Ball (HM Inspector of Taxes) v National & Grindlays Bank Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 23 June 1971 |
| Date | 23 June 1971 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
Corporation tax - Charges on income - Annual payment - Voluntary covenant for benefit of employees' children - Whether "liability incurred for valuable and sufficient consideration" - Finance Act 1965 (c.25), ss. 52(4)(b) and 53(1) and (5).
The Respondent Bank carried on business in Asia and Africa, and the members of its European staff normally spent their working lives abroad. In the late 1950s and early 1960s the burden of paying for their children's education in the United Kingdom was causing unrest among the European staff. On 13th September 1962 the Bank therefore covenanted with trustees that for seven years from 1st September 1962 it would make monthly payments to the trustees to be applied to or for the maintenance, education or benefit of children of its European officers employed overseas who were at school in the United Kingdom as fee-paying pupils.
On appeal against an assessment to corporation tax for the accounting period ended 31st December 1966, the Bank claimed that the said payments were allowable charges on income. It contended that, since a clear benefit accrued to the Bank from the 1962 scheme by the removal of discontent among staff who were necessary for the efficiency of its operations, the payments thereunder were made under a liability incurred for a valuable and sufficient consideration. For the Crown it was contended that the payments were not made under a liability incurred for a valuable and sufficient consideration, since that expression imported the concept of a binding contract and no consideration had moved to the Bank from the trustees, who were the other parties to the covenant; alternatively, that no consideration had moved from the staff who benefited. The Special Commissioners accepted the Bank's contention.
Held, that the liability must be incurred in return for (and not merely with a view to) a consideration (as that word is used in the field of contract) which was an adequate quid pro quo for the liability when incurred.
Stated under the Taxes Management Act 1970, s. 56, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 21st July 1969, National and Grindlays Bank Ltd. (hereinafter called "the Bank") appealed against an assessment to corporation tax for the accounting period ended 31st December 1966 in the sum of £3,700,000.
2. Shortly stated, the question for our decision was whether or not payments aggregating £17,500 (gross) made by the Bank to the trustees of a deed of covenant dated 13th September 1962 were payments made "under a liability incurred for a valuable and sufficient consideration" within the meaning of s. 52(4)(b), Finance Act 1965, and thus fell to be treated as a charge on the Bank's income and allowable as a deduction against the Bank's total profits for corporation tax purposes under s. 52(1) of that Act.
3. The following witnesses gave evidence before us:
(2) Mr. Robert Shearer, a deputy chief general manager of the Bank, who had been employed by the Bank in India from 1946 to 1964; (2) Mr. Bernard Robert McEntegart, an officer of the Bank, who has been employed by the Bank abroad since 1952; (3) Mr. Coldridge Stanley Yearwood, a former officer of the Bank, who had been employed by the Bank in India and Pakistan from 1936 to 1969.
4. The following documents were proved or admitted before us:
(2) A copy of a deed of covenant dated 13th September 1962, made between the Bank of the one part and the trustees named therein of the other part.
(3) Copies of two circular letters addressed by the Bank to the managers of its overseas branches in August and October 1962 respectively.
(4) Copies of the minutes of meetings of the directors of the Bank held on 1st November 1966 and 6th February 1968.
(5) Copies of resolutions passed by the trustees of the deed of covenant of 13th September 1962 on 23rd November 1966 and 8th July 1968.
Copies of such of the above as are not annexed hereto as exhibits are available for inspection by the Court if required.
5. As a result of the evidence, both oral and documentary, adduced before us we find the following facts proved or admitted:
(2) The Bank had carried on for many years, and carried on during the relevant accounting period, a banking business predominantly in parts of Asia and Africa. The vast majority of the Bank's branches were situated in the said continents, and members of the Bank's European staff were normally required to spend the whole of their working lives abroad. In 1962, when "the 1962 scheme" (see sub-paras. (7) and (8) below) was introduced, the Bank had about 120 branches, of which approximately half were in India, Pakistan and Ceylon and the remainder in Aden and Africa. The Bank's larger and more important branches were located mainly in India and Pakistan. The volume of business of the Bank in India, Pakistan and Ceylon was approximately ten times greater than in the other countries in which the Bank maintained branches, and the total numbers of staff employed by the Bank in India, Pakistan and Ceylon were approximately four times greater than in the other countries in which the Bank maintained branches.
(3) In 1962 the total staff employed by the Bank in India and Pakistan was approximately 5000, of whom about 175 were European "officers" recruited in the United Kingdom and about 60 were "officers" of the country concerned and had been recruited there. At that time it would have been normal for a European officer aged 35 to 45 to be earning the equivalent of £2,000 to £3,000 sterling as the accountant of a large branch or the manager of a small branch.
(4) Before the Indian sub-continent became politically independent of the United Kingdom good British schools had been available there. Subsequently, however, a European-type education became virtually unobtainable in the places in which the Bank's branches were predominantly situated, and European officers of the Bank serving in those places normally found it necessary to arrange for any children of theirs to be educated at boarding schools in the United Kingdom or elsewhere in Europe. The fees charged by such schools were high and their payment imposed a considerable financial burden upon parents; this led to much unrest and discontent among the Bank's European officers.
(5) In the late 1950s and early 1960s three new factors came into operation which exacerbated the said unrest and discontent: (a)taxes on personal incomes in India and Pakistan were very considerably increased during the 1950s; (b) a rule of the Bank which forbade its European officers to marry until they had completed eight years' service was relaxed to permit earlier marriage. By 1950 the Bank permitted marriage after two and a half years' service, with the result that children were born, and in due course required education, when their fathers were younger and were earning less than had previously been the case; (c) on 1st January 1961 the Bank took over Lloyds Bank's eastern branches (together with their staffs), numbering about 14 and situated in India and Pakistan. At that time a scheme for financial assistance with children's educational expenses was already in operation for the European staff of Lloyds Bank's eastern branches, a fact which was generally known to the European staff of the Bank.
(6) During the 1950s there had been increasing unrest among the Bank's European staff caused by the weight of the financial burden which the securing of a European education for their children imposed upon them. In 1956 the Bank had lost by resignation 12 European officers who were married with children, and further resignations and threats of resignation occurred in the immediately following years. The loss of European staff who had resigned left the Bank with a shortage of experienced staff in the middle ranks of its European officers, from which the higher posts in the Bank's service would normally have been expected to be filled in due course, and led to a reduction in the efficiency with which the Bank's day-to-day business was transacted. The Bank also experienced difficulty in recruiting new European staff.
(7) Following its takeover of Lloyds Bank's eastern branches, with their staffs, the Bank regarded itself as bound, as a matter of practical necessity, either to continue the Lloyds Bank education scheme (sub-para. (4)(c) above) for the benefit of the staffs it had taken over or to replace it with a new scheme. The Bank was aware that the reason for the discontent and unrest among its own European officers was the high cost of giving their children a European education without any special financial assistance, that the said discontent and unrest had been brought to a head by the assimilation into the Bank's European staff of European staff from the former Lloyds Bank's eastern branches who already enjoyed such special financial assistance, and that its own European officers would not countenance in future less favourable treatment in this respect for themselves than for the members of the European staff of the former Lloyds Bank's eastern branches.
(8) The Bank...
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