Campbell v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | Viscount Dilhorne,Lord Hodson,Lord Upjohn,Lord Donovan,Lord Guest |
| Judgment Date | 23 October 1968 |
| Judgment citation (vLex) | [1968] UKHL J1023-1 |
| Date | 23 October 1968 |
| Court | House of Lords |
[1968] UKHL J1023-1
House of Lords
Viscount Dilhorne
Lord Hodson
Lord Guest
Lord Upjohn
Lord Donovan
Upon Report from the Appellate Committee, to whom was referred the Cause Campbell and another (Trustees of the Davies's Educational Trust) against Commissioners of Inland Revenue, that the Committee had heard Counsel, as well on Tuesday the 11th, as on Wednesday the 12th, Thursday the 13th, Monday the 17th, Tuesday the 18th and Wednesday the 19th, days of June last, upon the Petition and Appeal of Malcolm Rider Campbell and James Stilgoe Fairfax-Jones, both of Manor Lodge, The Vale of Health, Hampstead, London, N.W.3 (as Trustees of the Davies's Educational Trust), praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 13th of February 1967, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioners might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the Case of the Commissioners of Inland Revenue, lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal, of the 13th day of February 1967, complained of in the said Appeal, be, and the same is hereby, Affirmed, and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellants do pay, or cause to be paid, to the said Respondents the Costs incurred by them in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments.
My Lords,
On the 6th May, 1946, a company called Davies's (Tutors), Limited (hereafter referred to as "Tutors") was incorporated. Its share capital was originally £4,000 divided into 3,890 5 per cent. Cumulative Preference shares of £1 each and 110 Ordinary shares of £1 each. Mr. Campbell, Mr. McBride and Mr. Hall were directors and Mr. Fairfax Jones, whose wife was a shareholder, its solicitor.
The company was formed to take over as a going concern the business of Davies's, a well known and reputable organisation which was providing tuition at a number of schools in different parts of the country. This organisation had since 1952 been under the control of Messrs. Campbell, McBride and Hall.
The directors and shareholders in the company were aware for some time prior to the 29th March, 1961 "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 Case Stated by the Special Commissioners says in paragraph 5 ( e) that they "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".
So on the 29th March, 1961, Davies's Educational Trust was created by a Declaration of Trust made by Mr. Campbell and Mr. Fairfax Jones who were to be the trustees of the trust which was admitted to be a trust for charitable purposes only within the meaning of section 447 (1)( b) of the Income Tax Act, 1952.
The next day Tutors entered into a Deed of Covenant, which was also executed by the Trustees of the Trust, whereby Tutors covenanted to pay out of its general fund of taxed income annually on the 5th April in every year for seven years commencing on the 5th April, 1961, to the Trustees "such a sum as will equal in amount 80 per cent. of the profits or gains accruing to" Tutors in the immediately preceding year, the first payment to be made on the 5th April, 1961. The figure of 80 per cent. 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. 20 per cent. of the net profits was therefore retained for Profits Tax purposes and, as the Case Stated says, "the Trustees, in effect, were to get the whole of the net profits of Tutors after meeting Profits Tax ".
Before 1962 Tutors had paid dividends of 800 per cent. on its ordinary shares as well as the preference dividends. Since then no dividends have been paid on the ordinary shares.
The Special Commissioners in paragraph 5 of the Case Stated found, inter alia, the following facts: that the Deed of Covenant 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 section 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 monies to acquire Davies's business".
The Commissioners gave their decision in writing and again said that the evidence established quite clearly that when Tutors entered into the Deed of Covenant on the 30th March, 1961, an understanding had been reached between the three directors of Tutors and the rest of the shareholders and the Trustees that the covenanted payments would be used by the Trustees to buy the business of Tutors as a going concern. "The intention of all these parties was that 'Davies's', in its present form, should be perpetuated in the hands of an educational trust and that the equity shareholders of Tutors should in due course receive a fair but not excessive price for the assets of Tutors. This understanding that the covenanted payments would be so used" the Special Commissioners found "to be a condition or counter-stipulation attached to the Deed of Covenant".
It was left to a Mr. Barber, the auditor of Tutors, to work out "the detailed implementation of the plan for the Trust to acquire the business of Tutors by means of the covenanted payments" and on the 4th April, 1962, a company called "Davies's Educational Developments Limited" (hereafter called "Developments") was incorporated. It had a share capital of £100 divided into 100 £1 shares. Two of the shares were issued, one to Mr. Campbell and the other to Mr. Hall, both directors of Tutors, and held by them as trustees of the Trust. The directors of Developments were Mr. Campbell, Mr. McBride and Mr. Hall who were also the directors of Tutors. The object of the company was inter alia to promote, carry on further and encourage educational work of every description.
The next day, the 5th April, 1962, a Deed of Partnership was entered into by Tutors and Developments "for the purpose of carrying on and developing as may be determined the business and work hitherto carried on by Tutors alone". Clause 3 ( e) of the Deed provided that Developments should immediately after the execution of the Deed purchase from Tutors 1/5th share of the goodwill of £50,000 of the business for £10,000 and that Developments might in any subsequent year purchase from Tutors at a fair market valuation the freehold and leasehold premises then vested in Tutors together with all trade fixtures, etc. of Tutors.
During the year ended the 5th April, 1963, the Trustees advanced £21,900 to Developments, £10,000 of which was used to purchase 1/5th share of the goodwill in Tutors and £11,900 to purchase the trade fixtures, etc.
The formation of Developments and the creation of the partnership were part of the machinery for carrying out the understanding arrived at on the basis of which the Deed of Covenant was entered into. The practical consequences of the understanding were that the equity shareholders of Tutors were to get a fair price for Tutor's assets out of monies provided by Tutors and which otherwise might have been distributed to them by way of dividend, and a price to which it was hoped that the Inland Revenue would contribute by refunding to the Trust the tax deducted by Tutors under section 169 (1) of the Income Tax Act, 1952, on making the payments under the Deed of Covenant. The future of Davies's was to be put on an established and permanent basis not just by transferring the assets of Tutors to the Trust but by their transfer on payment of a fair price paid out of monies provided by Tutors and, it was hoped, provided by the Inland Revenue. The main, if not the only, object of this curious financial transaction which was to precede the transfer of the assets was to secure the recovery of tax from the Inland Revenue.
Section 169 (1) of the Income Tax Act, 1952 , provides inter alia that:
"Where any yearly interest of money, annuity or other annual payment is payable wholly out of profits or gains brought into charge to tax—
( a)….
( b) ….
( c) the person liable to make the payment … shall be entitled on making the payment, to deduct and retain out of it a sum representing the amount of the tax thereon at the standard rate for the year in which the amount payable becomes due."
The payments made by Tutors under the Deed of Covenant were annual payments and it was not disputed that they were paid wholly out of profits or gains brought into charge to tax. Tutors, therefore, on making the payments under the Deed were entitled to deduct tax if the annual payments under the Deed were annual payments within the meaning of the section.
Section 447 (1) of the act provides that exemption from income tax shall be granted:
"( b) from tax chargeable … in respect of any yearly interest or other annual payment, forming part of the income of any body of persons or trust established for charitable...
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