Rolls-Royce Ltd v Jeffrey (Inspector of Taxes), Same v Inland Revenue Commissioners
[1962] 1 All ER 801(Judgment by: Lord Guest)
Between: 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
Judgment by:
Lord Guest
My Lords, the special commissioners have held that the lump sums received by the appellants under the agreements referred to fell to be treated as capital receipts not forming part of the profits or gains of the appellants. Pennycuick J, affirmed their determination and dismissed the Crown's appeal. The Court of Appeal reversed his decision and held that the lump sums were trading receipts and fell to be included in the profits or gains of the appellants for income tax purposes. In my opinion they were right in so holding.
The question whether any particular receipt is capital or income in the hands of the trader is a question of law to be determined on a consideration of all the relevant facts. The decision of the commissioners is therefore open to review by the court. This question has been treated by courts as a question of law in a number of cases of which Rustproof Metal Window Co Ltd v Inland Revenue Comrs , Per Lord Greene MR ([1947] 2 All ER at p 456; 29 Tax Cas at p 266), Van den Berghs Ltd v Clark, Doncaster Amalgamated Collieries Ltd v Bean and Davies v Shell Co of China Ltd (32 Tax Cas 133) are only examples.
The appellants' argument in favour of the sums being capital receipts was based on bringing the case within the ratio of the decision in Moriarty (Inspector of Taxes) v Evans Medical Supplies Ltd which, it was said, established that the proceeds of the sale of "know-how" was a capital receipt. Unless the appellants' case can be brought within that ratio. I can see no ground on which the commissioners' determination can be supported. However, I regard Moriarty v Evans Medical Supplies Ltd as a very special case decided on its own particular facts. The processes which the company undertook to disclose to the Burmese government in return for £100,000 were secret processes in relation to the preparation, storage and packing of pharmaceutical products which they manufactured. The disclosure of these secrets, never disclosed to anyone before, involved the gradual cessation of the company's own wholesale trading activities in Burma. The company parted with an asset which was the source or one of the sources of its profits. No similar agreement had been entered into by the company with any other foreign government or party. The ratio of the speech of Viscount Simonds, who held that the £100,000 was a capital receipt, was that the process was a secret process (See [1957] 3 All ER at p 726; 37 Tax Cas at p 579) and that the transaction "necessarily involved the realisation of a considerable part of its capital value", quoting from Lord Fleming's judgment in Earl Haig's Trustees v Inland Revenue Comrs (22 Tax Cas at p 735). It was a "once for all" sale. My Lords, the circumstances of the present case are very different. The case is said, like Moriarty v Evans Medical Supplies, Ltd , to involve the sale of "know-how". There is no mystique attaching to this word. In fact what the appellants did was to hand over in terms of the agreements the complete drawing and manufacturing and engineering data necessary to enable the other contracting parties to manufacture the aero engines in question. There were also provisions for the exchange of technical personnel. In addition to the lump sum payments the other parties to the agreements were to pay to the appellants royalties in respect of each engine and all spare parts manufactured by them. Whether this can properly be described as a sale of "know-how", what the appellants had done over a long period of years was to acquire a specialised knowledge of the methods of manufacture of aero engines. This knowledge they employed in the manufacture for sale by themselves of aero engines, and in countries to which the export of aero engines was not possible they employed their knowledge by obtaining lump sums under these licensing agreements. Similar agreements have been made with seven countries and in fact nineteen agreements in all have been concluded. These were not, of course, in relation to the same aero engine as new types were constantly being developed. It was suggested that mere multiplicity of transactions could not convert what was otherwise a capital receipt into trading profit and that the matter must be looked at when the very first agreement was made by the company. This would, in my view, be a totally unrealistic approach. The fact that the appellants were able over the years to continue to dispose so advantageously to themselves by means of these licensing agreements of their "know-how" shows, to my mind, quite clearly that they were not realising a considerable part of the capital value of the "know-how" but that a substantial portion of the "know-how" remained and was not dissipated by the disclosure of any secret process. It remained for disposal to the other numerous parties to the agreements.
It is not doubtful that if the Crown had made a case that the appellants entered on a new trade of dealing in "know-how" they might have been assessed on the lump sums paid under the agreements. The Crown, however, expressly disclaimed any intention of alleging a new trade. The question is therefore whether the licensing fees can be included as profits of the appellants as incidental to the manufacture of aero engines. I have given my reasons for distinguishing this case from Moriarty v Evans Medical Supplies Ltd . If the licensing fees are not capital receipts on the basis of the decision in Moriarty v Evans Medical Supplies Ltd , I do not see any other conclusion than that they are trading receipts. The matter can be expressed in different ways. I prefer to base my conclusion on the view that the licensing agreements were a development of the general trade carried on by the appellants. The royalties are admittedly included among the appellants' profits of the trade as manufacturers of aero engines. These could not have been earned so easily without the licensing which enabled the foreign governments to manufacture the aero engines. It was an integral trading activity and the licensing agreements were incidental to the manufacture of aero engines.
I would dismiss the appeals.
Appeals dismissed.