Inland Revenue v Ferguson
| Jurisdiction | Scotland |
| Judgment Date | 07 December 1967 |
| Date | 07 December 1967 |
| Docket Number | No. 14. |
| Court | Court of Session (Inner House - First Division) |
1ST DIVISION.
RevenueIncome taxDeduction of tax on payment of annuityAgreement to pay annuity "free of income tax"Whether agreement voidIncome Tax Act, 1952 (15 and 16 Geo. VI and 1 Eliz. II, cap. 10), sec. 506 (2).
The Income Tax Act, 1952, enacts by sec. 506:"(2) Every agreement for payment of interest, rent or other annual payment in full without any such deduction [i.e. deduction of tax] shall be void."
A husband agreed to pay his wife 35 monthly free of income tax and paid her the 35 regularly for several years. The General Commissioners held that the actings of the parties showed that by "35 free of income tax" they meant "such a sum as will after deduction of income tax at the standard rate leave 35," and therefore that the agreement was not void.
Held (dub. the Lord President) that, assuming the competency of drawing inferences as to their intentions from the actings of parties, their actings were consistent with the view that the husband paid 35 without deducting tax; that the words "free of income tax" had their natural meaning, viz. that the husband had agreed not to deduct tax; and therefore that the agreement was void.
RevenueIncome taxPersons assessableAnnuity payable free of income taxTax not accounted for by payerLiability of recipientIncome Tax Act, 1952 (15 and 16 Geo. VI and 1 Eliz. II, cap. 10), secs. 123 (1), 148 and 170.
The Income Tax Act, 1952, provides by sec. 123 (1), inter alia,that tax in respect of any annuity payable as a personal obligation in virtue of a contract shall be charged under Case III of Sched. D, and by sec. 148 that tax under Sched. D shall be charged on the persons receiving the income. Sec. 170 provides by subsec. (1) that when,inter alia, any annuity charged with tax under Sched. D is not payable out of profits and gains brought into charge, the person by whom the payment is made shall deduct tax at the standard rate; by subsec. (2) that the person making the payment shall deliver to the Commissioners of Inland Revenue an account of the payment and of the tax deducted, and that the Special Commissioners shall assess and charge the payment on that person; and by subsec. (3) that the Special Commissioners "may, where any person has made default in delivering an account required by this section make an assessment according to the best of their judgment "
A husband agreed to pay his wife 35 monthly free of income tax. He paid this regularly, but in some years the payment was not made out of profits and gains brought into charge and he delivered no account to the Commissioners. An assessment having been made on the wife for those years, she maintained that under sec. 170 it ought to have been made on her husband. The Court held that the agreement to pay free of income tax was void.
Held (per Lord Cameron whether the agreement was void or not) that sec. 170 merely gave the Commissioners an option to assess the husband and, as they had not exercised it, the wife was properly assessed under sec. 148.
At a meeting of the Commissioners for the General Purposes of the Income Tax for the Division of Midlothian Mrs Ruby Beatrice Ferguson appealed against assessments made on her under Case III of Schedule D of the Income Tax Act, 1952, in the sum of 420 for each of the years from 195556 to 195758 and in the sum of 74 for the year 195960, in respect of monthly sums received by her from her husband under a minute of agreement. The Commissioners allowed the appeal and, at the request of the Commissioners of Inland Revenue, stated a case for the opinion of the Court of Session.
The case set forth that the following facts were admitted:"(a) Under a minute of agreement dated April 1948 between Mr Neil George Ferguson (the husband) and Mrs Ruby Beatrice Ferguson (the wife) it was agreed they should separate, and clause 3 of the deed provided as follows: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. (b) Since then the wife has regularly received the monthly sum of 35 as provided by the agreement. (c)The husband was resident in Malaya till 1958 but since then has been resident in the United Kingdom, (d) In 1961 the Inspector of Taxes discovered that the respondent was in receipt of these annual payments, and assessments were made on the wife for the years 195556 to 196162. The wife appealed against these assessments. For the years 19559, 196061 and 196162 the husband had sufficient income subject to United Kingdom income tax to make thereout monthly payments of 35, and the assessments on the wife for those years were prohibited by section 169 (1)(a)of the Income Tax Act, 1952. No question now arises in connection with the assessments for these years. For the year 195960 the husband's income subject to United Kingdom income tax fell short by 74 of the amount required to cover the monthly payments of 35 which he made to the wife, (e) For the years 195556, 195657 and 195758, section 170 (1) of the Income Tax Act, 1952 is relevant, the husband in those years having no United Kingdom income chargeable to tax out of which the payments could have been made. Section 170 (1) also applies for 195960 in so far as the said monthly payments in that year were not wholly payable out of income brought into charge to United Kingdom tax."
The contentions of the parties were stated as follows:
"It was contended on behalf of the respondent that:(1) The words 35 free of income tax in clause 3 of the deed do not mean without deduction of tax, but should be read as a form of shorthand for such a sum as would after deduction of tax at the standard rate give 35. (2) This interpretation has been adopted by the courts in the case of free of tax payments by orders of the Court or under testamentary dispositions. It is the ordinary form of words used to describe dividends, etc., paid after deduction of United Kingdom income tax at the appropriate rate in any particular case. The only logical objection to a similar interpretation for other agreements rests on section 506 of the Income Tax Act, 1952. (3) The case for requiring free of tax provisions in other agreements to be treated as void rests on two English cases, Blount v. BlountELR, [1916] 1 K. B. 230, and Noel v. Trust and Agency Co. of AustralasiaELR,[1937] Ch. 438, which are not necessarily binding in a Scottish Court. Moreover, there is no logical necessity to equiparate an agreement to pay without allowing a deduction of tax to an agreement to pay free of tax, and such decisions fail to notice and give effect to the distinction between said two forms of words. (4) In a recent Court of Appeal case (Horton v. HortonELR (No. 2), [1961] 1 Q. B. 215) a separation deed provided for aliment of 30 per month but was amended by a supplemental deed which substituted a sum which after deduction of tax shall amount to a clear sum of 30, and included a declaration that this had always been the intention of the parties. (5) Real intentions can be substituted for faulty draftsmanship with retrospective effect if the actions of the parties throughout have been consistent with the interpretations sought, and in this case the intentions of the parties had always been to provide the wife with a clear 35 per month to spend, as was evidenced by the history of the payments made by the husband throughout the period from 1948 to 1962. (6) The deed is not struck at by section 506 (2) and is capable of interpretation on the lines followed in Horton v. Horton. (7) In the years under appeal section 170 was applicable. Deduction of tax by the husband was mandatory, and he alone could be asked to account for tax. In any event he must be presumed to have paid it: Stokes v. BennettELR, [1953] Ch. 566.
"On behalf of the Inspector of Taxes it was contended that:(1) The contentions put forward by the respondent regarding the interpretation of the phrase free of income tax in clause 3 of the agreement as meaning such a sum as after deduction of income tax for the time being payable in respect thereof would leave a net sum of 35 per month, if legally sound, made section 506 (2) wholly meaningless. (2) The cases in which the words free of income tax had been so interpreted by the Courts as not being within the mischief of section 506 (2) of the Income Tax Act, 1952 were confined to payments under court orders and out of taxed funds under testamentary dispositions. There were no decided cases in which the words free of income tax as used in an agreement had been held not to be caught by section 506 (2) and void so far as tax was concerned. (3) The words free of income tax had to be construed according to their ordinary meaning in their context, unless both parties to the agreement proved that some other meaning was intended. (4) The onus of establishing that the words 35 free of income tax fell to be read as meaning such a sum as after deduction of tax leaves a sum of 35 was on the respondent and had not been discharged. (5) The words 35 free of income tax in this case were within the mischief of section 506 (2) of the Income Tax Act, 1952, and fell to be read as 35 per month, from which sum tax ought to be deducted. (6) In the hands of the respondent the monthly sums were for income tax purposes instalments of an annuity or other annual payment. (7) The respondent had been correctly assessed under Case III of Schedule D in respect of the monthly sums of 35 received by her and the assessments should be confirmed."
The commissioners stated their decision as follows:"We were invited by the appellant to interpret the phrase 35 free of income tax as such a sum as will after...
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Inland Revenue v Ferguson
...so far as it is paid out of untaxed income. Blount v. BlountELR, [1916] 1 K.B. 230,overruled. (In the Court of Session 7th December 1967—1968 S.C. 135.) At a meeting of the Commissioners for the General Purposes of the Income Tax for the Division of Midlothian Mrs Ruby Beatrice Clibborn or ......