Rank Xerox Ltd v Lane
| Jurisdiction | England & Wales |
| Judge | Lord Wilberforce,Viscount Dilhorne,Lord Salmon,Lord Russell of Killowen,Lord Keith of Kinkel |
| Judgment Date | 25 October 1979 |
| Judgment citation (vLex) | [1979] UKHL J1025-3 |
| Date | 25 October 1979 |
| Court | House of Lords |
[1979] UKHL J1025-3
House of Lords
Lord Wilberforce
Viscount Dilhorne
Lord Salmon
Lord Russell of Killowen
Lord Keith of Kinkel
Upon Report from the Appellate Committee to whom was referred the Cause Rank Xerox Limited against Lane (Inspector of Taxes), That the Committee had heard Counsel as well on Tuesday the 10th as on Wednesday the 11th days of July last upon the Petition and Appeal of Gordon Ellis Lane of Somerset House, The Strand, London W.C.2 praying that the matter of the Order set forth in the Schedule thereto, namely an Order of Her Majesty's Court of Appeal of the 12th day of May 1978 might be reviewed before Her Majesty the Queen in Her Court of Parliament and that the said Order 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 Rank Xerox Limited 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 Order of Her Majesty's Court of Appeal of the 12th day of May 1978 complained of in the said Appeal be, and the same is hereby, Reversed and that the Order of Mr. Justice Slade of the 9th day of March 1977 be, and the same is hereby, Restored: And it is further Ordered, That the Respondents do pay or cause to be paid to the said Appellant the Costs incurred by him in the Court of Appeal and also the Costs incurred by him in respect of the said Appeal to this House, such last mentioned costs to include the attendance of three Counsel on behalf of the Appellant, the amount thereof to be certified by the Clerk of the Parliaments if not agreed between the parties: And it is also further Ordered, That the Cause be, and the same is hereby, remitted back to the Chancery Division of the High Court of Justice to do therein as shall be just and consistent with this Judgment.
My Lords,
This appeal is concerned with the capital gains tax. It turns upon Schedule 7, paragraph 12 of the Finance Act 1965 which provides that:
"No chargeable gain shall accrue to any person on the disposal of a right to, or to any part of …
( c) annual payments which are due under a covenant made by any person and which are not secured on any property."
The payments which were, admittedly, disposed of by the appellant company arose out of two agreements made in 1964 and 1967 by which, in consideration of the assignment by the appellant company to a U.S. company, now called Xerox Corporation, of certain patents, other rights, goodwill and know-how in defined territories, Xerox agreed to make the payments. The relevant clause in the agreement of 1964 read as follows:
"4. In consideration of the premises, Xerox shall pay or cause to be paid to Rank Xerox a royalty of 5% of net sales in the Western hemisphere with the exception of the United States of America, its territories and possessions, and Canada."
The agreement of 1967 contained a clause in similar terms. Each of these agreements was executed by Xerox under seal. So it is contended that the payments satisfy the words "annual payments which are due under a covenant", so that capital gains tax is not chargeable. The Court of Appeal (reversing Slade J.) has so decided.
My Lords, there can surely be no doubt that to bring the payments which arose to the appellant under the agreements of 1964 and 1967 within the exemption conferred by para. 12( c) is paradoxical. If the signature of Xerox to these agreements had not been under seal, the appellant company's liability to capital gains tax in respect of the payments could not have been disputed. To make their liability depend upon a circumstance so inessential and immaterial as the affixing, or absence, of a seal is arbitrary in the extreme. As a matter of substance it is impossible to detect any reason of fiscal policy why the affixing of a seal to an agreement should have any relevance to the imposition of the tax.
Now the intention of Parliament, in taxation matters, may sometimes be inscrutable or obscure, but we should hardly attribute to it so great a degree of arbitrariness as the decision of the Court of Appeal involves. If any reasonable meaning can be found for the words in question which would avoid this, that meaning should be accepted. And I do not have great difficulty in finding one. It can be accepted that the primary meaning of "covenant" is a promise by deed. As a secondary meaning the word may be applied to any promise or stipulation, whether under seal or not (Stroud's Judicial Dictionary, 4th ed. s.v. "covenant"). It can equally be accepted that in a statute, including a taxing statute, a word should be given its primary meaning unless something in the context, or in the history of the enactment, or the reasons for the enactment, indicates otherwise. But what has to be interpreted is not merely the word "covenant", but the whole phrase "annual payments which are due under a covenant made by any person". As a matter purely of grammar the words "due under" and "made by any person" suggest to me a unilateral promise which is enforceable in spite of the absence of consideration. They are not apt to refer to a bilateral agreement in which the annual payments are consideration for some obligation undertaken by the payee.
There is a further argument which supports what is so far a tentative interpretation. It has become for at least 50 years a well-known practice for individuals to promise to make annual payments to their dependants or to charities. These transactions have acquired in both popular and legal parlance the description "annual payments under covenant", or "seven year covenants". Charities when appealing for money invariably invite supporters to enter into a covenant—meaning a voluntary promise to pay, for a period. And this practice, and its nomenclature, has been recognised by fiscal legislation. I shall not trace this historically: it is sufficient to refer to the codifying Income and Corporation Taxes Act 1970.
Annual payments under covenant are dealt with by section 434 which, effectively, lays down the seven year rule. The relevant wording is:
"(1) Any income which, by virtue or in consequence of any disposition made … by any person … for a period which cannot exceed six years …" and
"… 'disposition' includes any trust, covenant, agreement or arrangement."
So if one reads "covenant" into subsection (1) in place of "disposition" the enactment becomes "any income which, by virtue or in consequence of any covenant made … by any person"—language which is very close to the phrase in Schedule 7, paragraph 12( c), which, as it appeared in the Income Tax Act 1952, the draftsmen of the latter must have had in mind. The word "covenant" again appears in section 441(1) in the definition of "settlement". Similarly in sections 445 ff, we find references to annual payments payable by virtue or in consequence of any provision of the settlement—the latter word again including "covenant" (section 454(3)). By contrast, section 457 refers to annual payments made under a partnership agreement, being payments made under a liability incurred for full consideration—clearly treated as a different case. So "covenant" in this part of the Act has a clear and special meaning, corresponding to practice, of a unilateral and voluntary enforceable promise as distinguished from an "agreement" supported by consideration. Mr. Nolan Q.C., for the Respondents, whose experience in these matters is very great, was only able to point to one place in the Act of 1970 where "covenant" has a different meaning, namely to section 34. There, the marginal note refers to restrictive "covenants" but the text of the section refers to "undertaking"—confirming, to my mind, that "covenant" in the Act bears a special sense not extending to an obligation under a bilateral agreement. Assuming, therefore, that the word "covenant" is to be interpreted as necessarily involving a seal, the manner in which it is used in the Income Tax legislation, conforming to practice, would suggest that it should be understood as referring only to unilateral promises of a voluntary character. This might, it is true, exclude promises to make annual payments contained in a marriage settlement or a separation or divorce agreement, but such cases are unlikely to involve capital gains tax.
If this is right, that would exclude the contractual and bilateral agreement in the present case.
There are two further points which deserve mention. First, it was said for the Revenue that a distinction is to be made in the legislation—specifically in the Finance Act 1965—between annual payments and royalties or other sums in respect of the user of a patent. The payments in the present case were, it is said, of the latter character, and so for this reason, not within paragraph 12( c).
In the view which I take of the meaning of paragraph 12( c) it is not necessary to decide this point.
Secondly, since the Finance Act 1965, as all Finance Acts, is a United Kingdom statute, applicable to Scotland as well as to England and Wales, it was argued that it should be given an interpretation which would produce a similar effect in both parts of the Kingdom. This is certainly in accordance with principle and with authority (see Lord Advocate v. Anna Countess of Moray [1905] A.C. 531, Commissioners for the General Purposes of Income Tax for the City of London v. Gibbs [1942] A.C. 402). In Scotland no distinction is made between contracts under seal, which are valid without consideration, and other contracts which require consideration, though...
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