Commissioners of Inland Revenue v Educational Grants Association Ltd
| Jurisdiction | England & Wales |
| Judge | THE MASTER OF THE ROLLS,LORD JUSTICE HARMAN,LORD JUSTICE SALMON |
| Judgment Date | 16 February 1967 |
| Judgment citation (vLex) | [1967] EWCA Civ J0216-5 |
| Court | Court of Appeal (Civil Division) |
[1967] EWCA Civ J0216-5
The Master of the Rolls
(Lord Denning)
Lord Justice Harman and
Lord Justice Salmon
In The Supreme Court of Judicature
Court of Appeal
Civil Division
From Mr Justice Pennycuick
MR. F. HEYWORTH TALBOT, Q.C., MR. H. MAJOR ALLEN, Q.C. and MR. PETER REES (instructed by Messrs Allen a Overy) appeared as Counsel for the Appellants.
MR. E. I. GOULDING, Q.C., MR. J. RAYMOND PHILLIPS and Mr. J. P. WARNER (instructed by The Solicitor of Inland Revenue) appeared as Counsel for the Respondents.
On the 1st November, 1953 a Company was formed called the Educational Grants Association Ltd. It was limited by guarantee. The seven gentlemen who subscribed to the Memorandum. of Association were all closely connected with the Metal Box Company Ltd., being the Chairman of the Metal Box Company? four of its directors and two of its solicitors. The principal object of the Association was, "To advance education in such ways as shall from time to time be thought fit and in particular by making grants to or for the benefit of and for the education of all such persons as shall be considered likely to benefit from education at a preparatory, public or other independent school, including boarding schools, and at technical colleges". There were other ancillary objects. All income was to be applied for the objects of the Association. It was not to be distributed or given away by way of profit.
Under the Articles the affairs of the Company were to be managed by a Council of Management. There were three members of the Council. They were all three directors of the Metal Box Company. On the 30th November, 1953, the Council met. The Association had no money: but it was reported to the Council that a grant would shortly be made to the Association by the Metal Box Company. The Council then arranged for applications to be made for the benefit of "Metal Box children (by which I mean children of employees or former employees of the Metal Box Company and of its associated companies). They told their secretary to inform the Metal Box Company that they would consider applications in respect of Metal Box children. On the 1st March, 1954, a circular was sent out from the office of the managing director of the Metal Box Company. It went to the staff in the higher salary range and to the managers of the various departments of the Metal Box Company. The circular said that: "As the Metal Box Company Ltd. subscribes to the Association, the Council of Management have stated that they will beprepared to consider (inter alia) applications made on behalf of children of employees of the Metal Box Company Ltd". Following the circular, the Association received applications on behalf of several Metal Box children. On the 15th April, 1954, they considered five of these applications. They also made an estimate of the income they would require. It was £2,500 to £3,000 a year. No doubt that estimate was conveyed to the metal Box Company: for we find that three months later the Metal Box Company entered into a seven year covenant for £3,000 a year. By deed dated the 16th July, 1954, the Metal Box Company Ltd. covenanted with the Educational Grants Association Ltd. "that for a period of seven years from the date hereof it will pay annually to the Association the sum of £3,000, less income tax". In 1955 Sir Robert Barlow, the Chairman of the Metal Box Company, made a donation of £5,000 to the Association, and his brother did the same.
For the first five years — 1954 to 1958 — all the grants for individuals were made for the benefit of Metal Box children, and no other children. The Association made some payments to educational institutions, such as Christ's Hospital. After the first five years from 1959 onwards the Association have made a few grants to young people who were not Metal Box children, but the majority of grants have been to Metal Box children. The figures show that in the year 1958/59 no less than 85 per cent, of the whole of the Association's income was devoted to the education of Metal Box children. In the year 1959/60 it was 85 per cent. In the year 1960/61 it was 76 per cent.; and in the year 1961/62 it was 85 per cent.
The question is whether the seven year covenant qualifies for repayments of tax. This depends on Section 447(1)(b)of the Income Tax Act, 1952, which says: "Exemption shall be granted from tax….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 purposes only….so far as the same are applied to charitable purposes only".
The first requisite is that the Association must, be "established for charitable purposes only". That means that it must be established for advancing education exclusively for the public benefit; and not for private benefit, in whole or in part Looking at the Memorandum of Association by itself, without outside aid, I should have thought the objects clause was ambiguous on this point. The Memorandum says the object is "to advance education". The Judge implied after "education" the words "for the public benefit". But you can just as well imply the words "for the public or private benefit". Seeing that the words of the document are ambiguous, it is permissible to look at what was done under it, see Watcham v. East Africa Protectorate, 1919 Appeal Cases, page 5351 if the Association used their funds for advancing education in the private sphere as well as in the public sphere, I should presume that the members were acting lawfully within their powers rather than unlawfully in dereliction of them. But at this stage I will not pursue the point.' Suffice it to say that the Revenue have conceded that this Association was a body of persons established for charitable purposes only.
The second question is whether the payments under the covenant were "annual payments" such as to qualify for exemption from tax. We have just considered those words in the case of Davies's Educational Trust. If these payments were made out of pure bounty, they qualify far exemption. But if they were made in the expectation of a benefit in return, whether arising out of contract or of private understanding, they would not qualify for exemption. The Commissioners found here that there was no agreement or understanding, whether contractual or otherwise, or any counter stipulation in favour of the Metal Box Company. The Revenue have not appealed from that finding. So these payments qualify as "annual payments".
There remains the third question whether the "annual payments" were "applied to charitable purposes only". If and in so far as they were applied for advancing education exclusively for the public benefit, they were applied for charitable purposes. But if and in so far as they were applied for advancing education in the private sphere, they were not applied for charitable purposes. Thus far it is easy to state. But when we come down to earth, we run into difficulties. A long line of cases show that a trust is for the public benefit if it is for the benefit of the community or a section of the community. The inhabitants of a named place are a section of the community for this purpose: but the employees of a particular company or companies are not. It follows that if a man sets up a trust for the children of the inhabitants of Boumville, it will be held to be for the public benefit. But if he sets up a trust for the children of those employed by Cadburys Limited at Boumville, it will be held to be for private benefit. In each case the beneficiaries will probably be identical, but in point of law the one trust is charitable and the other is not. There is no logic in it. Lord MacDermott pointed that out in his dissenting speech in Oppenheim v. Tobacco Securities Trust Ltd. 1951 Appeal Cases, page 297 Shorn of logic, we can only "go by the decided cases. So we come to this: If funds are applied to found a closed scholarship, available only to boys from a particular school, those funds are applied for charitable purposes only. But if funds are applied to found a closed scholarship, available only to boys whose fathers are employedby a particular company, they are not applied for charitable purposes.
Accepting this distinction, albeit illogical, I turn to the present case. The greater part of these funds were applied to advance the education of Metal Box children, i.e. the children of employees or former employees of the Metal Box Company Ltd. The Judge said: "The inference is inescapable that this part of the Association's income i.e. 75 per cent, to 85 per cent. — has been expended for the benefit of these children by virtue of a private characteristic; i.e. their connection with Metal Box. Such an application is not by way of public benefit". The remaining 15 per cent, to 25 per cent, was applied for children unconnected with the Metal Box Company and for educational institutions. Those are conceded to be for the public benefit. So we have a case where part of the income was applied for the private benefit of Metal Box children (which is not charitable) and the other part for the public benefit (which is charitable). In so far as the income was applied for Metal Box children, it was not applied for charitable purposes and does not qualify for exemption. The Commissioners took a different view. They seem to have been influenced by the decision of Mr. Justice Upjohn in Re Koettgen's Will Trusts, 1954 Chancery, page 252: but that has to be read subject to the doubts thrown out by Lord Radcliffe in Caffoor's case, 1961 Appeal Cases, page 584. In my opinion we are compelled by Oppenheim's case to hold that the application for Metal Box children was not charitable.
Mr. Heyworth Talbot in his forceful argument said that, if this conclusion...
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