Chapter BIM35310
| Published date | 22 November 2013 |
| Record Number | BIM35310 |
| Court | HM Revenue & Customs |
| Issuer | HM Revenue & Customs |
There is a difference between payment of a defined lump sum by means of a series of recurrent payments and payments that go on in perpetuity. The former may represent instalments of a capital sum, the latter will not.
The case of Commissioners of Inland Revenue v Mallaby-Deeley and Another [1938] 23TC153 concerned the arrangements used to finance a literary work.
In November, 1926, Sir Harry Mallaby-Deeley, Bart undertook to pay a sum of money in five equal amounts to finance the completion of a literary work (‘The Complete Peerage, or History of the House of Lords and all its Members’). On 10 March 1930, Mallaby-Deeley entered into a deed of covenant. The deed was exchanged for the original undertaking, but the deed contained no reference to the original undertaking. Under the deed Mallaby-Deeley was to pay, in each of seven years ending 31 March 1936, sums, which after deduction of income tax, ranged from £5,600 in the first year to £700 in the last year. In aggregate the sums payable equalled the balance remaining due at 1 April 1929, under the original undertaking.
On appeal Mallaby-Deeley claimed that the respective amounts payable under the deed of 10 March 1930, with an appropriate addition for income tax, were proper deductions in computing his total income for surtax purposes.
The Special Commissioners decided:
- that the payments under the deed were income payments, but
- that the deed was not ‘a disposition made for valuable and sufficient consideration’ within the meaning of S20(1)(b) Finance Act 1922, and
- that, in the computation of the appellant’s liability to surtax, the deductions allowable in respect of the payments under the deed must be restricted each year to the gross amount, before deduction of income tax, corresponding to the net sum of £700, as being the only amount payable for more than six years.
In the Court of Appeal the Master of the Rolls, Sir Wilfrid Greene, explained that to distinguish between payments of an income and of a capital character it is necessary to determine the precise nature of the transaction. If parties agree that the one shall pay to the other a capital sum, the nature of that sum does not change if it is paid in instalments. Sir Wilfrid Greene summarised the position in the middle of page 166:
‘The distinction which is to be drawn for the purposes of the Income Tax Acts between payments of an income character and payments of a capital nature is sometimes a very fine and rather artificial one. It may...
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