Heaton (Inspector of Taxes) v Bell
[1970] A.C. 728(Judgment by: Lord Upjohn)
Between: Heaton (Inspector of Taxes) - Appellant
And: Bell - Respondent
Judges:
Lord Reid
Lord Morris of Borth-y-Gest
Lord Hodson
Lord UpjohnLord Diplock
Subject References:
REVENUE
INCOME TAX
Employment
Perquisite
Gross wages
Deductions
Loan of car by employer to employee with consequent subtraction from remuneration
Whether subtraction a reduction in computing gross wages or a repayment out of gross wages
Whether use of car convertible into money
Whether a 'perquisite' within definition of emoluments for purposes of Schedule E to Income Tax Act, 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10) s. 156 (1) (as amended)
Legislative References:
Finance Act, 1956 (4 & 5 Eliz. 2, c. 54) - Sch. 2, para. 1.
Case References:
Abbott v. Philbin - [1961] A.C. 352; [1960] 3 W.L.R. 255; [1960] 2 All E.R. 763; 39 T.C. 82, 115, H.L.(E.)
Cordy v. Gordon - [1925] 2 K.B. 276; 9 T.C. 304
Ede v. Wilson and Cornwall - [1945] 1 All E.R. 367; 26 T.C. 381
Hartland v. Diogenes - [1926] A.C. 289; 10 T.C. 247, H.L.(E.)
Inland Revenue Commissioners v. Miller - [1930] A.C. 222; 15 T.C. 25, H.L.(Sc.)
Inland Revenue Commissioners v. Westminster (Duke) - [1936] A.C. 1; 19 T.C. 490, H.L.(E.)
Machon v. McLoughlin - (1926) 11 T.C. 83, C.A.
Nicoll v. Austin - (1935) 19 T.C. 531
Smyth v. Stretton - (1904) 5 T.C. 36
Tennant v. Smith - [1892] A.C. 150; 3 T.C. 158, H.L.(Sc.)
Wilkins v. Rogerson - [1961] Ch. 133; [1961] 2 W.L.R. 102; [1961] 1 All E.R. 358; 39 T.C. 344, C.A.
Judgment date: 12 March 1969
Judgment by:
Lord Upjohn
My Lords, the respondent was at all material times employed by John Waddington Ltd., as a machine minder at wages of over £30 a week and he had no need for the use of a motor-car in the course of his employment. But his employers had an excellent scheme called Waddington's Car Loan Service whereby (and I am now using neutral language) an employee could, if he so wished, and it was entirely at his option, forgo part of his weekly wages in cash and have for his own private use a brand new motor-car licensed and insured by his employers at their expense but upon the terms that he alone drove it, except in an emergency, and he had to continue to suffer the diminution in his cash when it was off the road for repairs or after an accident. It is quite clear he had no right nor title to the car, so could not sell, mortgage, nor hire it out to others. This arrangement was determinable by employer or employee on giving fourteen days' notice, when of course the employee would revert to his full wages in cash. The scheme was introduced in 1954.
The questions that arise upon this appeal are (1) whether upon the true interpretation of the contractual arrangements made in 1961 between the respondent and his employers, the monetary wage which the respondent was entitled to remained unaltered, the respondent agreeing that some part of it might be retained by his employer in consideration of his being entitled on certain defined terms to use a car provided by his employer; in which case admittedly the respondent is taxable upon his gross wage and no further question arises, or (2) whether the monetary wage to which the respondent would otherwise have been entitled was to be reduced during such time as he was entitled to use such car and, if so, whether such entitlement constituted a perquisite or profit effectively charged to income tax under Schedule E.
The first question upon which the respondent has unanimous findings in his favour in the courts below depends upon an examination of the scanty documents which, however, are set out in full in the report of the judgment of Ungoed-Thomas J. in [1968] 1 W.L.R. 263.
The offer contained in this car loan service contained among other conditions:
"6. An amended wage basis will come into operation if the application is accepted."
In February, 1961, the respondent applied to enter the scheme and he was in due course accepted, and he drove away the car provided for him on May 30, 1961.
On the same day an interdepartmental note went to the employer's wages office to make the necessary wage reduction, and on the next wage day, June 2, 1961, his wages were reduced by £2 10s.
The wages slip that he was accustomed to receive was quite a complex document but all the argument was based on a much later slip, for the weekend of June 5, 1964, which was accepted by all parties as exemplary of the respondent's wages slip. It is set out in [1968] 1 W.L.R. 263, 268S-E. It is quite clear that the exercise of this option to have the personal use of a motor-car in lieu of full wages had no effect upon the employment of the respondent in the sense that whether he had full wages or the use of a motor-car he performed precisely the same duties during precisely the same hours for a recompense at precisely the same rates as before and that his gross wages, taking this example with all its complex features, amounted to £33 9s. 2d. From this, though for a reason unspecified in the slip, the amount of £2 13s. 6d. due in respect of the operation of the car loan service was deducted. From this the usual tax deductions were made. This slip (I treat it as though delivered on June 2, 1961) was no part of the contract between employer and employee; that had been concluded when the respondent drove away his car three days earlier: it was merely the way in which the wages office regarded it and that by itself is irrelevant. What does appear quite clearly is that it was a deduction from or reduction of (for there cannot be any real difference between the two phrases) the monetary wages which had already been plainly earned by the respondent. The phrase in condition 6 "amended wage basis" taken by itself may be ambiguous; but in this case I can have no doubt that it meant no more to the parties than that the monetary wage would have to be adjusted and each knew by how much, namely (taking the example) £2 13s. 6d.
In my opinion, and with all respect to the judgments in the courts below, I think it is clear that the legal result of the transaction between the parties was that the respondent was agreeing to a retention or deduction or, if you like, reduction from the wages earned by him and clearly due to him in cash for the pleasure of having a motor-car supplied to him for his personal use on very advantageous terms.
It was suggested that a decision upon these grounds could easily be circumvented by clever draftsmanship to make it clear that in fact the wage of the employee was reduced by £2 13s. 6d. and that in lieu he received a perquisite. I am not quite sure what Rowlatt J. meant in Machon v. McLoughlin, 11 T.C. 83, 90, when he said, "In every case you have to see 'whether it is a question of words.' "Like Ungoed-Thomas J. I find them confusing though I think the learned judge misapplied them. Of course you have to look at the real nature of the transaction and not merely at its substance. That was decided in your Lordships' House in the Duke of Westminster's case [1936] A.C. 1. But having ascertained the real nature of the transaction you cannot, in my opinion, disguise it by using camouflaged clothing. Here the whole essence of the employment of the employee was as a machine minder at a weekly wage. If he so wished he could have part of his wages applied in providing for his own personal use, quite unconnected with the affairs of the company, a motor car, and that use was terminable by employer or employee on short notice. Dress that up how you will, I hope a court would not be deceived by the disguise.
For these reasons, I would allow this appeal upon the ground that the emoluments of the respondent for the purposes of taxation under Schedule E were his gross wages before any deduction for his participation in the car loan service.
So, in my opinion, the second question does not arise, but as it has been the subject of some judicial conflict of opinion in the courts below, I propose to make some observations upon it.
Did the privilege of having this use of the car at clearly advantageous rates amount to a perquisite within the meaning of the word "perquisite" in the Income Tax Acts as part of the respondent's taxable emoluments?
My Lords, I think the officious bystander uninstructed in the law would say that for an employee to have the use of a brand new car licensed and insured for himself and his family and not at all for the purposes of the employer at a rate in the neighbourhood of £2 to £3 a week would be a valuable perquisite if the employee liked to avail himself of it. But that is not the test; the word "emolument" (of which the word "perquisite" is only an example) in the Income Tax Acts means an incoming in the sense of a money incoming; a benefit such as the right or indeed obligation (for in the case I am about to mention no difference was made between the two) to live in a house free was not an incoming merely because it relieved the taxpayer from the obligation he would in common sense otherwise be under of providing a roof over his head. All this was decided in your Lordships' House in Tennant v. Smith [1892] A.C. 150 where it was pointed out, however, that profits or perquisites in kind readily convertible into money might be taxable as though they had been money received.
This principle has been repeatedly approved and quite recently in your Lordships' House in Abbott v. Philbin [1961] A.C. 352. Lord Radcliffe at pp. 377, 378 very conveniently collected together and approved the statements of their Lordships upon this point, so I will repeat these observations:
"The basis of the Revenue's claim in Tennant v. Smith [1892] A.C. 150 was really to tax the bank manager on expenditure which he was saved, not on any money that he got or could get, while tax on the full annual value of the premises was taken from the bank itself. It was not, however, the view of the House that profits or perquisites, to be taxable, could consist only of money paid. It was accepted that they could include objects or things of value received, payments in kind, so long as they were [as was said by several law Lords] 'capable of being turned into money' (Lord Halsbury L.C., at p. 156), 'money - or that which can be turned to pecuniary account' (Lord Watson, at p. 159), 'money payment or payments convertible into money' (Lord Macnaghten, at p. 163), 'that which could be converted into money' (Lord Hannen, at p. 165).
"I think that it has been generally assumed that this decision does impose a limitation upon the taxability of benefits in kind which are of a personal nature, in that it is not enough to say that they have a value to which there can be assigned a monetary equivalent. If they are by their nature incapable of being turned into money by the recipient they are not taxable, even though they are in any ordinary sense of the word of value to him."
Lord Radcliffe went on to discuss some of the uncertainties which this decision raised but in reference to circumstances so different from those before your Lordships that I do not think they are of assistance.
So is this perquisite a taxable perquisite?
Of course you can sensibly value it at £2 13s. 6d. per week but that plainly is not the test; you must be able (and I care not what expression is used, for we are not now construing an Act of Parliament) to turn it into money.
Ungoed-Thomas J. was of opinion that as the respondent could terminate the car loan scheme so far as he was concerned by giving 14 days' notice he could convert the perquisite into money by receiving higher wages thereafter.
My Lords, powerful reasons were advanced by the judges of the Court of Appeal for disagreeing with and overruling that reasoning. I agree with them. The respondent could not turn the perquisite, which was no more than the personal use of the car, into money or anything which could be equated to money; all he could do would be to give up his perquisite and obtain higher wages. In my opinion, this personal unassignable right for use of the car was not equivalent to money while it continued and that, surely, must be the test.
So upon the second question I would have dismissed the appeal, but for the reasons I have given earlier I would allow the appeal upon the footing that the respondent is properly assessable under Schedule E in respect of his gross wages before any deduction for the car hire.