Essex County Council (Appellant v John Roger Ellam and Another (Respondent

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLORD JUSTICE DILLON,LORD JUSTICE CROOM-JOHNSON,LORD JUSTICE PURCHAS
Judgment Date23 February 1989
Judgment citation (vLex)[1989] EWCA Civ J0223-8
Docket Number89/0208

[1989] EWCA Civ J0223-8

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

CHANCERY DIVISION (REVENUE)

(Mr. Justice Hoffmann)

Royal Courts of Justice

Before:

Lord Justice Purchas

Lord Justice Dillon

and

Lord Justice Croom-Johnson

89/0208

Between:
Essex County Council
Appellant (Appellant)
and
John Roger Ellam
(H.M. Inspector of Taxes)
Respondent (Respondent)

MR. G. R. ARGLES (instructed by Messrs Robin Thompson & Partners) appeared on behalf of the Appellant/Appellant.

MR. A. MOSES (instructed by The Solicitor of Inland Revenue) appeared on behalf of the Respondent/Respondent.

LORD JUSTICE DILLON
1

The court has before it an appeal by the Essex County Council against a decision of Hoffmann J. given on the 3rd November 1987 whereby the judge dismissed an appeal by case stated by the Council against a decision in favour of the Crown of one of the Special Commissioners for Income Tax, Miss Wix. Although brought by the Council, the appeal would, if successful, enure entirely for the benefit of a Mr. David Skidmore.

2

The facts are fully set out in the case stated. They can be summarised quite shortly for the purposes of this judgment.

3

Mr. Skidmore resides in Essex. It is his misfortune that his son Graham who was born in May 1963 is mentally handicapped. In 1980 Mr. Skidmore decided that it would be of benefit to Graham, if Graham could for two years from 1st September 1981 (by which dates Graham would of course be of full age) attend a course in social training at an institution called Dilston Hall at Corbridge in Northumberland. Dilston Hall is run by the well-known charity Mencap, and it is the policy of Mencap not to accept students at Dilston Hall unless they are sponsored by their local authorities. In particular, Mencap looks to the sponsoring local authority to pay, on the usual termly basis, the fees for any child at Dilston Hall, leaving it to the authority to make any appropriate arrangements for the child's parents to reimburse or contribute to the fees for the child's terms at Dilston Hall.

4

Accordingly, as a resident in Essex Mr. Skidmore approached the Council for the Council to sponsor Graham at Dilston Hall. The Council agreed to do so, provided that Mr. and Mrs. Skidmore first agreed to pay the Council the fees and a provisional place was reserved for Graham at Dilston Hall. Then by a written agreement dated the 30th June 1981 Mr. and Mrs. Skidmore jointly and severally agreed with the Council, in consideration of the Council entering into a contract with Mencap for Graham to go to Dilston Hall, that Mr. and Mrs. Skidmore would reimburse the Council any amount paid by the Council under the Council's contract with Mencap.

5

The Council thereupon confirmed to Dilston Hall the place provisionally reserved for Graham for 1st September 1981, and confirmed its sponsorship of Graham. Graham therefore duly went to Dilston Hall in September for the two year course.

6

Mr. Skidmore was—not unnaturally—concerned at the high fees payable for Graham's time at Dilston Hall, and he asked whether the Council would be prepared to contribute to the cost, but in its then financial circumstances the Council felt unable to do so. Mr. Skidmore accordingly, holding a view that under our tax law he could throw part of the costs of Graham's time at Dilston Hall on to the Commisioners of Inland Revenue, proceeded to put into effect an idea which had been briefly mentioned to the Council at the very outset in March 1980, but not then explored; he executed a Deed Poll which is dated 18th September 1981 and which is a Deed of Covenant in favour of the Council, and sent it to the Council under cover of a letter of 21st September 1981, without any prior warning (save in so far as the mention of such a scheme in a tentative way in March 1980 might be regarded as a warning."

7

By the Deed of Covenant he covenanted with the Council to pay the Council a gross amount of £1333 on each 1st December, 1st March and 1st August for a period of 7 years or for the period of the joint lives of Mr. Skidmore and Graham or until Graham should cease to be receiving full time education or social training at any university, college, school or other educational or social training establishment or until he should commence such education or social training in such establishment within the County of Essex (whichever should be the shortest period) the first payment to be made on 1st December 1981.

8

In the covering letter of 21st September he said as follows:

"I would now like to deal with the financial matters arising out of Graham's stay at Dilston Hall and to limit the considerable expense which may arise. I would like to make payments to the County Council by way of a standard education covenant, suitably adapted to cover the special circumstances. My covenant is enclosed and should be retained for production to the revenue authorities at the end of the fiscal year. They occasionally wish to see it when the Form R185(AP) is made.

The annual fee at Dilston Hall is approximately £5,000 p.a. but after taking supplementary benefits into account is more like £4,000 p.a.

I have covenanted to pay £3,999. I will make out a standing order with my bank to remit £933.10 on the 1st December, March and August each year. This totals £2,799.30. The balance, i.e. £1,199.70 is recovered by sending Form 185(AP) to the Inland Revenue. This payment is equal to 30% tax on the sum of £3,999. I will obtain the form which I have to complete and send it to you for you to submit.

I have, of course, arranged to reimburse you for the full expense you incur on Graham's behalf and inasmuch as these arrangements fall short, I will discharge the liability by cheque.

Please let me have full details of the account and the address to which I should direct my standing order."

9

The Council, on receipt of the Deed of Covenant and covering letter, sought confirmation from the Inland Revenue that if payments were made by Mr. Skidmore under the Deed of Covenant subject to deduction of tax, the Council would, in all the circumstances which were candidly put before the Revenue, be entitled to recover from the Revenue the tax deducted. Such confirmation was however not forthcoming. Consequently the Council never agreed to accept the Deed of Covenant in satisfaction, to the extent of the gross sums thereby covenanted to be paid, of the obligations of Mr. and Mrs. Skidmore under the Indemnity Agreement of 30th June 1981. But Mr. Skidmore made his payments to the Council under the Deed of Covenant, net of tax at the standard rate, and the Council accepted the sums paid, applied them towards settlement of Mr. Skidmore's obligation to reimburse the Council for Graham's fees at Dilston Hall, and then applied to the Inland Revenue for the refund of the tax deducted by Mr. Skidmore. That was refused by the Inland Revenue. Consequently the Council appealed against the refusal and the appeal came before the Special Commissioner; hence the appeal to the judge and now the present appeal. Clearly however the appeal would, if successful, enure entirely for the benefit of Mr. Skidmore, since the Council has an incontestable right under the indemnity agreement to recover from Mr. and Mrs. Skidmore whatever it fails to recover from the Inland Revenue by these proceedings. That may have some connection with the fact, otherwise irrelevant, that the firm of solicitors of which Mr. Skidmore is a partner act as solicitors for the Council in these proceedings.

10

The statutory framework is not in dispute. Under section 353 of the Taxes Act 1970 the Council is exempt from all charge to income tax in respect of its income. The section further provides that so far as the exemption from income tax calls for repayment of tax, effect shall be given thereto by means of a claim. That was the section under which the Council claimed repayment of the tax deducted by Mr. Skidmore from the gross payments payable under the Deed of Covenant. Mr. Skidmore's claim to deduct the tax arose under section 52 of the Act, on the basis that the payments under the Deed of Covenant constituted "an annuity or other annual payment charged with tax under Case III of Schedule D". It is common ground that if the payments under the Deed of Covenant constituted "an annuity or other annual payment charged with tax under Case III of Schedule D", Mr. Skidmore was entitled to deduct tax and make the payments net as he did, and the tax so deducted was income of the Council which the Council is entitled to recover under section 353; but not otherwise. Case III of Schedule D is set out in section 109(2) of the Act, but it is unnecessary to set out that subsection in this judgment. The key words are those already quoted, "an annuity or other annual payment

11

The essence of the scheme for deduction of tax by the payer of an annual payment or annuity, and reclaim of the tax by the payee if the payee is exempt from income tax is that the annual payment or annuity is such as in law to be regarded as income of the payee. It is well established, however, that not all income qualifies, and the crucial question, as put by Lord Donovan in Campbell v. I.R.C. [1970] A.C.77 at 112 F-G is whether the payment is "pure income" or "pure profit income" in the hands of the payee as those terms have been used in the decided cases. That is the crucial question in the present case.

12

Mr. Argles submits, however, at some considerable length as a preliminary issue that as the Deed of Covenant is a Deed the question whether the sums payable under the Deed of Covenant are "pure income" or "pure profit income" of the Council has to be decided on the words of the Deed of Covenant...

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