Chartered Accoutant's Firm v Mrs R F Braisby (H M Inspector of Taxes)

This is an appeal by a firm of chartered accountants (“Chartered Accountants”) against partnership assessments for as long ago as 1987-88, 1988-89, 1990-90 and 1990-91 when the preceding year basis applied, and the allocation of the assessments among the partners (I record that it is common ground that partnership assessments for all years before these have been settled by s 54 agreements). It is essentially a dispute between the partners rather than a dispute with the Inspector. Following a preliminary hearing I gave leave to Mr Delta, a former partner, to argue 7 points. Mr Alpha and Mr Beta (“the Other Partners”) and the Inspector are content with the assessments and allocation and they have replied to Mr Delta’s points.

The Other Partners and Mr Delta and entered into a partnership as chartered accountants from 1 February 1983. The partners fell out in about 1990 and Mr Delta left. Litigation followed and I was shown a schedule of legal issues said to have been determined by Master Barratt on 21 and 22 March 1994, and on 18 and 19 July 1994. I understand that he requested the parties to try to settle the action but negotiations broke down. Heads of agreement were initialled by all parties at some time but are undated. I understand that the action has been stayed.

As an initial issue Mr Alpha on behalf of the Other Partners raised res judicata and issue estoppel. He cited Coflixip v Stolt Offshore MS Ltd [2004] EWCA Civ 213:

“41 At 105D-E [of Arnold] Lord Keith said that issue estoppel:

‘may arise where a particular issue forming a necessary ingredient in a cause of action has been litigated and decided and in subsequent proceedings between the same parties involving a different cause of action to which the same issue is relevant one of the parties seeks to re-open that issue.’

43.

Estoppel per rem judicatam also extends to some types of abuse of process. Thus, at 104F, Lord Keith said:

‘Cause of action estoppel extends also to points which might have been but were not raised and decided in the earlier proceedings for the purpose of establishing or negativing the existence of a cause of action’

44.

Lord Keith went on to explain what he had in mind in a little more detail at 104F-105B:

‘In Henderson v Henderson (1843) 3 hare 100, 114-115, Sir James Wigram V.-C. expressed the matter thus:

‘In trying this question, I believe I state the rule of the court correctly, when I say, that where a given matter becomes the subject of litigation in, and of adjudication by, a court of competent jurisdiction, the court requires the parties to the litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matters which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, expect in special cases, not only to points upon which the court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time.’…”

Mr Alpha contended that all disputed points were open to Mr Delta to take in the previous litigation and he should not be allowed to go over the same ground in the guise of a tax dispute. He apologised for not having researched the law more fully but he is not a lawyer and had limited time available. I said I would look at the subject further myself before giving a decision, which I have done. I consider he has a good point in principle but not one that is applicable on the facts. The Master gave no final determination of the dispute as is clear by his requesting that the parties attempted to settle. As there is no judgment there can be no estoppel. Mr Delta’s act of withdrawing from the action is not a decision. I therefore turn to consider Mr Delta’s points.

For reasons that I need not go into the partners agreed a profit adjustment from the normal one for the year ended 6 April 1990 so that Mr Delta receives an additional £6,327.15. Without the profit adjustment the results would have been:

Mr Delta contends that the adjustment should have been made simply by adjusting the profit-sharing ratios, as shown below:

The difference in the result is that Mr Delta pays tax on an additional £6,327 under the Other Partners’ method, which is what one would expect. In my view therefore their method is to be preferred, even though it creates the unusual negative salaries, but these are only a method of arriving at the allocation of profits.

At the preliminary hearing there was some discussion about whether Mr Gamma was a partner or was a sole practitioner in another parallel firm but none of the parties suggested how this made any difference to the final figures. I therefore directed that Mr Delta could not argue the question of whether there were different partnerships. Accordingly for the purpose of this appeal Mr Gamma is a partner with a fixed share in the Appellant partnership (as was the case in Stekel v Ellice [1973] 1 All ER 465), which is how all parties have treated him in the figures above. Mr Delta questions whether he and the Other Partners should pay tax on disallowed car expenses relating to Mr Gamma. I consider that Mr Delta is really trying to treat Mr Gamma as an employee who is held out as a partner, in which case benefits in kind would be relevant. However, since as a result of my previous direction he is a true partner with a fixed, rather than a variable, share, the question of benefits in kind do not arise. This is solely a matter of how the partners have agreed to share profits and is not an issue for me.

Mr Delta disputes the validity of two clauses in the heads of agreement made between the partners relating to the dissolution of the partnership either on the ground that he did not have full information or that the Other Partners had not carried out its terms. I am afraid that the validity of an agreement is not a matter for me, particularly so when the agreement provides for arbitration.

I therefore dismiss the appeal and determine the assessments and allocation of profits to the partners in the following agreed figures. So far as personal allowances are concerned, Mr Delta has provided them to the Inspector and the Other Parties in a letter received by the Inspector on 12 May 2004, and the Inspector has the figures for his MIRAS payments.