Campbell and Another v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 23 October 1968 |
| Date | 23 October 1968 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS
Income tax - Annual payment - Payments agreed to be applied in purchasing payer's business - Whether payable under deduction of tax - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), ss. 169 and 447(1)(b).
The Appellants were trustees of a charitable trust set up to acquire a tutorial business carried on by T Ltd. On 30th March 1961 T Ltd. covenanted to pay to the Appellants annually on 5th April for seven years commencing 5th April 1961 80 per cent. of its trading profits chargeable to income tax (less capital allowances), the remaining 20 per cent. being retained to meet its profits tax liability. There was a clear understanding by the directors and shareholders of T Ltd. and the Appellants that the net sums payable under the deed of covenant, together with any income tax recoverable under s. 447(1)(b), Income Tax Act 1952, would be used by the Appellants to purchase the business of T Ltd.
The sums falling due under the covenant on 5th April 1961 and 1962 were expressed to be paid to the Appellants under deduction of tax at the standard rate. They were applied in purchasing the trade fixtures, furniture, books, etc., of T Ltd. and part of its goodwill. The Commissioners of Inland Revenue refused the Appellants' claims to repayment under s. 447 (1) (b) for the years 1960-61 and 1961-62 of the tax expressed to have been deducted from the payments.
On appeal it was contended for the Crown (i) that the payments, not being paid by T Ltd. without conditions or counter-stipulations, were not "annual payments" within s. 447(1)(b), and (ii) that they had not been applied to charitable purposes only. The Special Commissioners found that the understanding as to the use of the covenanted payments was a condition or counter-stipulation attached to the deed of covenant and held that payments were not annual payments, but that they had been applied to charitable purposes.
Held, (1) that the payments were not income of the Appellants, because (a) (per Lords Dilhorne, Guest and Upjohn) the Appellants were contractually bound to return them to the payer, or (b) (per Lords Hodson, Guest and Donovan) they were instalments of capital in the hands of the Appellants, being paid under a contract which required them to be applied in purchasing the business;
(2) that they were applied to charitable purposes only.
Stated under the Income Tax Act 1952, s. 64, 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 4th and 5th November 1964 the Trustees of the Davies's Educational Trust (hereinafter called "the trustees" and "the Trust" respectively) appealed against the refusal by the Commissioners of Inland Revenue of claims made by the trustees under s. 447(1)(b) of the Income Tax Act 1952 for exemption from income tax chargeable for the years 1960-61 and 1961-62 on payments received by the trustees under a deed of covenant dated 30th March 1961.
2. Shortly stated, the questions for our decision were: (a) whether payments made under the said deed of covenant were annual payments within the meaning of s. 447(1)(b); and (b) if so, whether those payments had been applied to charitable purposes only within the meaning of that subsection.
3. Cecil Arthur Barber, F.C.A., senior partner in Barber & Co., chartered accountants, gave evidence before us.
4. The following documents were proved or admitted before us:
(2) A brochure giving the history and activities of Davies's.
(3) The memorandum and articles of association of Davies's (Tutors) Ltd. (hereinafter called "Tutors").
(4) A declaration of trust dated 29th March 1961.
(5) A notification dated 18th August 1961 of the registration of the Trust on the Register of Charities.
(6) The memorandum and articles of Association of Davies's Educational Developments Ltd. (hereinafter called "Developments").
(7) A deed of partnership dated 5th April 1962 between Tutors and Developments.
(8) A deed of covenant dated 30th March 1961 by Tutors in favour of the Trust.
(9) A bundle of correspondence between Barber & Co. and the Inland Revenue Department.
(10) A letter dated 31st March 1962 from Mr. C.A. Barber containing the valuation of the goodwill of Tutors.
(11) The accounts of the Trust for the period ended 5th April 1962 and the year ended 5th April 1963.
(12) Service agreements entered into by M.R. Campbell, W.N. McBride and P.J. Hall with Tutors and Developments, trading together in partnership under the name of style of Davies's.
Copies of such of the above as are not annexed hereto as exhibits(1) 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:
(a) Davies's, a well-known and reputable organisation, was started in 1927 by Vernon Davies for providing tuition for entry to the Administrative Class of the Civil Service. After the last war this "civil service" work declined, and the organisation branched out into different forms of tuition. At the material times for this appeal the main branches of tuition were:
Schools of English in London, Cambridge and Hove;
Senior tutorial schools in London and Hove;
Junior tutorial schools in London;
Preparatory schools for boys in London;
A secretarial training college in London.
(b) The founder of Davies's died unexpectedly in 1952, and thereafter the organisation has been under the control of M. R. Campbell, W. N. McBride and P. J. Hall.
(c) On 6th May 1946 Tutors was incorporated to acquire and take over as a going concern the business of tutors carried on by Davies's. The share capital of Tutors was originally £4,000 divided into 3890 5 per cent. cumulative preference shares of £1 each and 110 ordinary shares of £1 each.
(d) At the material times the issued shares in Tutors were held as follows:
Preference |
Ordinary |
|
shares |
shares |
|
M. R. Campbell |
200 |
30 |
W. N. McBride |
2000 |
30 |
P. J. Hall |
2500 |
22 |
Mrs. Davies (widow of the founder) |
500 |
20 |
Miss Harley |
500 |
2 |
Mrs. Fairfax-Jones (wife of J. S. Fairfax-Jones) |
500 |
2 |
Miss Goodman |
500 |
2 |
6700 |
108 |
(e) Messrs. Campbell, McBride and Hall were directors of Tutors, and Mr. J. S. Fairfax-Jones, a solicitor, was secretary to that company.
(f) By a declaration of trust made on 29th March 1961 (exhibit 3) by M. R. Campbell and J. S. Fairfax-Jones the Davies's Educational Trust was set up. The trustees of the Trust, M. R. Campbell and J. S. Fairfax-Jones, were required to hold the trust fund and the income thereof upon charitable trusts for the promotion and furtherance of education. The trustees had powers, inter alia, to accept donations, contributions and legacies; to issue appeals therefor; to purchase, acquire or found schools and tutorial establishments; to acquire buildings, land and chattels for the purpose of carrying on any school or tutorial establishment; and to provide bursaries, scholarships and prizes at schools or tutorial establishments.
(g) The Trust was entered in the Register of Charities in accordance with the provisions of s. 4 of the Charities Act 1960, and was admitted to be a trust established for charitable purposes only within the meaning of s. 447(1)(b) of the Income Tax Act 1952.
(h) On the following day, namely, 30th March 1961, Tutors entered into a deed of covenant (exhibit 7) with the trustees of the Trust. Under this deed Tutors covenanted to pay annually on 5th April in every year for a period of seven years commencing on 5th April 1961 a sum equal to 80 per cent. of its net profits or gains chargeable to income tax under Case I of Schedule D, less any capital allowances properly allowable therefrom. The first payment under the deed was to be made on 5th April 1961. The figure of 80 per cent., and not 100 per cent., of the net profits was chosen because the payments to be made to the trustees would not be deductible in computing the profits of Tutors for profits tax purposes. The 20 per cent. of net profits was therefore retained to meet profits tax, and the trustees, in effect, were to get the whole of the net profits of Tutors after meeting profits tax.
(i) The directors of and the shareholders in Tutors had been aware for some time prior to the establishment of the Trust that it would be difficult, if not impossible, to find individuals who were both qualified to run Davies's and possessed of sufficient capital to purchase the organisation as a going concern. The directors and shareholders were anxious that Davies's should continue on an established and permanent basis, and they conceived the idea that a charitable trust should be set up to acquire Davies's. The Trust was set up for this purpose, and the deed of covenant of 30th March 1961 was entered into on the clear understanding by the directors and shareholders of Tutors and the trustees that the net sums payable thereunder, together with the income tax thereon (which it was thought would be recoverable under s. 447(1)(b)), would be used by the trustees to purchase the business of Davies's. There was no doubt in the minds of any of the parties that the trustees would use these moneys to acquire Davies's business.
(j) Mr. C. A. Barber, who had acted as accountant to Vernon Davies and as auditor to Tutors, had the full confidence of all the parties concerned. It was left to him to work out the detailed implementation of the plan for the Trust to acquire the business of Tutors by means of the covenanted payments. The intention of all the parties to these arrangements was that the future of Davies's should be secured in the hands of an educational trust, and that the profits of Davies's should be used to obtain for the shareholders of Tutors a fair and reasonable price...
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