Facts
- Goodhews, a regional brewery company, operated various licensed premises through tenanted public house agreements.
- From time to time, changing commercial considerations—such as refitting premises, altering product ranges, or consolidating outlets—required the company to terminate particular leases before their ordinary contractual expiry.
- Recognising that early termination could place individual tenants in financial difficulty, Goodhews chose to make ex gratia payments when a lease ended in these circumstances.
- The payments were calculated generously but informally; no formula was incorporated into the tenancy agreements, and tenants had no contractual right to demand them.
- The Inland Revenue, reviewing several tax years in which such payments had been made, asserted that the sums fell within “profits arising from the trade” of running the public house and were therefore taxable.
- Murray and other affected tenants filed appeals, contending that the payments were gifts motivated by goodwill and sympathy, not by any obligation or by consideration for past services.
- The dispute proceeded through the normal appeal machinery and ultimately came before the House of Lords to determine the correct tax classification.
Issues
- Whether ex gratia payments voluntarily made by a landlord-brewer to its tenants, upon termination of their leases, constitute taxable income in the hands of the tenants.
- Whether the presence or absence of a legal or contractual obligation is decisive, or merely one factor, in the income/gift distinction.
- How courts should distinguish between payments traceable to the recipient’s trade or employment—typically taxable—and payments genuinely detached from any source of profit.
Decision
- The House of Lords unanimously found for the tenants, holding that the payments were not taxable income.
- Their Lordships examined the “source” of the payments and concluded that it lay not in any contractual nexus, nor in remuneration for services rendered, but in the brewery’s unilateral desire to cushion tenants from hardship and preserve amicable relations in the trade.
- Because no tenant could have sued to recover the money, the payments lacked the character of enforceable consideration; they were, in substance, spontaneous gifts.
- The Court stressed that the Revenue could not convert a purely voluntary act into a taxable receipt merely because the parties had previously been engaged in business together.
- Accordingly, the assessments raised by the Inland Revenue were discharged.
Legal Principles
- A receipt is ordinarily taxable if it represents profits or gains arising from the recipient’s trade, employment, or vocation. Conversely, a gratuitous payment, motivated by personal generosity or goodwill and not referable to any legal duty, falls outside the charge to income tax.
- The controlling test is to identify the “occasion” and “motive” of the payment. Where the dominant motive is sympathy or benevolence, and no quid pro quo exists, the payment is a gift.
- The mere existence of a prior commercial relationship does not, by itself, transform a subsequent voluntary payment into taxable income; the court must scrutinise whether the payment is “in respect of” the trade.
- Courts place substantial weight on enforceability. If the putative recipient could compel payment, the sum is likely to be taxable; if the recipient could not, the absence of legal duty strongly supports a non-taxable classification.
- Each case is fact-sensitive. Factors such as method of calculation, contemporaneous documentation, and statements of intention are relevant but not individually decisive.
Conclusion
Murray v Goodhews confirms that, for United Kingdom tax purposes, genuinely voluntary ex gratia payments—made out of goodwill and without any legal or contractual obligation—do not constitute taxable income. The decision highlights the importance of examining the source, enforceability, and motive of a payment when distinguishing between taxable receipts and non-taxable gifts.
