Ferguson v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | Lord Reid,Lord Guest,Lord Upjohn,Lord Donovan,Lord Diplock |
| Judgment Date | 11 March 1969 |
| Judgment citation (vLex) | [1969] UKHL J0311-2 |
| Date | 11 March 1969 |
| Court | House of Lords |
[1969] UKHL J0311-2
House of Lords
Lord Reid
Lord Guest
Lord Upjohn
Lord Donovan
Lord Diplock
After hearing Counsel, as well on Tuesday the 14th, as on Wednesday the 15th and Thursday the 16th, days of January last, upon the Petition and Appeal of Mrs. Ruby Beatrice Ferguson (Assisted Person), 2 Belford Place, Edinburgh, praying, That the matter of the Interlocutor set forth in the Schedule thereto, namely, an Interlocutor of the Lords of Session in Scotland of the First Division, sitting as the Court of Exchequer, of the 7th of December 1967, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Interlocutor might be reversed, varied or altered, or that the Petitioner 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 Commissioners of Inland Revenue, 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 Interlocutor of the 7th day of December 1967, complained of in the said Appeal, be, and the same is hereby, Recalled, and that the first Question of Law in the Stated Case be, and the same is hereby, answered in the Affirmative: And it is further Ordered, That the said Cause be, and the same is hereby, remitted back to the Court of Session in Scotland to proceed as accords: And it is further Ordered, That the Respondents do pay, or cause to be paid, to the said Appellant the Expenses incurred by her in respect of the Action in the Court of Session and also the Costs incurred by her in respect of the said Appeal to this House, the amount of such last-mentioned Costs to be certified by the Clerk of the Parliaments: And it is also further Ordered, That unless the Costs, certified as aforesaid, shall be paid to the party entitled to the same within one calendar month from the date of the Certificate thereof, the Cause shall be, and the same is hereby, remitted back to the Court of Session in Scotland, or to the Judge acting as Vacation Judge, to issue such Summary Process or Diligence for the recovery of such Costs as shall be lawful and necessary.
My Lords,
The Appellant and her husband agreed to separate in 1948. He worked in Malaya and under a Minute of Agreement she was entitled to continue to occupy the house in which they had resided free of all expense and it was farther provided:
"THREE: The husband will during the subsistence of the marriage from the date on which he leaves Edinburgh to return to Malaya pay to the wife for her sole and separate use a sum of Thirty five pounds monthly in advance free of Income Tax by remitting said sum to her account with the National Bank of Scotland Limited, Saint Andrew Square, Edinburgh, or such other Bank Account as the wife might instruct in place thereof."
It appears from the Case Stated by the General Commissioners that the Appellant has regularly received the monthly sum of £35. The husband returned to the United Kingdom in 1958. In 1961 the Inspector of Taxes discovered that these payments were being made and assessments were made under Case III of Schedule D on the Appellant in respect of them for the years 1955/6 to 1961/2. Before his return to the United Kingdom the husband had no income which was subject to British Income Tax but but after his return he had sufficient taxed income to pay the whole of these sums out of it in 1960/61 and 1961/62, and sufficient to pay all but £74 in 1959/60. Accordingly the Respondent only sought before the Commissioners to uphold the assessments for the years 1955/6 to 1957/8 and the assessment for 1959/60 to the extent of £74.
The Commissioners discharged all these assessments. I do not think it necessary to set out their reasons. The questions of law stated by them were:
"(i) whether we were correct in our decision that the words 'free of Income Tax' in the agreement were not caught by section 506 (2) Income Tax Act, 1952, and in determining that the monthly sums of £35 were net amounts after deduction of tax.
(ii) if the monthly sums of £35 received by the Respondent were gross sums, whether she was correctly assessed under Case III of Schedule D for the years in which the circumstances of the husband were such that section 170, Income Tax Act, 1952 applied."
By Interlocutor of 7th December 1967 the First Division answered the first question in the negative and the second in the affirmative.
I think that the best way to make the question at issue reasonably clear is first to consider the true meaning of the obligation which the Appellant's husband undertook in Clause 3 of the Agreement which I have quoted. He was to remit £35 monthly from Malaya to her in Edinburgh and the payments were to be "free of income tax". Everyone knows that anyone who receives income in this country must pay tax on it. "Free of income tax" must mean that he intended and undertook that she should not have to pay tax on these payments. So it must mean that he undertook that, in addition to paying these sums to her, he would pay any tax which might become due by reason of his making these payments, for there was no other way by which he could ensure that she did not have to pay tax. Looking to the whole circumstances, I can see no other reasonable interpretation of this obligation.
But the Respondents' contention is that a line of authorities requires us to give to this obligation a different and, as I think, obviously unintended meaning; and that if that is done then section 506 of the Income Tax Act 1952 makes the obligation illegal and requires the words "free of income tax" to be struck out. If this is right the result is that the obligation becomes an obligation to pay a gross sum of £35 monthly and then the Appellant has to pay income tax in respect of these payments and the assessments in question are valid.
So it is necessary to examine this line of authorities but before doing so one must have in mind the relevant provisions in Income Tax legislation. The origin of section 506 goes back to 1803 but I need not go farther back than the Income Tax Act of 1842. We are now familiar with the fact that a person who makes annual payments which fall within Case III always deducts Income Tax. But that was not so in 1842. Before 1888 there was no provision which required or authorised the payer to deduct tax if he was making the payment out of money which had not already borne income tax. But if he was making the payment out of his income which had already borne tax he was authorised to deduct and retain tax.
This cannot have been for the protection of the Revenue because the Crown did not get the money which he deducted and retained: it made no difference to the Revenue whether or not he deducted it. The right to deduct and retain tax was for the benefit of the payer. The last part of section 103 of the Act of 1842 requires the payee to submit to this deduction and made it unlawful for the payer and payee to agree that this deduction should not be made by making any such agreement void. One may surmise that the reason why such an agreement was made void was that in those early days it was very unusual for statutes to interfere in this way and payees might well object to not being paid the whole sums to which they were entitled; so far for the protection of the payer any attempt by the payee to get him to agree to pay in full was frustrated by the provision that any such agreement would be void. If without agreement he chose to pay in full then he was making a gift to the payee.
Then in 1888 a person who made such payments out of money which had not borne tax was required to act as a tax-gatherer. He became obliged to deduct tax and to account to the Revenue for the tax which he had deducted. There was no provision with regard to such payments that an agreement not to deduct tax would be void, for it was the duty of the payer to make the deduction, whereas with regard to money which had already borne tax he had no duty but only a right to make the deduction.
Before dealing with the cases on which the Respondents rely I think it is desirable to see how the phrase "free of income tax" and similar phrases have been construed when used in deeds other than agreements. Such phrases commonly occur in wills. They also occur in other classes of documents such as Orders of Court but it will be sufficient to enquire how they have been construed in wills. There it is settled law that the phrase means what it says. Trustees directed to pay an annuity free of income tax do not deduct tax but they pay the full sum to the beneficiary. But that is not the end of the matter. When the beneficiary has to make a return of his total income he does not merely return the net sum paid to him by the trustees. He must "gross it up": he must return as his income such sum as after deduction of tax leaves the sum which he received free of tax. The trustees, who normally pay out of money which has borne tax, are notionally regarded as having set aside that gross sum and then deducted the tax from it before paying to the annuitant the net sum which is the sum they have been directed to pay free of tax. And the difference between the gross and net sums, the tax which they have retained, is regarded as tax borne by the beneficiary. If the trustees were paying out of capital they would in fact have to set aside the gross sum, deduct tax from it, and account to the Revenue for that tax. If the beneficiary is entitled to recover tax for any reason, e.g. because his total income is small, he can recover it from the Revenue out of the tax notionally retained by the trustees in the...
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