Campbell v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | THE MASTER OF THE ROLLS,LORD JUSTICE HARMAN,LORD JUSTICE SALMON |
| Judgment Date | 13 February 1967 |
| Judgment citation (vLex) | [1967] EWCA Civ J0213-5 |
| Court | Court of Appeal (Civil Division) |
| Date | 13 February 1967 |
[1967] EWCA Civ J0213-5
In The Supreme Court of Judicature
Court of Appeal
(Civil Division)
From Mr Justice Buckley
The Master of the Rolls
(Lord Denning)
Lord Justice Harman and
Lord Justice Salmon
MR. DESMOND MILLER, Q.C., MR. SIDNEY I. Simon and Mrs. Margot Hoare (instructed by Mr. J.S. Fairfax-Jones) appeared as Counsel for the Appellants.
MR. E.I. GOULDING, Q.C., MR. J. RAYMOND PHILLIPS and Mr. J.P.F.E. WARNER (instructed by the Solicitor of Inland Revenue) appeared as Counsel for the Respondents.
"Davies's" is a first class place of education. It was founded by Mr. Vernon Davies in 1927 and turned into a private limited company in 1946, called Davies's (Tutors) Ltd. The founder died unexpectedly in 1952, leaving his interest to his widow. Since that time Davies's has been run by three of the principals, Mr. Campbell, Mr. McBride and Mr. Hall. They are directors of Davies's (Tutors) Limited, and, together with Mrs. Davies hold most of the shares. In 1961 they were all anxious to establish Davies's on a permanent basis. So they decided to set up a charitable trust for the purpose. The idea was that the trust should buy from Davies's (Tutors) Limited the goodwill, premises and equipment of Davies's: and then carry it on for the years to come. They consulted their solicitor, Mr. Fairfax-Jones and their accountant, Mr. C.A. Barber; and, under their advice, executed various documents to implement the plan. One of these documents was a seven-year covenant in favour of the charitable trust. The object was to enable the trust to recover tax on the payments under the covenant. That is a perfectly legitimate thing to seek to do. Every charity in the country benefits in this way by seven-year covenants. The question is whether it has succeeded in this case.
The facts are stated in the Special Case. Suffice it for me to reduce them to the essentials:-
(1) .
On the 29th March, 1961, a charitable trust was formed under the name "The Davies's Educational Trust". The first trustees were Mr. Campbell (a director and shareholder in Davies's (Tutors) Limited) and Mr. Fairfax-Jones (a solicitor and the secretary of Davies's (Tutors) Limited). There was to be a trust fund of moneys thereafter to be received by the trustees: and the trustees were to hold the fund upon charitable trusts for the promotion of education; with power (amongst other things) to purchase, acquire and carry on schools and tutorial establishments.
(2) .
On the 30th March, 1961, Davies's (Tutors) Limited executed a deed of covenant whereby they agreed with the trustees of the charitable trust that "it the Company will out of the general fund of taxed income of the Company annually on the 5th April in every year for a period of seven years…pay to the trustees such a sum as will equal in amount 80 per cent. of the" net profits of the Company. The remaining 20 per cent., was retained to meet profits tax. So the covenant was in effect to pay all the net profits of Davies's (Tutors) Limited (after deducting profits tax) to the trustees for the next seven years. These net profits came to about £12,500 a year.
(3) .
On the 4th April, 1962, the two trustees formed themselves into a Company called Davies's Educational Developments Ltd. Its authorised capital was £100, of which two shares of £1 each were issued, one to each trustee. I will call it Davies's Developments Ltd. On the 5th April, 1962, Davies's Developments Ltd. by deed agreed to purchase from Davies's (Tutors) Limited the goodwill of Davies's. The value of the goodwill was put at £50,000 (which was a fair price), and Davies's Developments Ltd. were to buy it by five instalments of £10,000 a year. As soon as the £50,000 had been paid, Davies's Developments Ltd, agreed to buy from Davies 's (Tutors) Limited all its premises and equipment at a fair market valuation by an independent valuer.
(4)
The evidence established quite clearly that, when Davies's (Tutors) limited entered into the deed of covenant of the 30th March, 1961, an understanding had been reached between all concerned that the" "covenanted' "payments would be used by the trustees to buy the business of Davies's (Tutors) Limited as a going concern. The intention of all the 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 Davies 's (Tutors) Limited should in due course receive a fair but not excessive price for the assets of that Company.
(5)
The trustees received the first two instalments under the deed of covenant due on the 5th April, 1961, and the 5th April, 1962)amounting to £25,831. 12s.2d. The trustees used this money, as to £10,000 in part purchase of the goodwill of Davies's (Tutors) Limited, and as to £11,900 in the purchase of the trade fixtures of that Company.
The question is whether the trustees of the charitable fund are entitled to repayment of tax by the Revenue in respect of the first two instalments they have received under the deed of covenant.
This claim to repayment arises out of the provisions of the Income-Tax Act, 1952, sections 123(1), 169(1) and 447(1)(b). They are so familiar that I will not read them again. Suffice it to say that a trust established for charitable purposes only is entitled to exemption from tax "in respect of any yearly interest or other annual payment, forming part of the income of…the trust…so far as the same are applied to charitable purposes only".
The Davies's Educational Trust is admittedly a trust established for charitable purposes only. So the two points are:- (1) Were the payments under the deed of covenant "annual payments" forming part of the income of the trust? (2) Were they applied to "charitable purposes only"?
It is a common practice nowadays for a man to make a seven-year covenant in favour of a charity. The object is to enable the charity to recover tax from the Revenue. The theory on which it works is best shown by an illustration. Take a man who has a taxable income of £1,000 a year. He is taxed on the whole of the £1,000 at the standard rate of 8s.6d., in the pound it comes to £425. now suppose he makes a covenant in favour of his Parochial Church Council to pay them £10 a year for seven years. He is entitled to deduct tax at source before he pays the Church Council. He deducts tax at 8s. 6d., in the pound, which comes to £4. 5s.0d, and pays the Church Council £5. 15s.0d. a year. Now that £10 a year payable under the covenant is really the income of the Church Council. If you look at it from their point of view, it is £10 a year coming to them forming part of their income. Being their income, it ceases to be the income of the payer. So the £10 a year becomes the income of the Church Council, thus reducing the income of the payer to £990. Now you do not subject any income to tax twice over. That means that when he pays tax on the full £1,000, he pays it both on his own income of £990 and on the Church Council's income of £10. In so far as he pays tax on the £990, he pays it on his own account. It is over and done with. In so far as he pays tax on the£10, he pays it on behalf of the Church Council. The Church Council has suffered tax by deduction of £4. 5s. 0d., at source. But being a charity, the Church Councilare not liable to tax on that £10. They are exempt. They can, therefore, recover it from the Revenue.
That illustration points the moral of this whole case. In order to be an "annual payment" within these sections, the payment must be such that it can be truly regarded as the income of the recipient taxable by deduction at source. Typical instances are mentioned in the statute. "Yearly interest" can be illustrated by interest payable on loans. "Annuities" can be illustrated by annuities granted by will or obtained by purchase from an insurance Company. The words "other annual payments" are ejusdem generis. They are payments which recur each year in which nothing remains to be done by the recipient except to receive the money. The recipient is not to supply goods or services or give or do anything in return for the payment. If he does so, it is no longer an "annual payment". This appears from Earl Howe's case, 1919, 2 King's Bench, page 336, and Re ( Hanbury 1939; 38 Tax Cases, page 588. In the Eipping Forest case, 1953, 1 Weekly Law Reports, page 652, at page 664 Lord Normand indicated that a sum would be an "annual payment" if it was paid "without conditions or counter-stipulations out of taxed income"; and this was adopted by Lord Evershed as a good guide in the National Book League case, 1957 Chancery, page 488, at page 499.
Mr. Desmond Miller, Q.C. submitted that Lord Normand was referring only to conditions or counter-stipulations which were legally enforceable; and he argued that, even where there was only a private understanding that the covenanter should receive a counter benefit (which was not legally enforceable) it was nevertheless an "annual payment". I cannot accept this submission in the least. A seven-year covenant is nullified for tax purposes by a private understanding, just as much as by a contractual stipulation; Take the common case of a covenant by a father to pay his son, who is over 21, £400 a year. If it is wholly the son's income without reservation, it is an "annual payment". But if there is a private understanding that the son should return it or part of it to his father in cash or in kind, then it is not an "annual payment" so as to qualify for tax benefits. The Royal Commission over which Lord Radcliffe presided made a caustic reference to private understandings of this kind. They said: "We feel little doubt that a number of such understandings do exist and that they...
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