonial to the personal qualities of ......'. In the (Schedule E) case of Cowan v Seymour 7 TC 372, receipts in such circumstances were for the appellant's personality as a human being, not for his office, and thus they were not assessable. This subtle difference needs to be carefully weighed by 'Oddball'.
'Oddball' should also be aware that the Revenue may look closely at any such arrangements with a view to establishing if the organisers should be treated as carrying on a trade in their own right, giving rise to the profit of £10,000! - Jim.
From the information given, 'Oddball's' client appears to have a very good case for treating the donation to him as not being subject to tax. If it were subject to tax, it would be because it is in reality a business receipt.
The following are the main characteristics of the payment which in our view make the payment non-taxable.
* The client did not have to do anything to receive the payment.
* It was not known how much would be given to the client until the collection was completed.
* There is no link between the amount that a particular member has donated and his use of the shop.
* The members have not claimed tax relief on the donations and expect nothing in return.
* The business has not been underpaid for past services and this is not therefore additional consideration for past services. This appears to be the weakest leg of the client's case as the comment 'mainly as a service for club members' may imply that goods have not been sold on a commercial basis. Assuming that the client has no other significant sources of income, the fact that he has been in business for 25 years and lived on the proceeds would tend to imply that he has been selling goods commercially. This can be contrasted with McGowan v Brown & Cousins [1977] 1 WLR 1403 in which an estate agent charged fees which were inadequate for the work done in the hope of getting further work. When this did not materialise, a voluntary payment was made which was held to be for the services not paid for in full.
* The donations were not made to allow the client to expand, or otherwise use in, his business. This may be contrasted with Commissioners of Inland Revenue v Falkirk Ice Rink Ltd [1975] STC 434 in which the members of a club that used the ice rink made a voluntary payment to the ice rink to help it improve facilities.
The fact that the donations may be made in recognition of past services (as distinct from an extra payment for past services) does not make them taxable. This is confirmed in the Inland Revenue's Inspector's Manual at paragraph IM535, which also provides support generally to 'Oddball' for not treating the donations as taxable. - Wentworth.
Extract from reply by 'Lane':
The absence of an enforceable contract between the parties is the key factor which 'Oddball' will need to emphasise when resisting any Revenue claims. These are unlikely to arise unless and when a self-assessment enquiry is initiated. Accordingly, copies should be retained of all relevant communications between club and members or otherwise.
In Temperley v Smith 37 TC 18 the judge said 'the crucial test is as to the character in which the recipient of a benefit takes it and, if it came to him in virtue of his office or in virtue of his profession or vocation and otherwise than as a mere present' ... it is liable to tax. 'Oddball's' client received the benefit as a mere present.
Lacking any conveniently identifiable source or other nexus, an Inspector may resort to a Schedule D, Case VI assessment. That may often catch indeterminate services but not if there is no antecedent contract or intention to create legal relations. Acknowledgement payments escaped tax in Bloom v Kinder 38 TC 77 and also in Dickinson v Abel 45 TC 353.
Editorial note: Most, but not all, replies considered that the sum should escape tax.
