Rank Xerox Ltd v Lane (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 25 October 1979 |
| Date | 25 October 1979 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-10 AND 11 JULY AND
Capital gains tax - Disposal of a right to what was termed a "royalty"- Whether a disposal of a right to an "annual payment due under a covenant not secured on any property" - Finance Act 1965 (c 25), Sch 7, para 12(c).
In 1957 the Xerox Corporation ("Xerox") granted a licence to the Appellant Company (in which it was a shareholder) to enable it to exploit the xerographic process throughout the world, except in the U.S.A. and Canada. By an agreement made in 1964 (and subsequently amended) between the Appellant Company and Xerox, the former agreed to surrender to the latter its rights in Central and South America and the West Indies in consideration of, inter alia, the payment by Xerox to the Appellant Company of a royalty of 5 per cent. on certain net sales within the areas from which the Appellant Company was to be excluded. In 1969 the Appellant Company disposed of its right to the royalty by distributing the same in specie to its shareholders, each of whom (for a consideration) surrendered its portion of the dividend to Xerox. The Inspector of Taxes raised a corporation tax assessment on the Appellant Company to include the chargeable gain arising on that disposal. The Company, appealing to the Special Commissioners, contended (i) that the right had been received for the surrender of a capital asset; (ii) that the annual payments made by Xerox in satisfaction of that right were annual payments due under the covenant made by Xerox; and (iii) that para 12(c) of Sch 7 to the Finance Act 1965 applied to such payments with the result that no chargeable gain accrued. The Commissioners, whilst accepting that the payments made by Xerox were annual payments, decided, contrary to the Appellant Company's remaining contentions, that the provisions of para 12(c) of Sch 7 were only applicable in relation to payments, the right to which would only be enforceable if the same were granted by a convenant (which was not so in this case), and that the expression "right to…annual payments which are due under a covenant made by any person and which are not secured on any property" referred to a right to annual payments due under a personal voluntary disposition of income, made by a deed of covenant.
In the High Court the Crown accepted that the relevant payments did not form part of the Appellant Company's trading receipts.
The Chancery Division, dismissing the appeal, held that, although the relevant payments were "due under a covenant" (made by a person and not secured on any property) within the meaning of para 12(c) of Sch 7 because the
obligation to make such payments had been created by an undertaking embodied in a document executed under seal, the payments could not be construed as "annual payments" within the meaning of that sub-paragraph, having regard to the construction of those words in ss 52(3)(a) and 53(5)(b) of the 1965 Act, where "royalties" were distinguished from "annual payments" by s 169(3) of the Income Tax Act 1952. Accordingly the Company failed to gain exemption under para 12(c). The Company appealedThe Court of Appeal, unanimously allowing the appeal held (i) that the payments were annual payments within the meaning of para 12(c), Sch 7 (it being common ground that the basic characteristics, which have been held necessary for the identification of an "annual payment" in the Schedule D context, must also be taken to characterise an "annual payment" in the context of para 12(c), since (a) it would be a misuse of language to describe the payments as being made "in respect of the user of a patent" but if such payments could properly be so described as having been made "in respect of the user of a patent" that would not of itself prevent them from being "annual payments", (b) if the position of the payee of royalty payments is such that his absolute entitlement to receive the same is wholly independent of any outgoings or expenses to which he may be liable, such payments can be pure income profit and thus "annual payments" and (c) while "annual payments" to be within the meaning of para 12(c) must exhibit the same general characteristics as in the Schedule D context, it does not follow that a payment having those characteristics cannot qualify as an "annual payment" under para 12(c) solely because it would fall to be charged under Schedule D under a different Case from Case III for reasons unconnected with and not affecting its character as an "annual payment"; and (ii) that the payments were "due under a covenant" within the meaning of para 12(c) since, in the context of the paragraph, "covenant" clearly bears its ordinary and primary meaning of a promise in a document executed by the promisor under seal. The Crown appealed.
The House of Lords, unanimously allowing the appeal, held that the phrase "due under a convenant made by any person" referred only to unilateral promises of a voluntary character and did not extend to the contractual and bilateral agreement in the present case. The House expressed no view on the question wh ether the payments in question were "annual payments". The House derived no assistance from the law of Scotland; "covenant" being regarded as a technical term of English law which, in a case arising in England, fell to be interpreted by the rules of English law: Special Commissioners of Income Tax v. Pemsel 3 TC 53; [1891] AC 531 applied.
Stated under the Taxes Management Act 1970, s 56, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 7 and 8 November 1973 and 16 July 1974 Rank Xerox Ltd. (herinafter called "RXL") appealed against the assessment to corporation tax for the accounting period of 12 months to 30 June 1970 in the sum of £49,100,000.
2. Shortly stated the question for our determination was whether, as the Revenue contended, the profits for corporation tax purposes should include the chargeable gain (if any) which arose from the disposal of royalty rights or whether, as RXL contended, no chargeable gain accrued on the disposal because they were rights to annual payments due under a covenant not secured on any property within the meaning of para 12(c) of Sch 7 to the Finance Act 1965.
3. Mr. Harry Edward Rose Shand the financial director of RXL, gave evidence before us.
4. The following documents were proved or admitted before us:
(2) Extract from report of the chairman of The Rank Organisation Ltd. for the year ended 27 June 1964 (exhibit "C").
(3) Directors' report and accounts for the period 29 June 1969 to 31 October 1970.
(4) Heads of agreement dated 30 November 1956 ("the 1956 agreement") between The Haloid Co. (now Xerox Corporation) ("Xerox"), The Rank Organisation Ltd. ("Rank") and Rank Precision Industries Ltd. (which company has changed its name to Rank Precision Industries (Holdings) Ltd. and is referred to herein as "RPH") (exhibit "A").
(5) Licence agreement dated 1 May 1957 between The Haloid Co. (now Xerox Corporation) and RXL ("the licence agreement").
(6) Supplement to heads of agreement dated 19 February 1958 between Xerox, Rank and RPH ("the 1958 agreement").
(7) (A) Agreement dated 20 February 1964 between Xerox and RXL ("the 1964 agreement") (exhibit "B"). (B) Agreement dated 20 February 1964 between Xerox, Rank and RPH amending the 1956 agreement. (C) Purchase agreement dated 20 February 1964 between Xerox and RXL.
(8) Agreement dated 1 January 1967 between Xerox and RXL ("the 1967 agreement") (exhibit "D").
(9) Ordinary resolution passed at an extraordinary general meeting of the members of RXL on 11 December 1969.
(10) Agreement dated 11 December 1969 between Rank, RPH, Gaumont British Ltd. ("Gaumont"), RXL and Xerox ("the termination agreement").
(11) Agreement dated 11 December 1969 between Rank, RPH, Gaumont and Xerox ("the royalty agreement").
(12) Letter dated 9 October 1973 from RXL to Peat Marwick Mitchell & Co.
(13) Profit and loss accounts of RXL for period 1964 through 1970.
(14) Tax computations of RXL for the period 1964 through 1970.
(15) Bond issue prospectus of Rank: November 1971. Copies of such of the above as are not annexed hereto as exhibits are available for inspection by the Court if required.
5. As a result of the evidence both oral and documentary adduced before us we find the following facts proved or admitted:
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(A) Share Capital.
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(2) The issued share capital of RXL is divided into five classes and is currently held as follows:
"A"
"B"
"C"
"D"
"E"
Shares
Shares
Shares
Shares
Shares
Xerox Corporation ("Xerox")
6356,147
Lyell
7401,254
1125,241
Rank
2960,502
1309,242
RPH
3700,627
1870,347
Gaumont
740,125
561,105
Trustees of the RXL Share Purchase Scheme
32,950
Total
7401,254
7401,254
7481,388
3740,694
32,950.
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(3) The issued share capital of RXL on 11 December 1969 (the date of declaration of the specie dividend of the Latin American royalty right) was
"A"
"B"
"C"
"D"
Shares
Shares
Shares
Shares
Xerox
6506,147
Lyell
7401,254
975,241
Rank
2960,502
1309,242
RPH
3700,627
1870,347
Gaumont
740,125
561,105
Total
7401,254
7401,254
7481,388
3740,694.
(4) Lyell is and on 11 December 1969 was a wholly-owned subsidiary of Xerox.
(5) On 11 December 1969 Rank beneficially owned the whole of the issued share capital of Gaumont and 92 per cent. of the issued share capital of RPH.
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(B) RXL and Xerox.
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(2) RXL was incorporated in England as a limited liability company under the Companies Act 1948 on 9 December 1956. The principal object of RXL as set out in clause 3(A) of its memorandum is as follows:
(A) To carry on all or any of the trades or businesses of designers, manufacturers...
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