Racal Group Services Ltd v Ashmore
| Jurisdiction | England & Wales |
| Judgment Date | 17 October 1995 |
| Date | 17 October 1995 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Kennedy, Peter Gibson L JJ and Sir Iain Glidewell.
David Ewart (instructed by David Whittaker, Racal Group Services) for RGSL.
The trustees did not appear.
The following cases were referred to in the judgment:
Blount v Blount ELR[1916] 1 KB 230
Burroughes v Abbott ELR[1922] 1 Ch 86
Butler v Mountview Estates Ltd ELR[1951] 2 KB 563
Ferguson v IR Commrs ELR[1970] AC 442
Jervis v Howle and Talke Colliery Co Ltd ELR[1937] Ch 67
Sherdley v Sherdley WLRTAX[1986] 1 WLR 732; [1986] BTC 220
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
Van der Linde v Van der Linde ELR[1947] Ch 306
Whiteside v Whiteside & Ors ELR[1950] Ch 65
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 339 subsec-or-para (8) section 660 subsec-or-para (1)Income and Corporation Taxes Act 1988, ss. 339(8), 660(1)(3).
This was an appeal against a refusal of Vinelott J ([1994] BTC 191) to rectify 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 339 subsec-or-para (8)Income and Corporation Taxes Act 1988, s. 339(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 the Income and Corporation Taxes Act 1988 section 339 subsec-or-para (8)Income and Corporation Taxes Act 1988, s. 339(8) would be satisfied. Vinelott J refused the application on the grounds that the rights of the parties would be unaffected and the only effect of the order would be to secure a fiscal benefit. RGSL appealed.
Held, dismissing the appeal:
1. The court would order rectification of a document if satisfied that it did not give effect to the true agreement of the parties and that there was an issue capable of being contested between the parties. It was irrelevant first that rectification of the document was sought or consented to by them all, and second that rectification was desired because it had beneficial fiscal consequences.
2. It followed that since there was an issue capable of being contested between the parties, viz. whether RGSL was entitled to deduct income tax from the covenanted payments, the court could entertain the application for rectification.
3. Rectification of a written document could only be granted if convincing evidence was produced to counteract the cogent evidence of the parties' intentions displayed by the instrument itself. The crucial evidence concerned the intention of the covenantor.
4. In the absence of evidence that RGSL's real intention when the deed was executed was that the dates of the last three payments should be the anniversaries of the first payment, the judge had been justified in concluding that RGSL had failed to establish that the covenant did not give effect to its intention. Accordingly the judge had been correct to refuse an order for rectification.
Peter Gibson LJ: This is an appeal by the plaintiff, Racal Group Services Ltd ("RGSL"), from the decision of Vinelott J on 7 March 1994 dismissing RGSL's application for rectification. RGSL is a subsidiary of Racal Electronics Plc ("Racal"). The document of which RGSL sought rectification is a deed of covenant whereby RGSL covenanted to make certain annual payments to a charity, The Racal Electronics Charitable Trust ("the trust"). The defendants are the trustees of the trust. The judgment of the judge is reported at [1994] BTC 191 to which reference should be made for his full and accurate statement of the facts. I shall confine myself to those matters which should be recounted to make this judgment intelligible.
RGSL regularly donates money to the trust and does so by deeds of covenant with a view to obtaining the maximum tax benefit. RGSL is obliged in making each payment to deduct income tax at the basic rate (Income and Corporation Taxes Act 1988 section 349s. 349 of the Income and Corporation Taxes Act 1988), the trust receiving the payment with a tax credit for the deducted tax. The trust being a charity is exempt from income tax under Case III of Sch. D on annual payments (Income and Corporation Taxes Act 1988 section 505 subsec-or-para (1)s. 505(1)(c)(ii)) and can recover the tax credit from the Revenue. RGSL can claim the whole of the gross amount of each payment as a charge on its income provided that the payment is a "covenanted donation to a charity (within the meaning ofIncome and Corporation Taxes Act 1988 section 339s. 339)" (Income and Corporation Taxes Act 1988 section 338 subsec-or-para (5)s. 338(5)(b)). That term is defined byIncome and Corporation Taxes Act 1988 section 339 subsec-or-para (8)s. 339(8) to mean
… 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.
By Income and Corporation Taxes Act 1988 section 660 subsec-or-para (1)s. 660(1) any income which by virtue or in consequence of any disposition is payable to or applicable for the benefit of any other person for a period which cannot exceed six years is deemed for all income tax purposes to be the income of the person who made the disposition. But that provision is inapplicable in relation to income which is payable as "a covenanted payment to charity" (Income and Corporation Taxes Act 1988 section 660 subsec-or-para (2)s. 660(2)). That term is defined byIncome and Corporation Taxes Act 1988 section 660 subsec-or-para (3)s. 660(3) to mean
a payment made under a covenant made otherwise than for consideration in money or money's worth in favour of a body of persons or trust established for charitable purposes only whereby the annual payments (of which the payment in question 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.
On 15 March 1988, the last payment under a previous deed of covenant having been made on 21 June 1987, the trustees of the charity decided to request a further donation, replacing the old covenant, in the region of £70,000...
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