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

[1936] AC 1

---

(Decision by: Lord Macmillan)

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

Court:

Judges: Lord Atkin
Lord Tomlin
Lord Russell of Killowen

Lord MacmillanLord Wright

Judgment date: 7 May 1935

---

Decision by:
Lord Macmillan

My Lords, the respondent recently entered into certain transactions with a number of his employees, and the question to be determined in this appeal is whether these transactions have affected his liability to surtax. It has been agreed that, to test the matter, the respondent's transaction with Frank Allman may be taken as typical of the series.

Allman was employed by the respondent as a gardener at a weekly wage the amount of which is not stated, but which was in excess of 38s. a week. The wages paid by the respondent to Allman were profits arising to Allman from his employment within the meaning of Sch. E to the Income Tax Act, 1918. Consequently the respondent was not entitled to deduct tax on paying Allman his wages, nor was he entitled to deduct his payments to Allman in computing his total income for surtax purposes. This being the position of the parties, they executed in 1930 a deed of covenant which has been quoted in full by my noble and learned friend Lord Atkin.

It is agreed on all hands that the legal effect of this deed was to give Allman thereafter for the period of its endurance the right to a weekly payment of 38s. irrespective of whether he remained in the respondent's employment or not, but without prejudice to Allman's right to remuneration for such services as he might thereafter render to the respondent. I do not think that there can be any doubt, and indeed none was suggested, that, if this deed had stood alone, the sums paid to Allman in pursuance of it would have been of the nature of an annual payment payable as a personal debt or obligation by virtue of a contract within the meaning of Rule 1 applicable to Case III. of Sch. D, with the result of entitling the respondent, under Rule 19, sub-s. 1, of the Rules applicable to all the Schedules, to deduct income tax on making the covenanted payments to Allman, and consequently to deduct the amount of these payments in computing his total income for surtax purposes.

But the deed of covenant did not stand alone. There were in addition a letter addressed to Allman by the respondent's solicitors and an acknowledgment by Allman, which have also been quoted in full by my noble and learned friend. In my opinion these two documents formed part of the transaction between the parties. It has been suggested that they had no legal efficacy. The respondent's solicitors do not appear to have held that view. They may have been mistaken in their belief that the letter and the acknowledgment embodied a binding arrangement, but I confess that I share it. In my opinion these documents embody an agreement between the parties that, notwithstanding Allman's unqualified right under the deed to 38s. a week, work or no work, and to full remuneration for any future work he may do for the respondent, nevertheless, so long as he remains in the respondent's employment, he will be content with the covenanted payments under the deed plus the difference between them and the wages he was previously receiving. In other words, Allman agrees that in view of the respondent having undertaken to pay him 38s. a week in the future independently of his employment, he will not expect or be entitled to any further payment from the respondent, so long as he remains in the respondent's employment, beyond the difference between the covenanted payments and the wages he previously received.

Allman has, I understand, remained in the respondent's service and receives in fact the same sum of money weekly from the respondent as he received before the transaction in question. Has that sum to the extent of 38s. altered its legal character in consequence of the transaction? In my opinion it has. Whereas previously Allman was entitled to the 38s. a week as wages, he is now entitled to payment of this sum weekly whether he is employed by the respondent or not. That is the effect of the deed of covenant. The arrangement embodied in the two collateral documents does not alter that effect, whatever else it does. It is difficult to see how a sum which is payable irrespective of employment can be said to be a profit arising from employment. If the collateral documents had affected the absolute and independent nature of the obligation under the deed of covenant different considerations might have arisen. But the absolute obligation to pay irrespective of employment remains unaffected by the collateral documents, which recognize that Allman will in future have an unqualified right to a weekly payment of 38s. from the respondent whether the respondent employs him or not.

My Lords, I venture to suggest that the proper approach to the problem is to ask the question, in the language of Rule 1 applicable to Case III. of Sch. D: Is the 38s. a week of the nature of an annual payment payable by the respondent as a personal debt or obligation by virtue of a contract? Plainly it is, and none the less so because of the collateral arrangement which, whatever it does, does not convert the deed of covenant into a contract of employment, for the 38s. remains payable, employment or no employment. It is agreed that if Allman leaves the respondent's employment the weekly payments which he will continue to receive under the deed will fall within Rule 1 applicable to Case III. of Sch. D. But the payments made to him while he remains in the respondent's employment are exigible by him under precisely the same legal obligation on the part of the respondent. If then the question which I have put must be answered in the affirmative, Rule 19, sub-s. 1, of the Rules applicable to all Schedules automatically applies and the respondent is entitled to deduct tax on making the covenanted payments to Allman, and if he is entitled to deduct tax from the payments he is also entitled to deduct the amount of these payments in computing his total income for surtax purposes. The same reasoning is applicable to the respondent's transactions with his other employees, except that in the case of Mr. Blow there was only a deed of covenant and no collateral letters. His case is consequently a fortiori of the others.

I am fully conscious of the anomalous consequences which might conceivably arise in other connections from the course adopted by the respondent, but your Lordships are concerned only with the technical question whether the respondent has brought himself within the language of the income tax rule as to contractual payments, and I think that he has succeeded in doing so. That is enough for the decision of the case. It is not likely that many other employers will follow the respondent's example, for few employers would care to take the risk to which the respondent has left himself exposed - namely, that his servants may quit his employment and take their services elsewhere and yet continue to exact the covenanted weekly payments from him.

The result of the views which I have expressed is that in my opinion the appeal should be dismissed and the judgment of the Court of Appeal affirmed.