The Commissioners of Inland Revenue Appellants v His Grace the Duke of Westminster Respondent

[1936] AC 1

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(Judgment by: Lord Atkin)

The Commissioners of Inland Revenue Appellants
v His Grace the Duke of Westminster Respondent

Court:

Judges:
Lord AtkinLord Tomlin
Lord Russell of Killowen
Lord Macmillan
Lord Wright

Judgment date: 7 May 1935

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Judgment by:
Lord Atkin

My Lords, in the year 1930 and in subsequent years the respondent the Duke of Westminster executed a series of deeds in which he covenanted to pay to the several parties mentioned in the deed certain weekly sums for a period of seven years or the joint lives of the parties. The recipients in all the cases in question were persons then in the employ of the respondent at fixed wages or salaries: and after the completion of the deeds they continued in the employment and continued to receive such sums as with the sum payable by the deed made up the amount of the wages or salary payable before the deed and no more. The sums varied from 12s. to 2000l.; the employment from gardener and laundryman to architect; and the past periods of employment from four years to forty-five. The Crown say that the payments made under the deed were made in the circumstances given in evidence as remuneration for services, and could not be deducted from the respondent's total income for purposes of surtax. The respondent says that the payments were annual payments which he was entitled to deduct. It is agreed between the parties that the question in this case is whether the payments were for remuneration of services or not: if the former the respondent is chargeable: otherwise not. It is unnecessary, therefore, to trouble your Lordships with the various relevant sections and rules of the Income Tax Act, 1918, and subsequent Finance Acts. It is sufficient to say that your Lordships were satisfied that the admission was correct.

It was not, I think, denied - at any rate it is incontrovertible - that the deeds were brought into existence as a device by which the respondent might avoid some of the burden of surtax. I do not use the word device in any sinister sense, for it has to be recognized that the subject, whether poor and humble or wealthy and noble, has the legal right so to dispose of his capital and income as to attract upon himself the least amount of tax. The only function of a Court of law is to determine the legal result of his dispositions so far as they affect tax. In the present case Finlay J., affirming the Commissioners, decided in favour of the Crown, while the Court of Appeal have set aside that decision and given judgment in favour of the respondent.

The Commissioners have taken six cases as typical in which the documents differ slightly in form, but in their opinion have the same effect. They chose for special example the case of Frank Allman, a gardener, and I will adopt the same course, though reference may have to be made later to some of the other instances.

The deed is in the following terms:-

"This deed of covenant is made this fourteenth day of August one thousand nine hundred and thirty between The Most Noble Hugh Richard Arthur Duke of Westminster, D.S.O. (hereinafter called 'the Duke') of the one part and Frank Allman of Vine Cottage Aldford near Chester Gardener in the Duke's service (hereinafter called 'the Annuitant') of the other part Whereas in recognition of the services which for over twenty-seven years past the Annuitant has well and faithfully rendered to the Duke the Duke desires to make provision for the Annuitant in manner hereinafter expressed notwithstanding that the Annuitant may re-engage or continue in the service of the Duke in which event he will become entitled to remuneration in respect of such future services Now this deed made in furtherance of the Duke's said desire and in consideration of the past services so rendered as aforesaid witnesses as follows:-

"1.

The Duke covenants to pay to the Annuitant as from the 2nd day of August one thousand nine hundred and thirty during the joint lives of himself and of the Annuitant or for a period of seven years the weekly sum of One pound eighteen shillings (amounting in each year to the sum of Ninety-eight pounds sixteen shillings) the first of such payments having fallen to be made on the 9th day of August 1930.

"2.

The said payment shall be made from time to time on such days for such periods and in such proportions as shall from time to time be mutually agreed upon by the parties hereto and in default of agreement shall be made in weekly payments on the Saturday of each week.

"3.

It is hereby expressly agreed that the said payments are without prejudice to such remuneration as the Annuitant will become entitled to in respect of such services (if any) as the Annuitant may hereafter render to the Duke.

"In witness whereof the said parties to these presents have hereunto set their hands and seals the day and year first above written.

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

St. G. CLOWES, Broadwater, Framlingham, Capt.: late 19th Hussars.

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

F. A. CARLTON SMITH, The Grosvenor Office, 53 Davies Street, London, W.1, Solicitor."

Counsel for the respondent took the view that the period of the covenant was the joint lives or seven years whichever was the shorter; and that the deed was to be without prejudice to the recipient receiving full remuneration for his future services. I shall assume that this construction is correct. No contention was raised in the present case that the payments, though expressed to be weekly, were not annual payments within the Income Tax Act and Rules.

It will be convenient to consider the legal relations which would exist between the Duke and his servant on the supposition, which is that of the respondent, that the deed came into force without any further agreement of any kind being made between the parties.

The servant was serving the Duke under a contract of employment under which he was entitled to receive an agreed weekly wage of, we will suppose, 3l.; which contract would continue until terminated by notice or summarily, or until varied by agreement. On this footing when the deed came into operation the servant remaining in the employment would be entitled to 38s. a week in addition to the 60s. wages, and it is obvious that, so far from benefiting himself by avoiding income tax, the Duke would be adding several thousand pounds annually to his expenditure. I conceive it to be self-evident that no single party to the transaction ever contemplated that the servant would in fact draw the full contract wages in addition to the 38s. under the deed. And in fact as we learn from the case the servant after the deed continued to receive weekly the exact former amount of his wages 60s., i.e., he received 38s. and such additional sum as made the total weekly payment the equivalent of his contractual wages. We are to assume, however, on the respondent's contention, that no contract was made modifying either the terms of the deed or the contract of employment. The position of the Duke therefore was that assuming the servant was content to draw only 60s. a week the Duke would remain at all times liable to pay to the servant the arrears of the contractual wages, i.e., 60s. minus 22s., in other words a sum equal to the payment under the deed. However long a time the service continued, the servant would be entitled to this sum within the limit, if the Duke of Westminster chose to plead the Statute of Limitations, of six years' arrears. The arrears would be a debt due to the servant and could be attached by any creditor of the servant, and would on death be assets of his which his personal representative would be bound to recover. It is perhaps worth mentioning that if in fact the Duke were only paying as wages 22s. peculiar results might follow if the wages were regulated by statute as by the Agricultural Wages Act or similar legislation; but as we have no evidence of such a position it is unnecessary to dwell on it. A nice question might also arise as to the amount which the Duke would be bound to tender as wages in lieu of notice.

The embarrassments, however, are not all on the Duke's side. One result to the servant, perhaps unexpected, would be that, his total income having become 98s. a week, he would incur liability to income tax; for salary or wages that he is entitled to, but voluntarily forgoes, must be included in his total income. And on what footing his "earnings" in his last employment would be calculated for purposes of workmen's compensation, whether on 22s. or 60s., is a problem which I am glad we have not to decide.

This being the position if the matter rested upon the deed and no more, it seems to me plain that the Duke's advisers were not prepared to leave him exposed to the liabilities I have mentioned. In every case before the deed became operative a letter was written by the Duke's solicitors to the servant the effect of which seems to me to be the material question in this case. The letter is not in the same form in every case though its effect is the same. In Allman's case it is on a typed form and is signed by the solicitors over 6d. stamp. It is as follows:-

"PRIVATE.

The Grosvenor Office,

53, Davies Street,

Berkeley Square, London, W.1.

"To Mr. Frank Allman.13th August, 1930.

"Dear Sir,

"On Wednesday the 6th instant we read over with you a Deed of Covenant which the Duke of Westminster has signed in your favour under which you will be entitled to a gross sum of 1l. 18s. 0d. a week in consideration of your past faithful service and irrespective of any work which you may do for His Grace after the deed comes into effect. The deed will be in force for seven years if you and the Duke should so long live, and His Grace can reconsider the position at the end of that period. We explained that there is nothing in the deed to prevent your being entitled to and claiming full remuneration for such future work as you may do, though it is expected that in practice you will be content with the provision which is being legally made for you for so long as the deed takes effect, with the addition of such sum (if any) as may be necessary to bring the total periodical payment while you are still in the Duke's service up to the amount of the salary or wages which you have lately been receiving.

"You said that you accepted this arrangement, and you accordingly executed the deed.

"We write, as promised, to confirm the explanation which we gave you on the 6th instant. If you are still quite satisfied we propose to insert the 6th instant as the date of the deed and we shall be obliged by your signing the acknowledgment at the foot of this letter and then returning it to us.

Yours faithfully,

BOODLE, HATFIELD & CO.

Stamp 6d.

ACKNOWLEDGMENT.

"To the Duke of Westminster, D.S.O.

"And to Messrs. Boodle, Hatfield & Co., his Solicitors.

"I have read the above written letter, and I confirm that I accept the provision made for me by the deed. I agree to the deed being dated and treated as delivered by and binding upon the Duke of Westminster and myself.

FRANK ALLMAN."

It will be observed from the letter that on August 6, the solicitors had produced to the servant the deed already executed by the Duke but undated and had made the explanation set out in the letter; that the servant had accepted "this arrangement," and had executed the deed. Now what was the object of the letter and the signed acknowledgment which formed part of the document? The respondent gravely says merely to provide evidence that the servant was satisfied with the provision made for him by the deed and to protect the Duke against claims against him in the future for any increased pension. But the servant in no case had any legal claim to pension; in any case the deed was not to last for more than seven years; and finally, and as I suggest, conclusively, the servant had already signified his acceptance of the provision made in the deed by executing it "accordingly." Execution by the servant had been in law unnecessary.

In my opinion the facts and the terms of the letter indicate that the transaction was intended to have, and had, far more substantial results than the interchange of unnecessary assurances between master and servant. The document was intended to bind the servant, exactly to what terms I will shortly discuss. They must depend on the terms of the letter. But that the document was intended to be contractual is a conclusion that I find irresistible. For what reason is the signature of the solicitors placed by them over a contract stamp? Can there be any reason except that they thought that the letter contained an offer of a contract which would be completed by the signature of the acknowledgment by the party to whom it was addressed? I am satisfied that a letter signed over a contract stamp and requiring the addressee to return it with the appended acknowledgment signed, addressed by the employer's solicitors to a workman at weekly wages would inevitably be understood by the recipient and would be intended by the writers to be understood as a representation that he was being asked to make a contract in the terms of the document.

It still remains to consider whether the document discloses the parties to be agreed and sufficiently defines the terms. I have already pointed out the urgent necessity there was to relieve the Duke from the obligations which would exist if the deed stood alone. I read the letter as saying there is nothing in the deed to prevent your claiming 60s. in addition to the sum mentioned in the deed, but you are expected in practice to be content with the provision, etc., with the addition, etc. You have already said that you accept this arrangement, and will you now bind yourself by a formal contract to this effect? The acknowledgment, "I confirm that I accept the provision made for me in the deed, " in my opinion plainly relates to the only matter previously recited as being said by the servant - namely, I confirm that I accept this arrangement; and the arrangement is that I will be content with the provision in the deed with the addition, etc., of any sum necessary, etc.

We are thus, I think, inevitably forced to the conclusion that before the deed was executed there was a contract between master and servant as to the effect of the deed on the existing contract of service.

The only remaining question is relatively simple. Is the contract one which radically alters the terms of the existing contract of service - I will make a new contract of service and I will serve you as gardener for 22s. a week; or, as in some of the other cases, I will serve you for nothing; or is it a contract which maintains the existing contract of service - I will continue to serve you as gardener for 60s. a week; but I will take in payment of that 60s., as to 38s., the payment under the deed, and as to the balance, the ordinary weekly payment. In the latter case the employer remains under an obligation to pay 60s.: and discharges 38s. of that obligation by making the payment under the deed, which has been delivered with that bargain in existence.

I quite agree that the former is a possible bargain. A servant may agree to work for nothing, or for some sum which is merely a fraction of the current rates of wages. But such agreements are in my experience very exceptional. In the present case they would apply, it is said, to about 100 employees. And I cannot contemplate so many servants consciously making bargains so alien to their traditions and for a period which would not be longer than seven years and might be shorter. The better construction appears to me to be that the servants were never asked to abandon the existing contractual rate. If it were otherwise one bears in mind the strange position of what were neatly called the uncovenanted servants, serving for higher wages, together with the other difficulties earlier referred to as to wages statutes and wages in lieu of notice.

With great respect to the members of the Court of Appeal they seem to ignore what seems to me the essential fact of the document of August 13 signed by both parties. Slesser L.J. alone makes what seems to me the necessary assumption that it is contractual, but for the reasons given I cannot assent to his view of the ensuing legal effect. Nor am I impressed with the fact that the deed would have a different effect on the surtax liability of the Duke if later he did not happen to be employing the recipient. That seems to me a very ordinary result if the circumstances of the covenantor and covenantee alter for income tax purposes. The fact is that what would make the difference in the tax position would be that the recipient would no longer be employed; the letter would not be in operation; and there could be no ground for alleging that the Duke was paying the money as remuneration.

I do not myself see any difficulty in the view taken by the Commissioners and Finlay J. that the substance of the transaction was that what was being paid was remuneration. Both the Commissioners and Finlay J. took the document of August 13 into consideration as part of the whole transaction, and in my opinion rightly. I agree that you must not go beyond the legal effect of the agreements and conveyances made, construed in accordance with ordinary rules in reference to all the surrounding circumstances. So construed the correct view of the legal effect of the documents appears to me to be the result I have mentioned. I think the difficulty has probably arisen from the wording of the Commissioners' finding that "the payments made under the deed were in substance " payments by way of remuneration. Standing alone I do not think that phrase would be justified. But reference to the immediately preceding sentence indicates that the Commissioners had taken into consideration the letters and form of acknowledgment before expressing their finding as above. Though they have not analysed the transaction as fully as I have endeavoured to do, I have little doubt that they and Finlay J. arrived at the same result as I, and it may be noted that so far as there is any question of fact involved, the finding of the Commissioners, if there is evidence, is final.

Basing as I do my conclusion on the preliminary contract contained in the letter and acknowledgment I find myself unable to accept the Commissioners' conclusion in the case of Mr. Detmar Blow. No letter appears to have been written to him and there was no evidence before the Commissioners as to any agreement made with him. In those circumstances on the facts as they were made known to the Commissioners it appears necessary to treat the legal relations between him and the Duke in respect of the payment of 2000l. a year as governed by the deed alone. The assessment therefore should be reduced by that sum. Except as thus varied, in my opinion the order of the Commissioners should be restored and the appeal allowed with costs here and below.