Racal Group Services Ltd v Ashmore
| Jurisdiction | England & Wales |
| Judgment Date | 07 March 1994 |
| Date | 07 March 1994 |
| Court | Chancery Division |
Chancery Division.
Vinelott J.
David Ewart (instructed by D Whittaker) for RSGL.
The trustees did not appear.
The following cases were referred to in the judgment:
Blount v Blount ELR[1916] 1 KB 230
Ferguson v IR Commrs ELR[1970] AC 442
Lake v Lake & Ors TAX[1989] BTC 8046
Seymour & Anor v Seymour TAX[1989] BTC 8043
Sherdley v Sherdley WLRTAXELRTAX[1986] 1 WLR 732; [1986] BTC 220 (CA); [1988] AC 213; [1987] BTC 273 (HL)
Slocock's Will Trusts, Re UNK[1979] 1 All ER 358
Thomas Bates & Son Ltd v Wyndham's (Lingerie) Ltd WLR[1981] 1 WLR 505
Whiteside v Whiteside & Ors ELRELR[1949] Ch 448; [1950] Ch 65 (CA)
Corporation tax - Annual payment - Covenant in favour of charity - Mistake in covenant resulting in annual payments lasting less than three years - Payments thus not constituting charge on income nor income of charity - Whether court would rectify deed of covenant - Income and Corporation Taxes Act 1988 section 399 subsec-or-para (8) section 660 subsec-or-para (1)Income and Corporation Taxes Act 1988, ss. 399(8), 660(1)(3).
This was an application seeking rectification of a deed which, although intended to effect a covenant to pay £70,000 to a charity for a period which might exceed three years within the Income and Corporation Taxes Act 1988 section 399 subsec-or-para (8)Income and Corporation Taxes Act 1988, s. 399(8), was erroneously executed in terms which ensured that the period would not exceed three years.
Racal Group Services Ltd ("RGSL") executed a deed of covenant on 19 July 1988 whereby RGSL covenanted to pay Racal Electronics Charitable Trust ("the trust") an annual sum of £70,000. The deed as originally drafted was expressed to be for a period of four years from the date of the deed, but provided, Inconsistently, that the first annual payment was to be made on its execution and subsequent payments to be made on 1 April in each of the following three years, the last payment to be made on 1 April 1992. The discrepancy was noticed and the draft was amended, changing the date of the last payment to 1 April 1991 to correspond with the stated three yearly payments.
The result was that the form in which the deed was executed provided for annual payments to become payable for a period which did not exceed three years. The payments were not therefore covenanted payments to charity within the Income and Corporation Taxes Act 1988 section 660 subsec-or-para (3)Income and Corporation Taxes Act 1988, s. 660(3), and accordingly under Income and Corporation Taxes Act 1988 section 660 subsec-or-para (1)s. 660(1) the payments did not become the income of the trust. RGSL had no right to deduct tax because the payments were deemed to remain the income of RGSL under Income and Corporation Taxes Act 1988 section 660 subsec-or-para (1)s. 660(1). Equally, the payments were not covenanted donations within Income and Corporation Taxes Act 1988 section 339 subsec-or-para (8)s. 339(8) and accordingly they were not charges on income deductible in computing RGSL's profits.
RGSL applied to the High Court seeking rectification of the deed by substituting for the payment dates ending on 1 April 1991, the anniversary of the deed, the last payment to be made on 19 July 1991 so that the last payment would then be due three years after the first payment and the covenant would be for a period which "may exceed three years" and Income and Corporation Taxes Act 1988 section 339 subsec-or-para (8)Income and Corporation Taxes Act 1988, s. 339(8) would be satisfied.
Held, dismissing the application:
A court would make an order for rectification of a document if satisfied that it did not give effect to the true intention of the parties, or, as here, the covenantor; if satisfied that there was an issue between the parties capable of being contested it was irrelevant, first that rectification was sought or consented to by all concerned, and secondly that rectification was desired because it would have fiscal consequences. However, rectification would not be ordered if the rights of the parties would be unaffected and the only effect of the order would be to secure a fiscal benefit.
Vinelott J: This is an application for the rectification of a deed of covenant executed by Racal Group Services Ltd, ("RGSL"), a subsidiary of Racal Electronics plc, ("Racal"), on 19 July 1988 whereby RGSL covenanted to pay Racal Electronics Charitable Trust, ("the trust"), an annual sum of £70,000.
The trust is an unincorporated charity established by a declaration of trust dated 1 May 1984 and made by three individuals who were the first trustees of the trust. The covenant was expressed as a covenant:
… for a period of four years from the date hereof [to] pay annually the sum of £70,000 out of our general taxed income. The first annual payment to be made on 1st April in each of the following years. The last payment to be made on 1st April, 1991.
It will be seen at once that far from being for a period of four years, the last payment fell due less than three years after the date of the covenant.
Income and Corporation Taxes Act 1988 section 338 subsec-or-para (1)Section 338(1) of the Income and Corporation Taxes Act 1988, ("the Taxes Act"), provides that subject to, amongst other provisions, Income and Corporation Taxes Act 1988 section 339s. 339:
…in computing corporation tax chargeable for any accounting period of a company any charges on income paid by the company in the accounting period, so far as paid out of the company's profits brought into charge to corporation tax, shall be allowed as deductions against the total profits for the period as reduced by any other relief from tax, other than group relief.
Income and Corporation Taxes Act 1988 section 338 subsec-or-para (2)Section 338(2) provides that subject toIncome and Corporation Taxes Act 1988 section 339s. 339 and to other express exceptions (none of which are relevant to this case):
…"charges on income" means…-
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(b) payments which are qualifying donations (within the meaning of section 339) …
Income and Corporation Taxes Act 1988 section 339 subsec-or-para (1)Section 339(1) provides that:
A qualifying donation is a payment of a sum of money made by a company to a charity, other than-
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(a) a covenanted payment to charity, as defined in Income and Corporation Taxes Act 1988 section 660 subsec-or-para (3)section 660(3); and
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(b) a payment of a sum of money which is deductible in computing profits or any description of profits for the purposes of corporation tax.
The expression "covenanted donation" is defined in Income and Corporation Taxes Act 1988 section 339 subsec-or-para (8)subs. (8) as:
… a payment under a disposition or covenant made by the company in favour of a charity whereby the like annual payments (of which the donation is one) become payable for a period which may exceed three years and is not capable of earlier termination under any power exercisable without the consent of the persons for the time being entitled to the payments.
Income and Corporation Taxes Act 1988 section 660Section 660 is the section which renders ineffective for tax purposes dispositions of income for short periods.
Under Income and Corporation Taxes Act 1988 section 660 subsec-or-para (1)subs. (1), income which by virtue of any disposition, other than a disposition made for valuable and sufficient consideration, is payable or applicable to the benefit of another for a period which cannot exceed six years, is to be deemed for all the purposes of the Income Tax Acts to be the income of the person by whom the disposition was made, and not as the income of any other person.
Income and Corporation Taxes Act 1988 section 660 subsec-or-para (2)Subsection (2) provides that Income and Corporation Taxes Act 1988 section 660 subsec-or-para (1)subs. (1) is not to apply in relation to income payable as a covenanted payment to charity.
Income and Corporation Taxes Act 1988 section 660 subsec-or-para (3)Subsection (3) defines a covenanted payment to charity as a payment made under a covenant, otherwise than in consideration of money or money's worth in favour of the charity whereby the like annual payments, of which the payment in question is one, became payable for a period that may exceed three years, and is not capable of earlier termination under any power exercisable without the consent of the persons for the time being entitled to payment.
Applying these somewhat convoluted provisions to this covenant, the position is shortly this: the payments under the covenant, up to and including the payment due on 1 April 1990, were not covenanted payments to charity within Income and Corporation Taxes Act 1988 section 660 subsec-or-para (3)s. 660(3), and accordingly underIncome and Corporation Taxes Act 1988 section 660 subsec-or-para (1)s. 660(1) the payment did not become income of the trust.
It follows that RGSL had no right to deduct tax on making the payments. As the payments were deemed to be or remain the income of RGSL underIncome and Corporation Taxes Act 1988 section 660 subsec-or-para (1)s. 660(1) they were not annual payments charged to tax under Case III of Sch. D, or otherwise. Equally, the payments were not covenanted donations within Income and Corporation Taxes Act 1988 section...
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