HOUSE OF LORDS
18TH DECEMBER 1925
COURT OF APPEAL
31ST MAY AND 1ST JUNE 1943
VISCOUNT CAVE L.C., LORD ATKINSON, LORD BUCKMASTER, LORD CARSON, LORD BLANESBURGH
Revenue - Income Tax - Charity - Public School - Profits from School Fees - Profits or Gains from Trade - Income Tax Act, 1918 (8 & 9 Geo. 5, c. 40), s. 37, sub-s. 1 (b), Sch. D.
Held that the company in providing education for money was carrying on a trade, notwithstanding that the whole purpose and object of the charity was the carrying on of the school, and that the surplus receipts, though applicable to the purposes of the charity, were profits or gains arising from a trade, and were chargeable to income tax under Sch. D.
Per Lord Blanesburgh. The question whether in any particular case the activities of a charity constitute a trade is a question of fact, and on the facts there was evidence to support the finding of the Commissioners.
Held, further, that the profits from the school fees were not exempt from taxation under s. 37, sub-s. 1 (b), of the Income Tax Act, 1918, as being an annual payment forming part of the income of a body established for charitable purposes only.
Decision of the Court of Appeal [1925] 1 K. B. 312 affirmed.
APPEAL from an order of the Court of Appeal (Pollock M.R., Warrington and Scrutton L.JJ.) reversing an order of Rowlatt J. upon a case stated by the Commissioners for the Special Purposes of the Income Tax Acts ( [1925] 1 K. B. 312).
The following statement of facts is taken from the opinion of the Lord Chancellor:-
"The school known as Brighton College was founded in or about the year 1846 for the purpose of providing for the sons of noblemen and gentlemen a liberal and practical education in conformity with the principles of the Established Church, and was for some years conducted under the terms of a Deed of Establishment dated September 11, 1848. In the year 1873 the school was taken over by the appellant company, which was then incorporated under the Companies Acts as a company limited by guarantee, its principal objects being defined by the memorandum of association as follows:-'(a) To continue with an improved constitution the Brighton College, which has been carried on since the year 1846 in Brighton.(b) To provide thereby a sound religious, classical, mathematical, and general education, in conformity with the doctrines of the Church of England.'
The memorandum of association contained a provision to the effect that the income and property of the College, whencesoever derived, should be applied solely towards the promotion of the objects of the College as set forth in the memorandum of association, and no portion thereof should be paid or transferred directly or indirectly by way of dividend, bonus or otherwise by way of profit to the members of the College; and the Board of Trade, pursuant to s. 22 of the Companies Act, 1867, granted a licence for the registration of the company without the addition of the word 'limited' to its name. The articles of association provided (among other things) that every member should have the privilege of nominating to the College one pupil in respect of each share held by him, and that pupils not so nominated should pay an additional charge; but this privilege, although still in existence, is not now used by the members. The articles also provided that the Council should have the general care and management of the College and should regulate the tuition and other fees to be paid by the pupils.
The school has been carried on by the appellant company in accordance with the memorandum and articles of association. The company has taken over or acquired the land required for the school and has improved the school premises, borrowing considerable sums for that purpose on mortgage or debentures. It employs a large staff and charges fees for the education given. The school is not assisted by any subscriptions, and there is nothing to show that the fees are fixed on other than commercial principles. For many years past the receipts of the College have considerably exceeded the working expenses, and the surplus has been applied to the payment of interest on the debt secured by the mortgages and debentures and of instalments of the principal debt. In the years 1912 to 1921 these surpluses were as follows:-
Surplus Interest Principal
paid off£ £ £ 1912 1633 1013 500 1913 1515 994 500 1914 1538 1108 500 1915 1371 1171 500 1916 1403 1151 500 1917 1781 1124 500 1918 1901 1095 500 1919 2142 1064 1000 1920 1729 1031 - 1921 6468 1310 500 In these circumstances the additional Commissioners of Income Tax for the division of Brighton made an assessment upon the appellants under Sch. D of the Income Tax Act for the tax year 1922-3; and, on an appeal to the Special Commissioners, those Commissioners decided that a trade was being carried on, and after giving effect to certain agreed alterations they amended the assessment to £2414. and determined the appeal accordingly. It was agreed by both sides that in arriving at the liability of the appellant College under Sch. D, the annual value of the buildings and offices upon which no tax had been levied under Sch. A should be deducted. A case having been stated for the opinion of the High Court, Rowlatt J. held that the appellants were not assessable to the tax, but on appeal to the Court of Appeal that Court reversed the decision of the High Court and affirmed the decision of the Special Commissioners. Hence the present appeal.
It should be added that, for the purposes of the argument before the Court of Appeal and this House, it was admitted by the Crown that the object for which the College was established was a charitable object within the meaning of the statute of Elizabeth."
3, 5, 6 November 1925. Latter K.C. and Edwardes Jones K.C. (with them Dighton Pollock and Beagley) for the appellants. The question is whether a surplus of receipts over expenditure obtained by charitable trustees in administering their trust can be assessed to income tax under Sch. D. 1. A surplus of receipts over current expenditure in the hands of a body bound to administer a charitable trust is not a profit within the meaning of the Income Tax Acts. 2. Unless the appellants are carrying on a trade independently of their charitable activities they are not in receipt of any taxable income. 3. The appellants' only activity in the present case is the management of the College. The appellants do not contest the cases in which it has been held that charitable trustees who have power to carry on an independent trade are liable to income tax in respect of the profits of that trade, but here there is no separate activity; it is one administration of one charitable object. The College cannot make a trade out of its education, and if, under the guise of administering the trust, the appellants were to run the school on commercial principles they would be committing a gross breach of trust. Assuming that the carrying on of a trade is a question of fact, which is disputed, there is no evidence to justify the finding of the Commissioners, and that finding is inconsistent with the finding that the school has been carried on in accordance with the memorandum of association. Shortly, the appellants' case is that they are not entitled to carry on a trade, and that the business of providing education is not being run on commercial lines. Brighton College is not the less a charity because it is established as a school for the sons of noblemen and gentlemen, and the revenues applied to the general purposes of the College are applied to charitable purposes only and are exempt from income tax: Attorney-General v. Lord Lonsdale (1827 1 Sim. 105); Rex v. Commissioners for Special Purposes of Income Tax; Ex parte University College of North Wales (1909 5 Tax Cas. 408; 24 Times L. R. 491); Mary Clark Home v. Anderson (1904 2 K. B. 645, 652). Religious Tract and Book Society of Scotland v. Forbes (1896 3 Tax Cas. 415; 23 R. 390), so far from being opposed to the appellants' contention, really supports it. There the society was carrying on two businesses - a bookseller's business and a colportage business. It was held that, though the object of the society was not that of making a profit, it might as incidental to its main purpose carry on a trade; that the bookseller's business was such a trade, but that the colportage business was not, because it was not carried on by commercial methods; and that consequently the losses on the colportage business could not be set-off against the profits of the bookseller's business in assessing the society to income tax in respect of its trade profits. If a charitable body carries on as a separate enterprise a trade which can be segregated from the charity, then no doubt it is liable to income tax in respect of the profits of that trade: Grove v. Young Men's Christian Association (1903 4 Tax Cas. 613; 88 L. T. 696); Coman v. Governors of the Rotunda Hospital, Dublin (1921 1 A. C. 1, 21, 24, 33-4). But that is not this case. Here the appellants are engaged in administering a charitable trust, and the receipt of the school fees is incidental to that administration. That is not carrying on a trade: Inland Revenue Commissioners v. Eccentric Club (1924 1 K. B. 390, 415). Mersey Docks v. Lucas (1883 8 App. Cas. 891) merely decides that if profits are made in a trade it does not matter how they are applied. That is conceded, but it has no bearing on the question whether the appellants are carrying on a trade. In re Incorporated Council of Law Reporting for England and Wales (1888 22 Q. B. D. 279) also has no bearing on this question, because the Court was dealing with a body which had no raison d'être except the carrying on of a business. Further the appellants are exempt under s. 37, sub-s. 1 (b), from taxation under Sch. D in respect of the receipt of the school fees as being an annual payment forming part of the income of a trust established for charitable purposes only: In re Janes' Settlement (1918 2 Ch. 54); Rex v. Special Commissioners of Income Tax (the Shaftesbury Homes case) ( 1923]1 K. B. 393). [They also referred to Doe v. Bird (1834 2 Ad. & E. 161, 166) as to the meaning of carrying on a trade.]
Sir Douglas Hogg A.-G. and Reginald Hills for the respondent. Before dealing with the specific facts of this case it is essential to keep in mind four general propositions - namely: (1.) That income tax is a tax on income; (2.) that there is no general exemption from income tax of charities as such, though they are entitled to certain specified exemptions under s. 37, sub-s. 1, of the Income Tax Act, 1918; (3.) that in determining whether any gain or profit is taxable or not the destination of that gain or profit is irrelevant; (4.) that on an appeal against an assessment the judges of fact are the Commissioners. In every case it is a question of fact for the Commissioners to determine whether the carrying on by a public body of the business of providing education is the carrying on of a trade. It is not necessary to contend that whenever a profit is made by a public school out of school fees that is a trade profit for the purposes of income tax. This governing body may under their memorandum and articles fix such fees as they choose, and the mere fact that this College is not subject to the rule against perpetuities does not conclude the question whether a trade is being carried on. Nor is the purpose for which a profit is made relevant to the question at issue - namely, whether it is a taxable profit. Mersey Docks v. Lucas, per Lord Selborne L.C.( 8 App. Cas. 891, 905) The appellants are really seeking to maintain that because all the profits must be applied to the purposes of education they are excluded from taxation. As to the claim for exemption under s. 37, sub-s. 1 (b), Trustees of Psalms and Hymns v. Whitwell (1890 3 Tax Cas. 7) shows that trading profits are not an annual payment within the meaning of the sub-section so as to be exempt from income tax when applied to charitable purposes.
Latter K.C. in reply. To determine whether there is an intent to carry on a trade one must look at the purpose at an earlier stage than the application of the profits, and in this case it must be said that the administration of the charity, i.e., the provision of education, is the carrying on of a trade. Severn Fishery Board v. O'May (1919 2 K. B. 484) applies by analogy. As to the determination of the Commissioners, when all the facts are found and the only question is whether the facts are such as to bring the case within the provisions of some statutory enactment, their determination is on a question of law and is open to review: Farmer v. Cotton's Trustees, per Lord Parker (1915 A. C. 922, 932). The question whether this College is carrying on a trade in the circumstances set out in the case is pre-eminently a question of law, and the determination of the Commissioners does not purport to be a finding of fact. The onus is on the Attorney-General to bring the case within Case 1 of Sch. D, by showing that the appellants are exercising a trade, and that onus he has failed to discharge.
The House took time for consideration.
18 December 1925. VISCOUNT CAVE L.C. My Lords, in this case the Court of Appeal, reversing the decision of Rowlatt J., has held that the appellants, a corporation bearing the name of Brighton College, were properly assessed to income tax for the year ending on April 5, 1923, and the question for your Lordships' decision is whether the tax was rightly so assessed. [His Lordship stated the facts as given above.] My Lords, by the Income Tax Act, 1918, income tax is chargeable under Sch. D in respect of the annual profits or gains arising or accruing to any person (including a corporation) residing in the United Kingdom from any trade, profession, employment or vocation. Exemption is granted (under s. 37) from (a) tax under Sch. A in respect of the rents and profits of any lands or hereditaments belonging to any public school, and (b) tax under Sch. D in respect of any yearly interest or other annual payment forming part of the income of any charity. A further allowance is made (under Sch. A, r. 6) in respect of the tax charged on any public school in respect of the public buildings, offices and premises belonging thereto; and by the Finance Act, 1921 (s. 30), exemption is granted from income tax under Sch. D in respect of the profits of a trade carried on by any charity, if the work in connection with the trade is mainly carried on by beneficiaries of the charity and the profits are applied solely to the purposes of the charity. Except in these respects the Acts grant no exemption from income tax to educational or other charities. In these circumstances the appellant company, which carries on the business of providing education for money, is prima facie chargeable with tax in respect of its annual profits or gains arising from that business; and the question to be determined is whether there is anything in the statute or in the constitution of the appellant company which prevents it from being so chargeable.
Upon this question two arguments are put forward on behalf of the appellant company.
First, it is said that the appellant company, being admittedly a charity, cannot carry on a trade, and that a surplus of receipts over expenditure arising in the execution of a charitable trust is not properly described as profit; and stress is laid on the fact that, having regard to the provisions of the company's memorandum of association, no part of its income can be distributed among the members. I am unable to agree with this contention. It has long been decided that, if a trade is in fact being carried on at a profit, it is immaterial that the profits must, under the constitution of the trading corporation, be devoted to public objects: Mersey Docks v. Lucas (8 App. Cas. 891); cf. In re Incorporated Council of Law Reporting (22 Q. B. D. 279). It has also been decided, both in the Courts and in this House, that a charitable institution which carries on a trade at a profit is chargeable with income tax in respect of its profits or gains in that trade, notwithstanding that they are and can only be applied to the purposes of the charity. Thus, in St. Andrew's Hospital, Northampton v. Shearsmith (1887 19 Q. B. D. 624) a hospital for the care of insane persons was charged with income tax on the profits earned by receiving wealthy patients, although such profits were applied only for the benefit of the poorer patients and the improvement of the hospital. In Religious Tract and Book Society of Scotland v. Forbes (23 R. 390; 3 Tax Cas. 415) a society whose object was to promote religion by the circulation of tracts and books was held chargeable with tax in respect of profits earned by carrying on a bookseller's business. In Grove v. Young Men's Christian Association (4 Tax Cas. 613) a society formed for the improvement of young men was held liable to tax on profits made by carrying on a restaurant which was open to the public as well as to its members. And in Coman v. Governors of the Rotunda Hospital, Dublin (1921 1 A. C. 1) the governors of a hospital were held to have been rightly assessed to tax under Sch. D in respect of profits earned by letting certain rooms for entertainments. In all these cases the profits earned by the particular trade or business were applicable and applied only to the general purposes of the charities, but this was held to make no difference.
On behalf of the appellants, an endeavour was made to distinguish these cases from the present on the ground that in the cases cited the trades carried on were only subsidiary to the charitable purpose, while in the present case the carrying on of the school is the main purpose and object of the charity. I do not think this a sound distinction. If a corporation established for charitable purposes and carrying on a subsidiary trade for the benefit of its main objects is chargeable with tax, the tax is equally chargeable where the very purpose and object of the charity is to carry on a trade. The surplus receipts in such a case, even if they were not profits, are certainly gains, and so fall under the burden of the tax. The above-cited case of the Incorporated Council of Law Reporting (22 Q. B. D. 279) supports this view; and the reference in s. 30 of the Finance Act, 1921, to "the profits of a trade carried on by any charity" shows the understanding of the Legislature.
But secondly it is argued that the profits from the school are exempt from taxation on the ground that they are an "annual payment forming part of the income "of the company, within the meaning of s. 37 of the Income Tax Act, 1918. The answer is twofold - namely, first, that the fees received from the scholars are not properly described as an annual payment: see St. Andrew's Hospital, Northampton v. Shearsmith (19 Q. B. D. 628), and secondly, that it is not sought to tax the fees but the profits. It was not suggested before your Lordships that the profits are within the exemption contained in s. 30 of the Act of 1921.
Upon the whole I have come to the conclusion that the appellants have been properly charged with tax. It has been suggested that a decision to that effect will throw a heavy charge upon many places of education, such as colleges and public schools, not carried on with a view to individual profit. I think this improbable. The real property and investments of these bodies are exempt from taxation; and the cases in which such a college or public school can show (as in the present case) a substantial profit earned year after year and applied for capital purposes, must be rare. In any case, your Lordships have only to determine the true construction of the statute, and upon this I do not feel any doubt. In my opinion the appeal fails and should be dismissed with costs, and I move your Lordships accordingly.
LORD ATKINSON. My Lords, I have had the pleasure and advantage of reading the judgment which has just been delivered by my noble friend upon the Woolsack. I thoroughly concur, and have nothing to add.
LORD BUCKMASTER (read by LORD CARSON). My Lords, the detailed facts of this case have already been stated. But in order to make plain the principles which have formed my opinion it is desirable that I should summarize what I regard as the relevant matter.
Brighton College is carried on as an undertaking under the Companies Acts. The sole purpose of the company is to provide education at Brighton College in conformity with the doctrines of the Church of England, and this is wholly a charitable object. The surplus income after providing for the annual expense is devoted to the improvement of the institution, and cannot be divided in any way or under any pretence among the members of the company. The tax that it is sought to exact from these surplus profits is claimed by the Crown under Sch. D of the Act of 1918 as annual profits or gains arising from a trade carried on in the United Kingdom. If the purpose for which the school was established and the objects to which the surplus income is devoted be disregarded, the tax would, in my opinion, be properly charged, and the two questions on this appeal are first whether the circumstances I have stated prevent the carrying on of this institution from being a trade and, secondly, if this be answered in the negative, whether the exemptions under s. 37 of the Income Tax Act, 1918, and s. 30 of the Finance Act, 1921, will relieve the appellants from liability.
With regard to the first of these propositions it is, I think, clear that the purpose to which the profits are applied is not material. In Religious Tract and Book Society of Scotland v. Forbes (3 Tax Cas. 415) it was definitely decided that the destination of the profits does not secure immunity from tax, and this principle is, in my opinion, involved in the case of Coman v. Rotunda Hospital, Dublin ( 1921] 1 A. C. 1) It seems to me to make no difference so far as this point is concerned whether the trade from which the profits arose formed the whole or part only of the charity. The main argument, indeed, was in fact devoted to the contention that where the whole purpose of the undertaking was in fact the carrying on of the charity it ceased to be a trade. I am unable to accept this proposition, although it found favour before Rowlatt J. and formed the basis of his judgment. If the undertaking must be regarded as a trade and would be so regarded if it formed a branch only of a larger institution, it seems to me it must equally be a trade when it is the sole and only purpose. In accordance, therefore, with authorities which have stood too long to be now revised, I think that this tax was properly charged under Sch. D.
It remains to be considered whether, in these circumstances, it is exempted. The relief granted by s. 37 of the Act of 1918 from tax is first under (a) in respect to the rents and profits of lands and tenements belonging to a public school or vested in trustees for charitable purposes, and this has been allowed. It must be under sub-s. (b) if anywhere that the relief must be sought. This grants exemption in respect of any yearly interest or other annual payment forming part of the income of any body established for charitable purposes only. This company certainly satisfies that condition. The only point is whether the surplus profits can be regarded as yearly interest or annual payment. It is certainly not interest, nor do I think it can be regarded as an annual payment, for an annual payment to a company cannot cover the profits that may be made in carrying on a trade. Nor can exemption be claimed under s. 30 of the Finance Act of 1921, for the work done by the masters and staff in carrying on the school is work done by them in the exercise of their various callings, and none of them can be regarded as beneficiaries of the charity.
It is for these reasons that I think the judgment of the Court of Appeal is correct and ought to be affirmed.
LORD CARSON. My Lords, I agree with the judgments already delivered and with the motion that has been proposed from the Woolsack.
LORD BLANESBURGH. My Lords, I agree that this appeal should be dismissed for reasons which I can state in very few words.
Brighton College is none the less in legal language a charity, because it was established as a school for the sons of noblemen and gentlemen; nor does the institution lose its charitable character, nor do its activities become a trade occupation or business merely because fees are charged for the education which the scholars at the College receive: Attorney-General v. Lord Lonsdale (1 Sim. 105). Whether in any particular case activities which may properly be described as charitable have become trading or commercial must always be a question of fact - one important consideration being whether these activities are being conducted with commercial considerations in view and on commercial principles: see Religious Tract and Book Society of Scotland v. Forbes (3 Tax Cas. 415).
Any hesitation which, in view of the decided cases on this subject, I have felt in relation to this appeal is attributable to the doubt I entertain whether the Commissioners when arriving at their finding that a trade is in fact being carried on by the appellants have had sufficient regard to the considerations to which I have referred.
While still dubious, and while myself holding the opinion that the taking of fees in such a case as the present does not by itself carry the question very far, I cannot affirm on the case as stated that there was no evidence to support the finding of the Commissioners to which I have just referred.
In these circumstances it is not open to me to criticize that finding, and accordingly I concur in the motion which has been proposed from the Woolsack.
Order of the Court of Appeal affirmed, and appeal dismissed with costs.
Lords' Journals, Dec. 18, 1925.
Solicitors for the appellants: Lingards, Browne & Myatt.
Solicitor for the respondent: Solicitor of Inland Revenue.
Return to the top of this file