Heaton (Inspector of Taxes) v Bell

[1970] A.C. 728

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(Judgment by: Lord Morris of Borth-y-Gest)

Between: Heaton (Inspector of Taxes) - Appellant
And: Bell - Respondent

Court:

Judges: Lord Reid

Lord Morris of Borth-y-GestLord Hodson
Lord Upjohn
Lord 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.

Hearing date: 3-5 February 1969
Judgment date: 12 March 1969

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Judgment by:
Lord Morris of Borth-y-Gest

My Lords, the respondent, who was employed by a company as a machine minder in their lithographic department, appealed against an assessment made upon him under Schedule E for the year 1963/4. He had been employed by the company for many years. In 1954 the company introduced a scheme under which they loaned motor cars to certain of their employees. Having known of the scheme since that year the respondent decided to join it in the year 1961. It is beyond question that financial consequences were to result for those employees who hired cars. In one way or another their financial position was to be affected.

The respondent claimed that the assessment made upon him should be reduced by an amount which was the amount in fact referable to the hiring by him of his car. Thus if it be assumed that by his work and labour and as the result of the application of agreed rates and terms he became entitled to receive in a week the sum of £33 9s. 2d. and if in that week the amount referable to the hire by him or loan to him of his car was £2 13s. 6d. he claimed that he was only liable to pay tax on £30 15s. 8d. (being £33 9s. 2d. less £2 13s. 6d.). He claimed that his taxable gross wage for the week would be £30 15s. 8d. He so claimed because he contended that as from the date when he decided to join the scheme he had agreed to take a reduced wage. The assessment made upon him was on the basis that (assuming the above figures) the £2 13s. 6d. was to be included in computing the amount of his emoluments from his employment within the meaning of paragraph 1 of Schedule E of the Income Tax Act, 1952.

For the year which is in question the actual sums referable to the loan of the car were, up to May 31, 1963, £2 10s. per week, and £2 18s. per week thereafter. In the assessment made upon the respondent those weekly amounts were included in computing his emoluments.

It is necessary, in the first place, to decide as to the true interpretation of the agreement subsisting at the relevant time between the respondent and his employers. When he joined the car loan scheme did he vary his terms of employment by agreeing to accept a reduced wage or did he agree that from his wage there would be deducted such sum as represented the sum payable to him in respect of his hiring of a car? That there would be less money to take home week by week would follow in either event. But there would be rather more to take home week by week if the amounts referable to the car are excluded from the taxable income. I use the phrase "amounts referable to the car" so as not to prejudge the issue. There was, however, no suggestion that the car loan scheme was a benevolent scheme of the employers which was not to have any financial consequences for those employees who joined it. If there was a wage reduction the reduction was of an amount decided upon because there was the hiring of the car. If there was a deduction from wages the deduction was of the same amount. The only practical difference resulting from the view, on the one hand, that there was an agreement for a wage reduction and the view, on the other hand, that there was an agreement for a deduction from wages lies in the tax implications and consequences.

I turn, therefore, to consider on the facts as found what the true position was as between the respondent and his employers. The quest must be to find the realities of the arrangements that were agreed. If (taking these figures merely to state the point) the respondent, before he joined the scheme, had been entitled to receive in a week the gross wage of £33 9s. 2d. and if, when he hired a car, his employers wished to receive £2 13s. 6d. a week because the car was loaned to him, was the position thereafter that, for the same labour as before, rendered on the same terms as before, the respondent was still entitled to receive a gross wage of £33 9s. 2d. and that from his gross pay or from his take-home pay there was to be deducted the amount of £2 13s. 6d., or was the position thereafter that he agreed that his gross wage was to be £30 15s. 8d. and that he was to have the free use of a car?

My Lords, I consider that the former position was the true one. To describe the use of the car as being free seems to me to be trifling with words. There was nothing free about it. The letter written in 1954 by the managing director to each employee (a letter fully set out in the case stated) mentioned that a man with no family might be able to "afford" to come into the scheme where perhaps a man with four children could not. But most people can afford that which is free. So also the letter explained how the scheme would be available "when the pocket permits." The pocket readily permits that which makes no demands on it. It is true that the stated case records that the respondent in his evidence said that if he had ever been asked whether the company supplied him with a car at a rent deducted from his wage he would have said that he had accepted instead a lower wage and a car free. But whether he would have said that or not and whether or not he derived some personal happiness in a belief that he was having a car free, the incidence of tax must depend upon what the state of affairs really is rather than upon what someone can think it to be or can somehow state it to be.

In the letter which the managing director wrote to each employee the scheme was described as one evolved "whereby a craftsman may run a car, if he so desires, at most reasonable terms." It is difficult to understand how anyone could have thought that such language denoted the free loan of a car. To have the free use of a car would be to have it on terms that would be more than most reasonable.

The scheme was a "Craftsmen's Car Loan Service." The employers were to loan a new car of certain stated makes and they were to pay full comprehensive insurance and the road tax on the car. Certain of the conditions are to be noted. Condition 5 was "The user will sign a simple agreement." Condition 6 was "An amended wage basis will come into operation if the application is accepted." Condition 9 was "If the car is under repair for maintenance or following an accident the amended wage basis will still apply."

When the respondent decided to join the scheme he signed an application form (dated February 10, 1961). On that form he merely stated that he wished to join the scheme and he gave certain information. Nothing was set out as to his wages or as to payments. The respondent selected the make of car that he wished to have and then signed the "simple agreement." It was a printed form of agreement presented to him by his employers. It was rather a remarkable document. It was in the following terms:

"TO:

John Waddington, Limited,

Leeds.

MEMORANDUM OF TERMS OF SERVICE

During my service with you as:

LITHOGRAPHER

and the carrying out of the various duties you properly assign to me, I am to make use of Motor Car No. 3248 RO for the more efficient discharge of my duties. I am not to permit anyone other than myself to drive or use the car except in an emergency. I am to pay for maintenance and running. I agree to keep the car clean and in good condition and to hold it ready for inspection at any time. You have generously agreed to license and insure the car and to pay for decarbonisation when necessary. Either of us may cancel my obligation and authority to use the car on 14 days' notice.

DATED March 3, 1961

SIGNATURE Ralph G. Bell."

Though headed "Memorandum of Terms of Service" it will be seen that it contains nothing about the terms of his employment. It does not mention his wage rate or the money entitlements which were to result from his work. The mention of service is in the opening sentence in which were the words "during my service with you as Lithographer and the carrying out of the various duties you properly assign to me, I am to make use of Motor Car No. ..." It is admitted, however, that it was wholly erroneous that the respondent was to be under any obligation to use the car. The words "I am to make use" were not correct. The respondent was under no duty to use and did not need to use the car during "the carrying out of the various duties" which his employers might assign to him. By the use of a car an employee might be aided in his travel to and from his work and might be enabled "with his family to make the most of his leisure hours": but he owed no duty to use the car in any particular way. It was quite wrong, therefore, to state that either party could on 14 days' notice cancel the "obligation" of the respondent to use the car.

By signing the memorandum the respondent was required to assent to the statement that his employers had "generously" agreed to license and insure the car. By a letter of February 26, 1962 (set out in the case stated), the officer of the company in charge of the scheme informed all the employees in the scheme that he had "carefully surveyed the costs relating to cars." The letter contained the following paragraphs:

"The present wage adjustments have remained the same since the beginning of the scheme and since that time costs have risen in many different ways - the cost of the car, the cost of insurance and now the tax. The very fact that the tax has risen from £12 10s. to £15 per year means 1s. per week on every car, but this is trifling compared with other increases.

The higher costs coupled with the greater difficulty of obtaining the right price when we sell returned cars as second-hand cars makes it imperative for a heavy increase of 8s. to 10s. per week."

Not surprisingly that was described as a "very steep rise." Again, it is difficult to understand how anyone could possibly think that such language was used in reference to the free loan of a car. What was it that was being subject to the heavy increase of 8s. to 10s. per week? What was it that was subject to a "very steep rise"? In my view, it is impossible to resist the view that the increase was in the payment that was to be made for the hire of the car.

On behalf of the respondent reference has been made to certain office documents of the company. They are purely internal documents. They show that when the respondent joined the scheme and received a car on loan the wages office were asked to arrange "the necessary weekly wage reduction." They show that the "heavy increase" imposed after the letter of February 26, 1962, was noted as involving the increase of the reduction. My Lords, I cannot think that the adoption of this phraseology can in any way mask the realities in regard to what was actually arranged. Nor do I think that realities could be cloaked merely by some future adroit change of selected words.

In my view, there can be no doubt that the respondent obtained from his employers the right to use a car on terms which involved that he should pay to them whatever was from time to time an appropriate hire charge. As a matter of convenience he agreed that his payment was to be set off or deducted week by week from the amount which by his labour he had earned and which his employers therefore owed him. To dress that up as a wage reduction seems to me to be fanciful. The terms and conditions relating to the method of computing the respondent's earnings were in no way changed. If two craftsmen worked under precisely the same conditions so that they earned precisely the same amount and if one joined the car loan scheme while the other did not it would, in my view, be a mere delusion to treat the former as having agreed to a wage reduction (being a wage reduction which was to vary from time to time according as to how the cost of hiring the car varied). In truth there would have been an arranged and agreed deduction from wages. A deduction by any other name would be a payment just the same.

To speak of a wage reduction increase brought about by new charges affecting a car the loan of which is free involves a measure of verbal distortion which suggests tax adjustments rather than "wage adjustments."

Reliance was placed upon two matters in support of the contention that there had been a wage "reduction" having the result that tax was only payable upon an agreed reduced wage. The first of these involved consideration of condition 6 which I have quoted above. The second involved consideration of the form and contents of the weekly pay slips which the respondent saw and signed. The two matters are considerably interrelated.

Under condition 6 an amended wage basis was to come into operation if a craftsman loaned a car under the scheme. The words "wage basis" are somewhat ambiguous. They might denote the rate of pay which someone is to earn by his work. They might denote the way in which his pay is dealtwith or adjusted before the amount is arrived at which the employed person is to receive to take away. One thing is quite clear. Rates of pay and terms affecting what was to be the financial reward for work done were in no way altered if a craftsman joined the scheme. They were the same, other circumstances being equal, for those within and for those without the scheme. The "simple agreement" which was signed did not even purport to alter the terms of employment relating to the wage which one who signed was to receive. It made no mention whatsoever of payment or of wages. So there was no agreement made which produced an "amended wage basis" in any sense which meant that gross earnings were to be less. Work done after joining the scheme was to earn the same reward as would have been earned by similar work done before joining the scheme. No different conclusion follows from a study of the form of the weekly pay slips referable to those who joined the scheme. It appears that if someone became ill he received nowage. The stated case contains the statement that "whenever an employee was absent through sickness and received no wage, no deduction was made for the use of the car because the agreement between the company and the employee under the scheme was that theemployee should accept a reduced wage." But the question whether there was an agreement for the acceptance of a reduced wage is the very question to be decided. If there was such an agreement for a reduced wage then there could be no thought of a "deduction." If, however, the terms of employment of someone who joined the scheme were, as a result of joining it, in no way affected but if payment for the hire of a car was to be made by deduction from wages earned and if the employers were not going to pay wages to anyone absent through sickness it would follow that there was no sum from which a deduction could be made. It appears to have been the position, however, that no charge for the hire of a car was carried forward: but this proves no more than that the employers decided that as they paid no wage to someone who because of illness could not work they would not during such period of illness exact payment from him in respect of his hire of a car.

The entries made on a weekly pay slip were somewhat revealing. The respondent's pay slip for a particular week (actually the week ending June 5, 1964) was taken merely as an example of the manner in which the employers calculated the wages of their employees. The figures for that week were set out as follows:

It will be seen that Items 1 to 6 all represent sums earned by work. A side-note shows that of the 431/4 hours worked 39 were to be paid at the ordinary rate, 1/4 hour at a rate of 11/4, and 4 hours at a rate of 11/2 the ordinary rate. All this would be just the same whether the person concerned was or was not within the car loan scheme. So also in regard to the other named premium and bonus items. Anyone looking at the pay slip would be pardoned if he thought that just as the first six items must be added together, so also should be added the un-named and un-described item of £2 13s. 6d. But the first six items when added together come to £33 9s. 2d. The sum of £2 13s. 6d. was in fact a subtraction or deduction. It is beyond all question that it was in fact the amount then currently referable to the car which at the time the respondent was using and hiring. Conforming to the pattern of the employers' internal records the amount was duly recorded in one document as a "reduction": in another was the entry "Wage reduction changed to 53s. 6d. per week on Friday, June 5, 1964." It may well be that one of the reasons why what at first glance would have seemed to be an item of addition of £2 13s. 6d. in arriving at the taxable gross wage was given no label and no description was that it would have been difficult to devise words which would not reveal it to be what it really was. In my view, the reality was that the £2 13s. 6d. (or such sum as related to any period in question) was an agreed deduction from the respondent's wage and was the sum payable by him in respect of his participation in the car loan scheme.

The only "amended wage basis" that resulted and that the documents reveal was that a sum referable to the hiring of a car was retained by the employers as a deduction from the sums which were owing to the respondent as his earnings for work that he had done. In my view, therefore, the question raised in the stated case, i.e., whether sums of £2 10s. per week up to May 31, 1963, and £2 18s. thereafter, being the amount of car loan scheme adjustments, were correctly included in computing the amount of the emoluments of the respondent from his employment should be answered in the affirmative.

For the reasons that I have set out I consider that on a true interpretation of the contractual arrangements the position was that the monetary wage to which the respondent was entitled remained unaltered. When the respondent joined the scheme he agreed that some part of the earnings to which, by his work, he had become entitled might be retained by his employers as the money consideration of his hire of a car. The assessment that was made upon him was therefore, in my view, correct. Had I been of the alternative view, that the respondent agreed to take a reduced monetary wage during such time as he had the free hire of a car, I would still have been of the view that the assessment made upon him was correct. On that basis the entitlement to use the car would, in my view, have been a perquisite to be included in the full amount of the respondent's emoluments chargeable to tax.

In considering this alternative basis it is relevant to note what its features would be. The respondent would voluntarily have agreed to forgo an amount in money and in exchange would have the free use of a car. He would have agreed to take a reduced wage. He would be under no obligation to use the car though he would be under the restriction that (except in an emergency) he was not to permit anyone other than himself to drive or use it. He would not be using the car in the performance of his duties. But the new agreementwould be subject to unilateral alteration by either party to it. The employers might decide (because of increased costs referable to the car) to reduce the respondent's wage to a lower figure than that which he had previously agreed: or (if costs decreased or if a car was in its second year of hiring) the respondent's wage might rise. Furthermore, the respondent could at any time decide to cease to hire a car and by giving two weeks' notice to this effect he could produce an increase of his wage. So also his employers, whether he liked it or not, could end the hiring on two weeks' notice and then his wage would automatically increase.

The question that arises is whether his participation in the car loan scheme would form part of his emoluments so as to come within the wording of the taxing statute. Tax is chargeable on the "full amount" of the respondent's emoluments. The expression "emoluments" includes all salaries, fees, wages, perquisites and profits. The tax being a tax upon income or (as Lord Macnaghten said in Tennant v. Smith [1892] A.C. 150, 164) on what "comes in" the word "amount" denotes that in order to be taxable a perquisite must either be a cash or money payment or must be money's worth or of money value in the sense that it can be turned to pecuniary account. This conception in regard to the nature of a taxable perquisite was, in my view, revealed in earlier Acts. Thus, under the Income Tax Act, 1918, in reference to the sums to be charged to tax under Schedule E are the words "the annual amount thereof." In the Income Tax Act, 1842, in reference to perquisites to be assessed there occurs the word "payable." This denotes that the mere fact that a benefit in kind accrues does not mean that there is a perquisite which is taxable. In his speech in Abbott v. Philbin [1961] A.C. 352, Lord Radcliffe said (at p. 378) that it had been generally assumed that the decision in Tennant v. Smith does impose a limitation upon the taxability of benefits in kind which are of a personal nature: it is not enough to say that they have a value to which there can be assigned a monetary equivalent. Lord Radcliffe added: "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." The "attendant uncertainties" which, as was pointed out, the conception raises need not in the present case be resolved.

It was clearly the view of the House in Tennant v. Smith [1892] A.C. 150 that, in order that they should be taxable, perquisites need not necessarily take the form of money payments. Lord Halsbury L.C., at p. 156, in coming to the conclusion that the then applicable taxing Act referred to money payments made to the person who received them, added "though, of course, I do not deny that if substantial things of money value were capable of being turned into money they might for that purpose represent money's worth and be therefore taxable." He adopted, at p. 157, the words of Lord Young "that the thing sought to be taxed is not income unless it can be turned into money." In regard to the word "profits" Lord Watson, at p. 159, considered that in its ordinary acceptation it appeared to denote "something acquired which the acquirer becomes possessed of and can dispose of to his advantage - in other words, money - or that which can be turned to pecuniary account." In reference to Schedule E Lord Macnaghten said, at p. 163, that it extended "only to money payments or payments convertible into money." Lord Field, at p. 164, considered that the residence of the appellant upon bank premises, though rent free, "could not in any way be converted by him into money or money's worth." Lord Hannen, at p. 165, considered that different considerations would apply to the case of an agent who as part of his remuneration had a residence provided for him which he could let. "That which could be converted into money might reasonably be regarded as money."

My Lords, the principles enunciated in the passages to which I have referred were recognised in 1961 in the speeches in Abbott v. Philbin [1961] A.C. 352. That the principles can apply not only in respect of objects or chattels or things of value received but also in respect of certain rights received was, I think, recognised in both cases. In Abbott v. Philbin what was in question was an option or right to acquire shares at a fixed price. The majority considered that the grant of an option in the year 1954/5 was a profit or perquisite (arising from the appellant's employment) of that year and that tax was exigible upon its monetary value, if any. The option was something which could "assuredly be turned to pecuniary account." (See the speech of Viscount Simonds, at p. 366.) That was so, even though the option itself was not transferable. The option could be exercised and the acquired shares transferred. The test, said Lord Simonds, was whether it was something which was by its nature capable of being turned into money. In that case a sum of £20 was paid for the option. It was said that the Revenue authorities could easily have ascertained whether the option had any and what value. "If," said Lord Simonds, "it had no ascertainable value then it was a perquisite of no value - a conclusion difficult to reach since £20 was paid for it." Lord Reid pointed out at p. 370, that the parties agreed that the option was something which was within the words "perquisites or profits whatsoever." He said, at p. 371:

"I agree that the question is whether th¡s option was a right of a kind which could be turned to pecuniary account. I do not use these words as a definition but it is undesirable to invent a new phrase if an old one of high authority fits this case, and the parties agree that it does": and, at p. 372, "It appears to me that ifa right can be turned to pecuniary account that in itself is enough to make it a perquisite." In reference to the option Lord Radcliffe said, at p. 379: "I think that the conferring of a right of this kind as an incident of service is a profit or perquisite which is taxable as such in the year of receipt, so long as the right itself can fairly be given a monetary value. ..."

The principles laid down and recognised in the two cases in this House were, I think, correctly applied in Wilkins v. Rogerson [1961] Ch. 133. The opportunity to acquire the suit of clothes (or overcoat or raincoat) could not be assigned or sold but the suit when received could be sold. In that way the perquisite could be turned to pecuniary account, that is, it could be turned into money.

How, then, should the well-established principles be applied if it be assumed that since 1961 the respondent was employed on the terms that his wage was a reduced one but that he was to have the free use of a car? In my view, his free use of a car was a perquisite which represented money's worth and was taxable. It is true that his right to use the car could not be assigned (just as the option in Abbott v. Philbin [1961] A.C. 352 could not be transferred) but the right could be converted into money. The option in Abbott v. Philbin could be exercised and the shares acquired by its exercise could then be sold. It was recognised that by such process the option was by its nature capable of being turned into money. In the present case the respondent's right to use the car could be converted into money or was capable of being turned into money by a much simpler process. The respondent could at any time (subject only to giving two weeks' notice) and without making any new contract say to his employers that he relinquished in their favour his right to use the car and in exchange could require that an ascertained sum of money should be paid to him. His employers would be bound to accept the use of the car which was all that the respondent had a right to. They would then be bound to pay him a sum which (on the basis now being considered) was equal to the amount by which he had agreed that his wage was to be reduced. His employers, for their part, could at any time (subject only to giving two weeks' notice) require him to give up his right to use the car and require him to accept a sum of money in exchange. At all times and at any time since 1954 the respondent was in a position to decide whether he would choose to have from his employers a particular and ascertainedsum of money and no car or whether he would choose not to have that particular and ascertained sum of money but to have a car. The fact that two weeks' notice of change of will was needed does not, in my view, alter the fact that the perquisite represented money's worth.

At any time since 1961 the respondent, after giving notice, could have had money rather than the use of a car. Accordingly, throughout the year of assessment the respondent could, had he so wished, have had the money equivalent into which his perquisite was convertible. The right to use the car, on the one hand, was alternative to and interchangeable with the right to the receipt of a definite sum of money on the other. For administrative convenience a period of two weeks was agreed to as being requisite for effecting the exchange of the one for the other: that did not, in my view, affect the circumstance that the perquisite represented money's worth of known amount.

For these reasons I am of the opinion that the assessment made upon the respondent was correct and, accordingly, I would allow the appeal.