Commissioners of Inland Revenue v Church Comrs. for England

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLord Wilberforce,Lord Morris of Borth-y-Gest,Lord Kilbrandon,Lord Salmon,Lord Fraser of Tullybelton
Judgment Date07 Jul 1976
Judgment citation (vLex)[1976] UKHL J0707-2

[1976] UKHL J0707-2

House of Lords

Lord Wilberforce

Lord Morris of Borth-y-Gest

Lord Kilbrandon

Lord Salmon

Lord Fraser of Tullybelton

Commissioners of Inland Revenue
(Appellants)
and
Church Commissioners for England
(Respondents)

Upon Report from the Appellate Committee, to whom was referred the Cause Commissioners of Inland Revenue against Church Commissioners for England, That the Committee had heard Counsel, as well on Monday the 3d, as on Tuesday the 4th, Wednesday the 5th, Thursday the 6th and Monday the 10th, days of May last, upon the Petition and Appeal of the Commissioners of Inland Revenue of Somerset House, Strand, London, W.C.2, 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 27th of June 1975, so far as therein stated to be appealed against, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order, so far as aforesaid, might be reversed, varied or altered, and that the Respondents, claims for relief from income tax for the years 1959-60 to 1963-4 inclusive be remitted to the Commissioners for the Special Purposes of the Income Tax Acts, 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 Church Commissioners for England, 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 27th day of June 1975, in part 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.

Lord Wilberforce

My Lords,

1

The appeal concerns a claim by the Church Commissioners for England (respondents) to recover from the Commissioners of Inland Revenue (appellants) certain sums representing income tax deducted from rentcharge payments made to the Church Commissioners by Land Securities Investment Trust Ltd. ("Land Securities"), and Associated London Properties Ltd. in the years 1959/60 to 1963/4 inclusive. Associated London Properties Ltd. is an associated company of Land Securities and for convenience I can treat all payments as having been made by Land Securities. So far, in all hearings, the respondents have succeeded in their claim.

2

I shall have to elaborate upon some aspects of the facts later, but as an introduction they can be simply explained. The respondents were the owners, in some cases for freehold, in others for leasehold interests, of a number of properties which were let or underlet to Land Securities on long leases. The rents payable by Land Securities to the respondents came, in aggregate, to £40,000 a year. By an agreement dated 5 January 1960, the respondents agreed to sell these properties to Land Securities in consideration of what were described as yearly rentcharges issuing out of the properties for a period of 10 years from 1 April 1960. There was also a covenant by Land Securities to pay the amounts of the rentcharges. The rentcharges came, in all, to £96,000 a year. It is not disputed that the object of this was to enable the respondents, while maintaining their current income at £40,000 a year during the 10 years, to accumulate the balance in each year so that at the end of the period they would have a capital sum which would yield them at least £40,000 in perpetuity. On their side Land Securities would secure capital assets which would improve the value of their investments.

3

On paying the rentcharges Land Securities deducted income tax in accordance with the Income Tax Act 1952, section 177(1). There was litigation as regards their own tax position. They claimed that the rent-charges represented a revenue outgoing and could be deducted from their gross income for purposes of profits tax. This claim was disputed, and came to this House which held that the rentcharges could not be so deducted ( I.R.C. v. Land Securities Trust Ltd. [1969] 1 W.L.R. 604). Lord Donovan, in his speech, said that he was willing to assume that, as against the Church Commissioners, income tax was deductible from the rentcharges under section 177 but he did not so decide and the question is entirely open on this occasion.

4

If the present issue had to be decided on the terms of the agreement of 5 January 1960, between Land Securities and the Church Commissioners, alone, there would be a strong prima facie case in favour of the taxpayers' claim. Section 177 refers to ( a) rents under long leases; and ( b) "any yearly interest, annuity, rent, rentcharge, fee farm rent, rent service, quit rent, feu duty, … or other annual payment reserved or charged upon land". Any payment of these kinds is charged with income tax by deduction, as if it were a royalty or other sum paid in respect of the user of a patent. Then section 447 gives express exemption from this tax to charities. This provides a strong foundation for the respondents' claim.

5

In answer to this, the Revenue has two arguments, one general and one particular on the individual facts of this case. I will deal with the general argument first. This is expressed in the following formula which the Revenue invites us to adopt as a general principle of tax law.

"Where a capital asset is transferred, or a capital obligation is discharged, or a capital payment is made, in consideration of a series of cash receipts of fixed amount over a fixed period so that the total debt may be immediately calculated, then those cash receipts are in the hands of the recipient partly income and partly capital, whether the parties call the series of cash receipts 'rent' or 'annuity' or 'annual sums' or 'rent charges' or 'instalments', and whether the payments are secured or unsecured."

6

My Lords, of this general rule I would say two things. First, it is on the face of it extremely reasonable. Nothing more apparently correct, just and in accordance with sound principle, can be laid down than that when payment of the purchase price for a capital asset is spread over a number of years, each payment should be treated as containing a capital element and an income element, the latter reflecting the deferred character of the payment. That such a rule has much to commend it was cautiously recognised by Lord Greene in 1941 as "simple and perhaps not unjust" ( Southern-Smith v. Clancy [1941] 1 K.B. 276 [1941] 1 K.B. 276, 285). But as clearly as it appears to be consistent with simple justice so, equally clearly, is it inconsistent with our tax law as it has developed and as it has been applied—to the benefit incidentally of the Revenue which is now arguing for a change.

7

English tax law has consistently taxed, as revenue, periodical payments of the kinds enumerated in section 177, in spite of the fact that they may be payments for wasting assets—i.e., assets the capital value of which is to disappear after a time, and without any distinction (such as the Revenue seeks to draw here) between perpetual payments or payments for an indeterminate period, such as the life of a person, and terminable payments, in the sense of payments for a fixed term. The principle of this was explained with elegance and authority in Coltness Iron Co. v. Black 1 T.C. 287 both in the Court of Session and in this House, and since I cannot find that citation from these judgments has been made in recent authority, I may be allowed to quote some passages verbatim.

8

In the Inner House, the judgment of Lord President Inglis, after stating that the taxing statute does not take account of balance sheet principles as to capital and income, but taxes the whole income received—less only working expenses—continues as follows:

"Any other construction of the statute would not only be inconsistent with the leading principle on which it is based and with its express words, but would lead to very embarrassing consequences. A man who employs his whole capital in the purchase of terminable annuities increases his income, and is assessed to the income tax for the full amount of the annuity; but after the step has been taken, he is in practical effect living on his capital, and when the account terminates it will all be gone. He might have left his money on an ordinary investment, and have consumed every year a portion of the capital in addition to the interest. Nay, he might calculate the matter so nicely, that the whole capital would be gone just at the same time that the annuity would terminate. In this case this assessable income would be only the interest accruing annually on the principal sum, gradually diminishing year by year, and would not include the portion of the capital which he chose to expend year by year. But when he purchases an annuity he converts his whole estate into an income which represents no capital but that which he has paid away and exhausted to purchase the income. But the statute takes no heed of his exhausted capital, and makes no deduction from the actual amount of his income on that account."

9

Similarly, in this House, Lord Blackburn said:

"It has also been sometimes argued that it is very unjust to tax at the same rate a terminable interest such as that in a mine which must at some time be worked out, and a fee simple interest which will endure so long as this world continues in its present state. I will not inquire whether this is just or not. There is much force in the argument on the other side, that if the...

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