Spc00637
INCOME TAX — mining royalties — ICTA ss 119, 122, TCGA s 201 — whether “mining” and “working” distinct and cumulative conditions for application of s 122 — such interpretation excessively strict — appeal allowed
THE SPECIAL COMMISSIONERS
JOHN BUTEAppellant
- and -
THECOMMISSIONERSFOR
HER MAJESTY’S REVENUE AND CUSTOMSRespondents
Special Commissioner: Colin Bishopp
Sitting in public in Edinburgh on 26 June 2007
Julian Ghosh QC and Elizabeth Wilson, counsel, for the Appellant
Iain Artis, counsel, for the Respondents
© CROWN COPYRIGHT 2007
DECISION
1.The issue in this appeal is the application of ss 119 and 122 of the Income and Corporation Taxes Act 1998 (“ICTA”) to payments receivable by the taxpayer in return for the rights to drill, prospect and explore for coal, to extract coal by open cast mining and to disturb other minerals for the purpose of mining coal. Those rights have been granted by trustees of settlements in which the taxpayer has an interest, over various lands in respect of which the trustees own the mineral rights even though they do not own the coal and, in some cases, do not own the land. The respondents contend that the payments fall within s 119 and that of the payments are taxable as income; the taxpayer maintains that s 122 applies to them with the consequence that half is taxable as income while the other half is taxable as a chargeable gain.
2.The taxpayer is the beneficiary of various interests conferred by trusts created by the fifth Marquess of Bute and varied by a number of later instruments. The taxpayer, although he prefers to be known as Mr Bute, is the seventh Marquess and the fifth Marquess’s grandson. The details of the settlements are immaterial for present purposes; it is sufficient to record that the legal ownership of the estate assets remains with the trustees as bare trustees for the beneficial owners. The taxpayer’s beneficial interest extends to one half of the settled estate. The assets of the estate include land and buildings and, importantly for this appeal, mineral rights, some of which extend to land the surface of which is no longer owned by the trustees. Several wayleaves have been granted by the trustees to various mining companies in order that the coal under the surface might be worked. Some of the wayleaves have expired, while others are extant. I am required to determine how the payments received by the taxpayer, via the trustees, should be taxed, specifically in the years 1993/94 to 2002/03 inclusive. I am not asked to determine the amounts of tax due, but merely the issue of principle.
3.The taxpayer was represented before me by Julian Ghosh QC, leading Elizabeth Wilson, and the respondents by Iain Artis. I heard no oral evidence since the facts, as I have briefly recorded them above, were undisputed. I was provided with copies of the relevant documents, and had helpful skeleton arguments.
4.It is necessary to bear in mind that reserves of coal and related minerals were vested in the National Coal Board by s 5 of the Coal Industry Act 1946. That remains the position, save that the rights of the National Coal Board are now vested in the Coal Authority: see the Coal Industry Act 1994, s 7(3). Thus landowners such as the trustees of the relevant settlements no longer own the deposits of coal within their land, and those reserves may be lawfully mined only in accordance with the terms of a licence granted by the Coal Authority permitting the working. It follows that the trustees can grant, in respect of the land to which they retain the title, no more than a wayleave enabling the mining company to enter the land and exercise such rights as may have been, or it is assumed will be, conferred on it by the Coal Authority. The wayleave may authorise the disturbance and, perhaps, the extraction of other minerals. In those cases in which the trustees have disposed of the land itself but have retained the mineral rights the mining company will also, of course require, a wayleave or licence from the landowner, but there is no distinction for the purposes of the incidence of tax on the taxpayer’s receipts between those cases in which the trustees do, and those in which they do not, own the surface of the land.
5.There have been amendments of the applicable legislation during the relevant period but those amendments do not affect the principles. For the purposes of this decision I take the legislation as it was in force in the last of the disputed years of assessment, 2002/03.
6.The respondents contend that the moneys paid in return for the wayleaves fall within s 119 of ICTA which, so far as material, was in these terms:
“119Rent etc. payable in connection with mines, quarries and similar concerns
(1)Where rent is payable in respect of any land or easement, and either—
(a)the land or easement is used, occupied or enjoyed in connection with any of the concerns specified in section 55(2); or
(b)the lease or other agreement under which the rent is payable provides for the recoupment of the rent by way of reduction of royalties or payments of a similar nature in the event of the land or easement being so used, occupied or enjoyed,
the rent shall, subject to section 122 and section 201 of the 1992 Act, [i.e. Taxation of Capital Gains Act 1992] be charged to tax under Schedule D
(2)…
(3)For the purposes of this section—
‘easement’ includes any right, privilege or benefit in, over or derived from land; and
‘rent’ includes a rent service, rentcharge, fee farm rent, feuduty or other rent, toll, duty, royalty or annual or periodical payment and in the nature of rent, whether payable in money or money’s worth or otherwise.”
7.The concerns specified in s 55(2) include mines and quarries.
8.The taxpayer argues, however, that the appropriate charging provision is s 122 (which, as s 119 itself indicates, overrides that section if it applies at all). Section 122, so far as relevant, read:
“122Relief in respect of mineral royalties
(1)Subject to the following provisions of this section, a person resident or ordinarily resident in the United Kingdom who in any year of assessment or accounting period is entitled to receive any mineral royalties under a mineral lease or agreement shall be treated —
(a)for the purposes of income tax, or as the case may be for the purposes of corporation tax on profits exclusive of chargeable gains, as if the total of the mineral royalties receivable by him under that lease or agreement in that year or period and any management expenses available for set-off against those royalties in that year or period were each reduced by one-half;
(b)[repealed]
and this section shall have effect notwithstanding any provision of section 119(1) making the whole of certain kinds of mineral royalties chargeable to tax under Schedule D, but without prejudice to any provision of that section providing for any such royalties to be subject to deduction of income tax under section 348 or 349 …
(5)In this section references to mineral royalties refer only to royalties receivable on or after 6th April 1970, and the expression ‘mineral royalties’ means so much of any rents, tolls, royalties and other periodical payments in the nature of rent payable under a mineral lease or agreement as relates to the winning and working of minerals; and the Board may by regulations—
(a)provide whether, and to what extent, payments made under a mineral lease or agreement relating both to the winning and working of minerals and to other matters are to be treated as mineral royalties; and
(b)provide for treating the whole of such payments as mineral royalties in cases where the extent to which they relate to matters other than the winning and working of minerals is small.
(6)In this section—
‘minerals’ means all minerals and substances in or under land which are ordinarily worked for removal by underground or surface working but excluding water, peat, top-soil and vegetation; and
‘mineral lease or agreement’ means —
(a)a lease, profit à prendre, licence or other agreement conferring a right to win and work minerals in the United Kingdom; …”
9.Regulations (the Mineral Royalties (Tax) Regulations, SI 1971/1035, were made in accordance with sub-s (5), but they are not relevant to the matters in issue in this appeal.
10.Section 122 subjects only half of the net sums received to income tax or, where appropriate, corporation tax, but the other half does not escape taxation altogether: it is caught by s 201 of the Taxation of Capital Gains Act 1992 (“TCGA”), which, in the year 2002/03, read:
“201Royalties
(1)A person resident or ordinarily resident in the United Kingdom who in any chargeable period is entitled to receive any mineral royalties under a mineral lease or agreement shall be treated for the purposes of this Act as if there accrued to him in that period a chargeable gain equal to one-half of the total of the mineral royalties receivable by him under that lease or agreement in that period.
(2)This section shall have effect notwithstanding any provision of section 119(1) of the Taxes Act making the whole of certain kinds of mineral royalties chargeable to tax under Schedule D.
(3)The amount of the chargeable gain treated as accruing to any person by virtue of subsection (1) above shall, notwithstanding any other provision of this Act, be the whole amount calculated in accordance with that subsection, and, accordingly, no reduction shall be made on account of expenditure incurred by that person or of any other matter whatsoever.”
11.Mr Ghosh’s argument, for the taxpayer, was that what was received in return for the grant by the trustees of the wayleaves was properly described as “mineral royalties” as that term is defined by s 122(5), a definition which, by virtue of TCGA s 203, is adopted for the purposes of s 201. His case was that a wayleave enabling a mining company to enter and to disturb the surface of the land (in those cases where the trustees owned the surface) and to disturb other minerals was a necessary precondition for the mining and working of minerals. The coal could not have been worked without a wayleave since lawful access to it was not available. Thus a wayleave agreement was properly described as “a mineral lease or agreement as relates to the mining and working of minerals”, to adopt the wording of ICTA s 122(5), and the agreement itself came within subsection (6)(a) as it was one “conferring a right to win and work minerals”. The fact that the trustees did not own the coal itself, and in some cases did not own the land, was immaterial; taking the plain meaning of the statute, the grant was of a right, even if only one of several separate necessary rights, to win and work the coal.
12.For the respondents, Mr Artis maintained that the primary rule was to be found in ICTA s 119, with the result that the receipts were wholly taxable as income, unless the taxpayer could bring himself within the derogation afforded by s 122. That section laid down two discrete conditions, both of which must be satisfied if the taxpayer were to avail himself of the derogation. Those conditions were that the sums must be receivable under a mineral lease or agreement, and that they be mineral royalties within the meaning of the statute: it was not the case that if the first condition was not met, the second was also necessarily met. He emphasised the requirement that a mineral agreement must be one conferring the right to win and work minerals, implying that two, separate, rights must be conferred. Mr Ghosh’s response was that “win and work” was a composite expression, implying nothing more than the action of extracting the mineral from the ground in which it lay.
13.The meaning of the expression “win and work” has been the subject of earlier litigation. In Lewis v Fothergill (1869) 5 Ch 103 Lord Hatherley LC said that “I conceive that the coal is won when it is put in a state in which continuous working can go forward in the ordinary way”, implying that winning preceded and was distinct from working. In Rokeby v Elliot (1879) 13 Ch 277 at 279, James LJ, delivering the judgment of the Court of Appeal, said:
“We think the definitions of winning given in the case of Lewis v Fothergill are accurate, as accurate as definitions can be of a term like winning, which probably itself as intelligible and plain as any definition can be.
A coal field is won when full practicable available access is given to the coal hewers so that they may enter on the practical work of getting the coal.”
14.More recently, in Occidental Inc v Assessors for Orkney (1978) SC 231 at 257 Lord Ross said:
“The words ‘winning’ and ‘working’ are frequently used in mineral leases, but there do not appear to be any very satisfactory definitions of these activities. ‘Winning’ appears to cover searching for the mineral and obtaining access to it so that it can be effectually worked. ‘Working’ appears to cover extraction of the mineral.”
15.I was referred also to the Coal Industry Act 1994, s 5(6) of which also refers to winning and working as distinct activities. I accept that “winning” and “working” do have distinct meanings, and that (contrary perhaps to initial impression) “win” implies the gaining of access to a mineral in order that it can be worked. So much is clear from Rokeby v Elliot.However, in other contexts the term “winning and working” has been taken to have a composite meaning: see English China Clays Lovering Pochin & Co Ltd v Plymouth Corporation [1973] 2 All ER 730 at 763f (the matter was, however, undisputed in that case) and the Development Land Tax Act 1976, s 17(7), where “winning and working” is defined as a single phrase.
16.It follows, Mr Artis argued, that since there was no uniform definition of the phrase, nor any uniformity in the treatment of the term as, on the one hand, discrete activities and, on the other, as a composite activity, it was necessary to construe the words used by reference to the context in which they are found. The words do not give rise to any inherent difficulty, being ordinary English words with no ambiguity of meaning. That proposition seems to me to be right.
17.However, it is not so clear that Mr Artis is right in his contention that “winning” and “working” must be construed as cumulative requirements because of the use between them of the word “and”. I agree with him that “and” cannot be treated as if it read “and/or”. But I am unable to accept either the inherent implication that a composite activity is necessarily excluded or the argument he advanced that, since the trustees do not own the reserves of coal, they cannot grant the right to work them, meaning a facility enabling them to put themselves in a position to extract the coal from the ground. Parliament must be taken to have known when, in 1970, it enacted the precursor of s 122, and again in 1988 when s 122 was enacted, that coal reserves were vested in what is now the Coal Authority. It seems highly unlikely that Parliament would have enacted provisions with which, in the case of coal, no landowner, or mineral rights owner, could ever comply. Had it been intended to exclude nationalised minerals from s 122, it would have been simplicity itself to say so; s 122(6) excludes water, peat, top-soil and vegetation, but makes no mention of coal. I am not willing to conclude that Parliament intended a concealed exclusion.
18.I prefer Mr Ghosh’s argument that what Parliament had in mind was an agreement which put an intending miner into the position of being able to exploit minerals by winning and working them. It is true that the trustees cannot confer the right to extract and exploit the minerals; but the words in sub-s 122(5), by which mineral royalties are defined as receipts under “a mineral lease or agreement [which] relates to the winning and working of minerals” does not, in my view, demand any more than that the agreement has a clear connexion to the winning and working. Without the trustees’ wayleave, the intending miner could not, as the Court of Appeal put it in Rokeby v Elliot, win the coalfield and thereafter work it.I do not accept Mr Artis’ argument that such a construction would extend to, for example, a wayleave to lay a pipeline over land on which mining operations are to be carried out. The pipeline might make the mining operations easier, but it would not be something without which the operations could not lawfully be carried out.
19.I am satisfied that the taxpayer’s receipts fall within s 122 and, accordingly, I resolve this appeal in his favour.
COLIN BISHOPP
SPECIAL COMMISSIONER
Release Date: 13 September 2007
SC/3087/2006
Cases cited but not referred to in the decision:
Tylecote v Morton (1902) 85 LTR 692
Pepper v Hart [1993] AC 593
R v Oakes [1959] 2 QB 350
Wicks v Firth (Inspector of Taxes) [1982] Ch 355