Facts
- Sir Laurence Olivier entered into a service contract with a film production company for work on a film project.
- The production company decided not to proceed with the film.
- To terminate the contract, the company paid Sir Laurence Olivier a single lump sum.
- The key issue was whether this payment should be classified as a capital receipt (reflecting loss of a long-term right) or as a revenue receipt (reflecting ongoing income) for tax purposes.
Issues
- Whether a lump sum payment for terminating a service contract should be treated as a capital receipt or a revenue receipt for taxation.
- What criteria determine the classification of payments made to end service contracts.
Decision
- The court held that the payment to Sir Laurence Olivier was a capital receipt.
- The payment was not remuneration for services already performed, but compensation for surrendering the right to provide services under the contract.
- This surrender represented a loss of a capital asset—the ability to earn future income from the contract.
- The court distinguished this circumstance from ordinary payments for services, which would be classified as revenue receipts.
Legal Principles
- The actual purpose and substance of the payment, rather than its description or form, determine its classification.
- A single lump sum payment does not in itself establish a capital classification.
- The long-term advantage acquired by the payer and the enduring loss suffered by the recipient are relevant factors.
- Loss of future earning rights under a contract can be considered the loss of a capital asset.
- These principles provide a framework for distinguishing between capital and revenue receipts in the context of contract termination.
Conclusion
Higgs v Olivier [1952] Ch 311 establishes guidelines for classifying payments on termination of service contracts, emphasizing actual purpose, the recipient’s loss of earning right, and the payer’s lasting benefit, with continued relevance in tax and financial reporting.
