Rolls-Royce Ltd v Jeffrey (Inspector of Taxes), Same v Inland Revenue Commissioners
[1962] 1 All ER 801Between: Rolls-Royce Ltd
And: Jeffrey (Inspector of Taxes)
Between: Same
And: Inland Revenue Commissioners
Judges:
Viscount Simonds
Lord Reid
Lord Radcliffe
Lord Morris of Borth-y-Gest
Lord Guest
Subject References:
Income Tax
Income
Payment of lump sums for imparting technical knowledge
Whether income or capital receipt
Case References:
British Dyestuffs Corpn (Blackley) Ltd v Inland Revenue Comrs - (1923), 129 LT 538, affd CA; (1924), 12 Tax Cas 586; 28 Digest (Repl) 25, 105
Butterworth v Page - [1935] All ER Rep 943; 153 LT 34
sub nom Handley Page v Butterworth - 19 Tax Cas 328; 28 Digest (Repl) 26, 111
Davies v Shell Co of China Ltd - (1951), 32 Tax Cas 133; 28 Digest (Repl) 37, 165
Doncaster Amalgamated Collieries Ltd v Bean - [1946] 1 All ER 642; 175 LT 10
sub nom Bean v Doncaster Amalgamated Collieries Ltd - 27 Tax Cas 296; 28 Digest (Repl) 121, 467
Edwards v Bairstow - [1955] 3 All ER 48; [1956] AC 14; 36 Tax Cas 207; [1955] 3 WLR 410; 28 Digest (Repl) 397, 1753
Haig's (Earl) Trustees v Inland Revenue Comrs - [1939] SC 676; 22 Tax Cas 725; 28 Digest (Repl) 126, 373
Moriarty (Inspector of Taxes) v Evans Medical Supplies Ltd, Evans Medical Supplies Ltd v Moriarty (Inspector of Taxes) - [1957] 3 All ER 718; 37 Tax Cas 540; [1958] 1 WLR 66; 28 Digest (Repl) 268 112
Rustproof Metal Window Co Ltd v Inland Revenue Comrs - [1947] 2 All ER 454; [1947] LJR 1479; 177 LT 657; 29 Tax Cas 243; 28 Digest (Repl) 438, 1916
Van den Berghs Ltd v Clark - [1935] All ER Rep 874; [1935] AC 431; 104 LJKB 345; 153 LT 171; 19 Tax Cas 390; 28 Digest (Repl) 117, 450
Judgment date: 1 March 1962
ORDER
Manufacturers of aero engines entered into a series of agreements with Nationalist China, France, the United States of America, Belgium, Sweden, the Argentine and Australia, under which they undertook to supply drawings and manufacturing and engineering data and information necessary to enable engines of a particular type to be manufactured. They further undertook to teach technicians from those countries and to send some of their own employees to supervise operations there, and also to communicate, so far as they were permitted to do so, future improvements and developments. Payments to be made to the manufacturers under the agreements included lump sums and royalties. The royalties were payable on engines and parts of engines manufactured, and the lump sums were described as "consideration for the rights granted" and referred to as capital sums. It appeared that the manufacturers could not hope to sell their engines in those countries and therefore pursued a policy of allowing local manufacture, for otherwise they would have got nothing from those countries. On the question whether the "lump sums" received under the agreements were income or capital receipts in the hands of the manufacturers,
Held:
The lump sums were trading receipts which should be brought into charge to tax as income, because on the facts the manufacturers were not disposing of a capital asset by means of the agreements, but were exploiting their "know-how" and turning it to profit in the best or only method open to them, thus extending their trade of manufacturing engines to the granting and implementing of the agreements.
Moriarty (Inspector of Taxes) v Evans Medical Supplies Ltd ([1957] 3 All ER 718) distinguished.
Decision of the Court of Appeal ([1961] 2 All ER 469) affirmed.
Notes
As to what constitutes trade receipts and income as opposed to capital for income tax purposes, see 20 Halsbury's Laws (3rd Edn) 149, para 263; and for cases on the subject, see 28 Digest (Repl) 20-38, 78-173, 50-58, 191-225.
Appeal
This was an appeal by the taxpayers from an order of the Court of Appeal (Holroyd Pearce, Upjohn and Donovan LJJ), dated 26 April 1961, and reported [1961] 2 All ER 469, reversing an order of Pennycuick J dated 27 May 1960, and reported [1960] 2 All ER 640.
The taxpayers appealed to the Special Commissioners of Income Tax against assessments to income tax made on them under Sch D to the Income Tax Act, 1952, in respect of their trade of manufacturers of motor cars and aero engines in the following sums: 1948-49, £1,300,000; 1949-50, £1,200,000; 1950-51, £1,800,000; 1951-52, £1,500,000; 1952-53, £2,300,000; 1953-54, £2,500,000; 1954-55, £4,800,000. The grounds of the appeal were that in computing the taxpayers' profits or gains for the relevant periods sums paid to and received by the taxpayers by virtue of certain licensing agreements had been included contrary to law, such lump sum payments being of a capital nature. The taxpayers also appealed on the same grounds against assessments to excess profits tax (1945, £66,667), the profits tax (1947-53, various sums), and excess profits levy (1952, £240,000 and 1953, £600,000). The commissioners allowed each of the four appeals.