Rolls-Royce Ltd v Jeffrey (Inspector of Taxes), Same v Inland Revenue Commissioners

[1962] 1 All ER 801

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(Decision by: Viscount Simonds)

Between: Rolls-Royce Ltd
And: Jeffrey (Inspector of Taxes)
Between: Same
And: Inland Revenue Commissioners

Court:

Judges:
Viscount SimondsLord 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

Hearing date: 7, 8, 12 February 1962
Judgment date: 1 March 1962

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Decision by:
Viscount Simonds

My Lords, I am of opinion that these appeals must be dismissed and am so fully in agreement with the judgment of Holroyd Pearce LJ in the Court of Appeal that I need say very little.

It is common ground between the parties that the court, while paying proper regard (as to which see Edwards v Bairstow ) to the facts found by the commissioners and to the inferences drawn by them from those facts, must ultimately determine as a question of law alike whether receipts by the taxpayers are capital or income for purposes of income tax and whether expenses incurred by them are for the same purposes to be treated as incurred on income or capital account. In the present case the appellant company over a number of years received under agreements, which were sometimes called licence agreements and sometimes conviction agreements, various sums of money and among them substantial sums which were described as capital sums. It was urged on their behalf that these sums were the consideration that they received for the sale of a fixed capital asset and that therefore they could not be regarded as income for tax purposes.

My Lords, it appears to me to beg the question to refer to that which the appellants sold as a fixed capital asset. I will not analyse the several agreements made by the appellants first with the Chinese government and afterwards with other foreign governments and companies. It may be said compendiously in the words of Holroyd Pearce LJ that what the Chinese government received and the appellants gave were technical knowledge, plans, a licence and facilities for the interchange of staff. An important and valuable part of the consideration was, I think, the undertaking by the appellants to communicate, so far as they were permitted to do so, future improvements and developments. Can these things be regarded as a fixed capital asset and the communication of them as the disposal of that asset? I do not think so. It appears to me (and I venture once again to quote the apt words ([1961] 2 All ER at p 473) of the learned lord justice) that the only proper conclusion is that

"... in territories where the taxpayers could not hope to sell their engines they were pursuing a wise policy of allowing local manufacture from which they would receive the benefits of advertisement, lump sums and royalties."

This they did, not by parting with their assets but by using or trading in them in the only or at least the most advantageous way that was open to them.

I must add a word on Moriarty (Inspector of Taxes) v Evans Medical Supplies Ltd, Evans Medical Supplies Ltd v Moriary (Inspector of Taxes) since I was a party to the majority decision in this House. In the Court of Appeal in the present case Upjohn LJ who had given the first decision in that case pointed out the clear difference between the two cases. The facts in the earlier case were complicated, but the inference was there drawn that the capital sum in question was paid for the communication of secret processes to the Burmese government with a resulting total loss to the company of its Burmese trade. I applied in that case and would apply here, too, the test laid down by Bankes LJ in British Dyestuffs Corpn (Blackley) Ltd v Inland Revenue Comrs (12 Tax Cas at p 596):

"... looking at this matter, is the transaction in substance a parting by the company with part of its property for a purchase price, or is it a method of trading by which it acquires this particular sum of money as part of the profits and gains of that trade?"

In the circumstances of that case, regard in particular being had to the fact that the transaction was an isolated one of its kind, the conclusion was inevitable that the so-called capital sum was a receipt of a capital nature. The analogy of secret processes to patents was drawn to enforce this conclusion. The decision did not establish or purport to establish a principle that whenever and however often a company communicates what is called "know-how" to a third party and receives what is called a lump sum for it, that sum is for tax purposes a capital receipt. The circumstances may lead as in my opinion they lead in the present case to the opposite conclusion.

I would dismiss these appeals.