Heaton (Inspector of Taxes) v Bell

[1970] A.C. 728

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(Decision by: Lord Reid (including background))

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

Court:

Judges:
Lord ReidLord Morris of Borth-y-Gest
Lord 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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Decision by:
Lord Reid (including background)

The respondent was employed by J. W. Ltd., who in 1954 introduced a voluntary car loan scheme for certain employees who earned less than £2,000 p.a. and were not directors. Under the terms of the scheme J. W. Ltd. bought the cars, insured them, and paid the road fund tax, and lent them to those employees who applied to join the scheme. There was then subtracted from the weekly wage of those employees a sum of money which varied according to the type of car on loan. The respondent applied to join the scheme in 1961, and £2 10s. 0d. was subtracted from his wages each week. In 1963 the respondent exchanged the car for a new one, and the weekly subtraction from that time was £2 18s. 0d. That sum was reduced as the car became older. The respondent's weekly pay slip set out eight items included in the computation of his taxable gross wage. One of those items was a sum to be subtracted from the sum of the other items, in respect of the loan of the car. Under the scheme, the respondent could on 14 days' notice cancel the car loan agreement. On such cancellation becoming effective, the subtraction from his weekly wage would cease. The respondent was assessed to income tax under Schedule E ^[F1] for the year 1963-64 on his wages without subtracting the sum in respect of the car.

On appeal,

Held,

(1)

(Lord Reid dissenting) that on the true interpretation of the contractual arrangements in question, the monetary wage to which the respondent was entitled remained unaltered for upon joining the scheme he agreed that some part of his earnings to which, by his work, he had become entitled might be retained by his employers as the monetary consideration of his hire of a car. That, accordingly, the emoluments of the respondent, taxable under Schedule E, were his gross wage before deduction of any sum in respect of his right to partial pate in the car loan scheme (post, pp. 753A-B, 757E-F, 760B-F, 762A-B, 763D-E).

Observations of Rowlatt J. in Machon v. McLoughlin (1926) 11 T.C. 83, 90 considered.

(2)

(Lord Hodson and Lord Upjohn dissenting). But that in any event, albeit the respondent agreed to take a reduced monetary wage during such time as he had the free hire of a car the use of the car was a "I perquisite" of the respondent's employment and that the proper basis of assessment was (per Lord Reid), the increase of wages to which the respondent would have been entitled during the year of assessment if he had chosen to surrender his right to have the car on the first day of that year (post, pp. 746H - 747B), (per Lord Morris of Borth-y-Gest and Lord Diplock), the full amount debited to the respondent's wages in respect of the use of the car during the year of assessment (post, pp. 753B-C, 767B-C).

Tennant v. Smith [1892] A.C. 150; 3 T.C. 158, H.L.(Sc.) and Abbott v. Phil bin [1961] A.C. 352; [1960] 3 W.L.R. 255; [1960] 2 All E.R. 763; 39 T.C. 82, 115, H.L.(E.) applied.

Wilkins v. Rogerson [1961] Ch. 133; [1961] 2 W.L.R. 102; [1961] 1 All E.R. 358; 39 T.C. 344, C.A. approved.

Decision of the Court of Appeal [1968] 1 W.L.R. 1385; [1968] 2 All E.R. 1156, C.A. reversed.

The following cases are referred to in their lordships' opinions:

APPEAL from the Court of Appeal.

This was an appeal by leave of the House of Lords by the appellant, John Kingston Heaton, H.M. Inspector of Taxes, from an order of the Court of Appeal (Danckwerts, Salmon and Fenton Atkinson L.JJ.) dated May 9, 1968, allowing an appeal by the respondent, Ralph Garland Bell from an order of the Chancery Division (Ungoed-Thomas J.) dated July 11, 1967, reversing a determination of the Commissioners for the Special Purposes of the Income Tax Acts dated March 1, 1966.

The matter arose from an appeal by the respondent against an assessment made upon him under Schedule E of the Income Tax Act, 1952, for the year 1963-64. The question in issue was whether certain sums (being £2 10s. 0d. a week up to May 31, 1963, and £2 18s. 0d. a week thereafter) should be included in computing the amount of the emoluments of the respondent within the meaning of paragraph 1 of Schedule E of the Income Tax Act, 1952, for the year 1963-64. The weekly sums were the amounts by which the respondent's weekly pay was reduced in pursuance of an agreement with his employers by which the respondent enjoyed the use of a motor car purchased by his employers.

The case stated by the special commissioners, so far as material, was as follows:

1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on March 1, 1966, the respondent appealed against an assessment made upon him under Schedule E, Income Tax Act, 1952, for the year 1963-64 in the sum of £1,532 (less agreed expenses of £11 and superannuation payments of £7).

The question for determination was whether or not sums of £2 10s. 0d. per week up to May 31, 1963, and £2 18s. 0d. thereafter, being the amount of car loan scheme adjustments, as hereinafter described, were correctly included in computing the amount of the emoluments of the taxpayer from his employment within the meaning of paragraph 1 of Schedule E of the Income Tax Act, 1952.

4. The respondent was at all material times employed by the company as a machine minder in the lithographic department.

5. In 1954, the company decided to introduce a voluntary car loan scheme for the benefit of certain employees who earned less than £2,000 a year and who were not directors of the company. The managing director wrote to each employee who was eligible to join in the scheme as follows:

"Dear Mr.

In view of the keen competition which is developing both at home and overseas I am most anxious to obtain the highest production possible through the simple economies of:-

(a)

Running the machines to the maximum amount of time and speed.

(b)

Prevention of wastage.

(c)

Concentration on the job in hand, and all the other efforts which can be made to greater efficiency.

I believe that a motor car is of great assistance when people live at some distance from their work and occasionally have to work unusual hours, also a motor car enables a man to have more recreation. Therefore, I have evolved a scheme whereby a craftsman may run a car, if he so desires, at most reasonable terms.

Motoring is not enjoyable unless it is trouble-free and safe. Only new cars (up to two years old) can give this assurance and safety. So my scheme concerns new cars only. At the end of two years the company will trade the car (or cars) for new ones.

This scheme will enable the craftsman to travel to and from his work with speed and comfort and will also enable him, with his family, to make the most of his leisure hours.

The literature enclosed is private and confidential and the agreement which will be necessary for you to sign is made as simple as possible. From the original four-page document of here-to-fores, etc., I have whittled it down to a short paragraph which both of us can understand.

In starting this scheme (which I hope will shortly include not only craftsmen, but others) I am laying myself open to all manner of criticism from all manner of quarters. All kinds of objections have already been raised but steadily, one by one, I have overcome them.

It has been suggested that this scheme will create jealousies. A man with no family may be able to afford to come into the scheme where perhaps a man with four children could not.

My reply to that was that the man with four children was indeed fortunate. I would sooner have four kiddies than forty cars. But children grow up rapidly, all too rapidly, and the scheme will still be available when the pocket permits.

An application form is enclosed and subject to all things being satisfactory the application will be accepted.

Afterwards, the delivery of the car should take a matter of a few weeks only.

In conclusion, I hope this scheme will be a success and will prove of advantage to you, your family and the company.

Yours sincerely,

Managing Director."

The following documents were enclosed with the letter:

(a)

"Private arid Confidential.

WADDINGTON'S CRAFTSMEN'S CAR LOAN SERVICE CONDITIONS.

1.

John Waddington Ltd. will loan a new car (Ford Popular - Austin A30 - Ford Anglia or Morris 8) selected by the proposed user.

2.

John Waddington Ltd. will pay full comprehensive insurance for each year of the service (£15 per annum).

3.

John Waddington Ltd. will pay the road tax for each year of the service (£12 10s. 0d. per annum).

4.

John Waddington Ltd. will arrange for the decarbonizing of the car during the second year.

5.

The user will sign a simple agreement.

6.

An amended wage basis will come info operation if the application is accepted.

7.

The user will provide his own petrol, oil, grease and other incidentals.

8.

The user will provide for cleaning and running maintenance.

9.

If the car is under repair for maintenance or following an accident the amended wage basis will still apply.

10.

Completion of application form does not mean acceptance by the company. They reserve full discretion on each application."

(b)

A memorandum of terms of service to be signed by an employee who wished to join the scheme (Paragraph 6, below).

(c)

An application form to be filled in and signed by an employee who wished to join the scheme (Paragraph 6, below).

When, in 1954, the scheme was finally settled, a meeting was arranged for all the company's employees concerned to hear the details of how the scheme would operate.

6.

The respondent attended the meeting of employees in 1954 when the scheme was introduced but did not join the scheme until 1961. In the meantime the respondent did not attend any further meetings in connection with the scheme but all relevant information was circulated to the employees and detailed information could be obtained if desired. On February 10, 1961, the respondent signed an application form to join the scheme. The respondent selected an Austin A40 De Luxe car, and on March 3, 1961, signed a "Memorandum of terms of service."

On May 30, 1961, Mr. H. D. Brearley, the officer of the company in charge of eke scheme, wrote to Mr. Stephens, the secretary of the company, as follows:

"Craftsmen's Car Service

The Austin A40 De Luxe car reg. no. 3248 RO recently delivered has been allocated to Mr. R. Bell of the Litho Department.

Mr. Bell is a newcomer on the scheme and I am sending with this letter his signed agreement form and his completed application form fully approved.

He would like to take the car away today at 5.15 p.m. and if you will let me have the usual note saying that the car is insured, I will see that it is handed over to him."

On the same day, May 30, 1961, Mr. Stephens wrote to Mrs. Nicholson of the company's wages office, as follows:

"Dear Mrs. Nicholson,

A new car has been made available to the following person(s). Will you please arrange the necessary weekly wage reduction.

Craftsmen: R. Shields, Litho/Poster Dept., Leeds,

Clock No. 268.

R. Bell, Litho Dept., Leeds.

Clock No.

On and from: Pay day Friday, June 2, 1961.

Yours sincerely,"

The "necessary weekly wage reduction" made in respect of the respondent's Austin A40 car, registered no. 3248 RO, was £2 9s. 0d., and first applied on pay day Friday, June 2, 1961.

The Austin car was handed over to the respondent on May 30, 1961.

The company made a summary giving details of each of the cars supplied and the weekly wage reductions of some of its employees under the craftsmen's car scheme.

7. On February 26, 1962, Mr. Brearley wrote to all the employees in the scheme as follows:

"JOHN WADDINGTON LIMITED. LEEDS, to......................

February 26, 1962.

Dear

Craftsmen's Car Service.

Since writing my letter of January 15, I have very carefully surveyed the costs relating to cars.

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 secondhand cars makes it imperative for a heavy increase of 8s. to &10S. per week.

This is a very steep rise, but the car you are already running will be at a slightly less rate because of the cheaper purchase price of the car. Unfortunately a new car will have to stand the full increase and you must bear this in mind when you are thinking of changing.

There are two schedules attached, the first one which you will refer to now and the second which you will have to refer to if and when you are wanting a new car.

As promised I am giving you one month's notice and the change will take place as from April 1, 1962, when cars already on the road by Monday, February 26, will be according to schedule no. 1 and any cars delivered and handed over after this date will be as schedule no. 2.

Yours sincerely,

H. D. Brearley."

The effect of this alteration in the rate on the respondent's weekly wage reduction was to increase the amount to £2 14s. 6d. from April 1, 1962. On June 1, 1962, the Austin car being one year old, the respondent's wage reduction was amended to £2 10s. 0d.

At the end of May, 1963, the Austin being two years old, the respondent arranged with Mr. Brearley to exchange it for a Morris 1100 De Luxe, reg. no. 330 RAR. The respondent signed an amendment to his memorandum of terms of service to cover the Morris car. The respondent's wage reduction was amended to £2 18s. 0d.

9. Each employee of the company received a weekly payslip showing the wages to which he was entitled. The respondent's payslip for the week ending June 5, 1964, was taken as an example of the manner in which the company calculated the wages of its employees. The figures for that week were set out thereon as follows:

The respondent's weekly wage reduction under the scheme is shown in the payslip as £2 13s. 6d., item number 8, which was the only deduction in arriving at the taxable gross wage, items 2 to 6 being additions to the flat rate of £22 6s. 7d. for 43 hours' work. The wage reduction had been amended to this figure on the car becoming one year old in a manner as described in paragraphs 7 and 8 above.

The respondent was paid the flat rate per hour which was standard for his classification. The overtime premium was calculated at one and a quarter times the flat rate. The cost of living bonus was fixed each January. The shift premium was paid for shift work and was calculated on the basis of the flat rate. The bonus figure was calculated on production figures but came in one week later than the flat rate of wages.

10. 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 the employee should accept a reduced wage. If there was no wage it could not be reduced and no adjustment of any kind was made under the scheme. The respondent's payslip for the week ending December 13, 1963, when he was absent through sickness, had entry for only one item (number 5), being a bonus of £2 8s. 10d. which related to the previous week. No wage reduction was made under the scheme and the taxable gross wage was shown as £2 8s. 10d. The payslip for the week ending November 8, 1963, shows similarly no reduction where there was no wage.

11. In his evidence the respondent stated 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. He admitted that he had probably made a rough estimate of what it would cost to obtain the use of a car but added thathis main concern had been to see whether he could afford to run a car. He did not agree that in order to check his wages he would have to calculate the wage he would have received if he had not joined the scheme and then make a deduction for the car. As the figures were all set out on the payslip all that he had to do was to check the arithmetic.

The respondent understood the last two lines of the memorandum of terms of service to mean that the agreement could be cancelled by either party giving 14 days' notice and that, if it were cancelled, he would receive the former wage without any deduction.

12. It was contended on behalf of the respondent:

(a)

that the company had given the respondent a choice between receiving his wages in money only or wages in money of a reduced amount and the use of a car. He agreed to enter the scheme whereby he obtained the use of a car and suffered a reduction in his monetary wage;

(b)

that the respondent was not an employee who came within the provisions of section 163, Income Tax Act, 1952;

(c)

that the respondent, under the terms of the scheme, was precluded from allowing anyone else to make use of the car except in an emergency so that while he remained in the scheme the use of the car could not be turned into money;

(d)

that even if the use of the car had a monetary value, then the amount chargeable to tax was what the respondent, as employee, could get for it, which was nil, and not the cost of the scheme to the company;

(e)

that the appeal should succeed and the assessment be reduced to the agreed figure of £1,385.

13. It was contended on behalf of the Crown:

(a)

that, on authority, as the deduction in arriving at the net wage paid to the respondent was variable, and the net wage could not be arrived at until the gross wage had been determined, the respondent's emoluments were the gross wages before any deduction for the use of the car;

(b)

that in any event the respondent's emoluments were to be arrived at before taking into account the deduction for the use of the car;

(c)

that, in the alternative, if the true wage was a net wage plus the use of the car, then the use of the car was money's worth because the respondent could surrender his rights under the contract and by this revert to his former wage and turn the benefit into pecuniary account;

(d)

that the appeal should be dismissed and the assessment confirmed.

15. The commissioners gave the following decision.

They had to construe the agreement between the respondent and the company. The respondent had come into the car scheme and it had to be decided what his wages were. Under item 6 of the company's conditions of the scheme (para. 5 (a) above):

"An amended wage basis will come into operation if the application is accepted."

This in itself did not help muchin determining what was the true wage but in an extract from the company's record, headed "Craftsmen's car scheme," under the respondent's name the words "wage reduction" appeared on each relevant line, and in an extract from the company's record headed "Motor Cars (craftsman)" the word "reduction" appeared under item 8. Also in the memorandum dated May 30, 1961, from the secretary of the company to Mrs. Nicholson of the wages office (para. 6 above) there appears:

"Will you please arrange the necessary weekly wage reduction."

Rowlatt J. in Machon v. McLoughlin (1926) 11 T.C. 83, 90 said:

"But what has been done? I have to find out whether the true way of looking at it is that he is paid a gross wage and has to pay something back or that he is only paid a net wage. That was Vaughan Williams L.J.'s test in Bell v. Gribble [1903] 1 K.B. 517, and that is the test I have to apply.

As pointed out before, it may-be a question of words. In every case you have to see whether it is a question of words. I do not think there is very much to show that it is not a question of words."

On the facts of this case it seemed that the wage was what it was said to be on the payslip dated June 5, 1964, namely, the taxable gross wage, that was to say, the sum of the items 1 to 6, less item 8.

On that basis it fell to be considered whether the use of the car was money's worth. The commissioners had to bear in mind Tennant v. Smith [1892] A.C. 150 and Wilkins v. Rogerson [1961] Ch. 133, the latter being the case of the suit from Montague Burton Ltd. The position was distinguishable from Abbott v. Philbin [1961] A.C. 352. The use of the company's car was not an option and the question was whether the respondent in having the use of the car had money's worth.

From the memorandum of terms of service the respondent was not to permit anyone else but himself to drive or use the car except in an emergency. In those circumstances the use of the car was not money's worth. Accordingly, the commissioners held that the appeal succeeded in principle, and as the figures had been agreed between the parties the 1963-64 assessment on the respondent was reduced to £1,385.

Desmond Miller Q.C., J. Raymond Phillips Q.C. and Patrick Medd for the appellant. The ultimate question for determination in this appeal is what were the emoluments of the respondent from his employment with John Waddington Ltd. for the year 1963-64? The charge to tax under Schedule E falls on emoluments, which by definition, include perquisites.

On the Crown's view the car that the respondent received from his employers is a perquisite chargeable under Schedule E. If that be wrong and the true legal position is that in 1961 there was a variation in the original contract of employment entered into between the respondentand his employers in 1948 so that there has always been in existence only one contract between the parties, then, by the variation in 1961, there were four main terms imported into it:

(i)

The employee to receive wages from which his employers retained byway of deduction the stated sum for the weekly hire of the car.

(ii)

The employee could hire the motor car of his choice from among the models available.

(iii)

The employee to have the right reserved to him to increase his wages to the basic level on giving 14 days' notice.

(iv)

If the employee exercised the right under (iii) the car was to be returned to the company.

It follows that on the true interpretation of the agreement the emoluments of the respondent chargeable under Schedule E were the gross value of his wages before deduction of any sum in respect of his right to participate in the car loan scheme.

In the alternative, in any event, if there was a varied contract, that varied contract as a whole with its terms and conditions was the perquisite and this could always be turned into money by the respondent reverting to his old terms of employment.

The Court of Appeal held that throughout there was no variation of the respondent's basic wage structure but that is wrong, for from 1961 onwards there was a deduction from the respondent's wages in respect of the same amount of work as he had done before that date. Further, the Court of Appeal was wrong in holding that the perquisite was the use of the car.

As to the definition of "perquisite," see the Shorter Oxford English Dictionary:

"1 Law. Property acquired otherwise than by inheritance ... 3. [the one applicable here] Any casual emolument in addition to salary or wages."

The definition of "emolument" is:

"Profit or gain arising from station, office or employment ..."

The judgments of the Court of Appeal seem to proceed on the footing that the dicta of this House in Tennant v. Smith [1892] A.C. 150 in respect of what constitutes a perquisite was absolute. It is therefore necessary to examine that case to ascertain what was material to the actual decision there. A bank manager as part of his duties acted as a "night watchman" of the bank premises. The House indicated clearly that it took the view that the bank manager had a representative occupation and as a representative of the occupier he could not be chargeable in respect of Schedule A tax - the only person who could be was the employer. Inland Revenue Commissioners v. Miller [1930] A.C. 222 contains an authoritative exposition of the scope of Tennant v. Smith, most of the observations in which were purely obiter.

Abbott v. Philbin [1961] A.C. 352 was principally cited by the Court of Appeal for the observations of Lord Radcliffe but the appellants rely upon it for the proposition that the House there paid attention to the totality of the contract as being the perquisite in question.

If the perquisite is capable of being turned to pecuniary account it is assessable under Schedule E. Suppose that Waddingtons had informed the respondent that he was at liberty to fill up his car with petrol at the company's pump whenever he chose or that he was to send his petrol bills monthly to the company's secretary for payment, on the authorities as they stand, these two situations would have different fiscal results. Contrast Wilkins v. Rogerson [1961] Ch. 133 with Nicoll v. Austin (1935) 19 T.C. 531 and Hartland. Diggines [1926] A.C. 289.

As to the effect of the arrangement between the company and the respondent: see Smyth v. Stretton (1904) 5 T.C. 36 where Channell J. said (at p. 42)

"You must look at the substance of it and not the words ..."

Thus,

"... a sum receivable by way of salary or wages is not the less salary or wages taxable because for some reason or another the person who receives it has not got the full right to apply it just as he likes."

The special commissioners placed reliance on some observations of Rowlatt J. in Machon v. McLougklin (1926) 11 T.C. 83, 90 but the words used by the parties in the memorandum of terms of service do not assist the respondent here.

In Ede v. Wilson & Cornwall [1945] 1 All E.R. 381 there was a tie on the disposition of shares which the respondents had the privilege of subscribing for at their par value, nevertheless it was held that the shares were assessable under Schedule E since they were capable of being turned into money; the shares had value. In ascertaining the value, however, one cannot take into account the personal attributes of the person who takes the benefit, that is, the test is objective, not subjective. The instances given by Wrottesley J. in Ede v. Wilson & Cornwall are therefore wrong.

The valuation of a perquisite is a task for a tribunal of fact. In the present case doubtless the proper value is the value in the market of hiring a car of this nature. But the Revenue here did not choose to require evidence of the cost in the open market but were content to take the respondent's own estimate of the value to him of the perquisite.

Reference was also made to Cordy v. Gordon [1925] 2 K.B. 276.

J. Raymond Phillips Q.C. following.

As to the question of perquisite, it is necessary to distinguish between two quite separate issues:

(1)

whether there is a perquisite;

(2)

if there is a perquisite what is its value if it is not cash.

The decision in Wilkins v. Rogerson [1961] Ch. 133 was wrong. The Revenue should have argued there:

(1)

the test in Tennant v. Smith [1892] A.C. 150 of convertibility is not of universal application.

(2)

The value of the perquisite is the money value that can be put upon it.

The test is: what is the perquisite worth in the taxpayer's hands?

It would not be right to regard the tests laid down in Tennant v. Smith as a substitute for the words in the statute which the cases subsequent to that decision on this topic show has happened hitherto. Reliance is placed on the following propositions:

(1)

The test of whether the profit can be turned to pecuniary account is wrong as a test of a perquisite if it is intended to be of universal application.

It does not cover Hartland v. Diggines [1926] A.C. 289, Nicoll v. Austin, 19 T.C. 531 or Ede v. Wilson & Cornwall [1945] 1 All E.R. 367. Indeed, if it is a universal test then Nicoll v. Austin, 19 T.C. 531 was wrongly decided;

(2)

either there is no test of general application and one turns to see what is the sensible solution in any given case; or

(3)

the test is whether it is reasonably possible to put a monetary value on the benefit which the employee has received.

If it is so possible then it is a perquisite. It is the monetary value to the taxpayer, and not its realisable value, that is material.

George Graham Q.C. and T. H. Walton for the respondent. The first question for determination is the nature of the arrangement reached between the employers and the respondent. Was it an agreement that he should be entitled to the same wage as previously but the company was entitled to retain part of it for the hire of a car or was it to be reduced because of a benefit in kind thrown in? If the House come to a conclusion contrary to that of the special commissioners, Ungoed-Thomas J. and the Court of Appeal that is an end of this case.

All the difficulties on this part of the case arise from the failure of the company and its employees to make plain the nature of the arrangement between them. It is first necessary to consider the offer that was made. The "wage basis" does not necessarily mean the basic wage. The offer does not pretend to compute the total amount of an employer's remuneration. Conditions 6 and 9 of the document headed "Wadding ton's Craftsmen's Car Loan Service" are wholly inconsistent with the arrangement resulting in a deduction from, rather than a reduction in, an employee's wage.

If the true agreement had been that the respondent was entitled to the same wage as previously but that he had agreed that £2 13s. 6d. was to be deducted then this sum should have been deducted after ascertainment of the net wage. It should have appeared on the payslip below the entries for "Standard deductions, Graduated Pension Contribution, P.A.Y.E." Here there was a reduction in wages and the payslip indicates that this was the arrangement. The present case is precisely analogous to that where an employer says to one of his young employees, "As you are going on holiday I will give you £25 or, alternatively, you can have my car for that fortnight." There is no element of hire in such an offer. So here, the company reduce the respondent's wage by £2 13s. 6d. and loan him a car.

If the courts below were correct in their answer to the first question, then the second question is whether a charge to income tax can be imposed on the benefit in kind which the respondent enjoyed.

As to the principles to be applied, so far as Tennant v. Smith [1892] A.C. 150 is concerned, what was there stated to the effect that a perquisite can be charged with tax only to the extent that it can be turned into money is part of the ratio decidendi and not obiter dicta . These statements were approved by four members of this House in Abbott v. Philbin [1961] A.C. 352 and binding authority or not they ought to be adopted or followed on their merits for in Tennant v. Smith [1892] A.C. 150 it was realised that if any wider test be adopted it would lead the law into a morass.

It is to be observed that Tennant v. Smith could have been decided on the narrow ground that the agent of the bank was required to live in the bank-house as part of his duties but the House chose to decide the matter on the wider ground that the privilege of free residence was not a "perquisite or profit" within Schedule E since that expression was confined to benefits which are capable of being turned into money, nor was it an emolument under Schedule D. Where the House has chosen to rest its decision on a broad ground, that ground is established notwithstanding that the same conclusion might have been reached on a narrower ground.

Reference is made in some of the speeches to the word "payable." The history of this word in respect of Schedule E is curious. It is to be found for present purposes in rule 4 of Schedule E in the Income Tax Act, 1842. That rule remained unaltered until the Income Tax Act, 1918, which was expressed to be a consolidating Act. But rule 4 of the rules applicable to Schedule E of that Act in reproducing rule 4 of Schedule E of the earlier Act omits the phrase "payable either by the Crown or the subject." By the Third Schedule to the Finance Act, 1922, rule 4 of the rules applicable to Schedule E of the Act of 1918 was expressly repealed. Insofar as the decision in Tennant v. Smith is based on the word "payable" it would be surprising if the general principle there laid down should be overturned either because of the omission of the above-cited phrase in a consolidating Act or because of the repeal of the rule containing that omission itself.

The primary meaning of "perquisite" is a money perquisite and nothing more, but this House in Tennant v. Smith, having extended its meaning to include that which can be turned into money, was very wise to state that that was the extent of its ambit for any extension of the concept of a perquisite beyond that which is a vehicle of putting money into the taxpayer's pocket cannot be valued.

It is pertinent to observe that the valuations, which may be difficult to make, required under section 7 (5) of the Finance Act, 1894, for estate duty purposes are perfectly logical and consonant with the principle of Tennant v. smith. It is true that provision was made by section 23 of the Income Tax Act, 1842, for the appointment of special commissioners for the purposes of the Income Tax Acts, but if Parliament had envisaged that a perquisite should be valued one would have expected Parliament to have given guidance in respect thereof as was done in relation to valuations for estate duty under section 7 (5) of the Finance Act, 1894.

Doubtless a luncheon voucher marked "three shillings" would fetch say 2 shillings and nine pence in the open market but suppose a business house has a canteen it is plain that an employee could not nominate a friend to have lunch in his place, and therefore, how can the lunch be valued if an employee prefers to bring sandwiches?

As to Wilkins v. Rogerson [1961] Ch. 133, the taxpayer is taxed on what he receives. If the taxpayer does not want the new suit and does not accept it he is not taxable at all in respect of it. This shows that the contention that the taxpayer is assessed on the right to receive the perquisite is wrong. To revert to the lunch illustration, suppose a firm offers a salary plus five shillings a day for food or the right to lunch in the firm's canteen on giving 14 days' notice. If an employee accepts the canteen offer and subsequently adopts the salary plus five shillings a day scheme the employee is not assessable in respect of the canteen offer because he cannot turn the perquisite into money but only into the consumption of food.

Wilkins v. Rogerson was correctly decided on the correct basis, namely, that the perquisite was the suit in so far as it could be turned into money, that is, sold as a second-hand suit. If the Court of Appeal were wrong and the perquisite was the offer or right to receive a suit from Montague Burton then for the Crown to have succeeded there the offer should have been in the form "You the employee or anyone you nominate can obtain a suit" for that is a taxable perquisite because the right can be sold. But if the offer is "you the employee and you alone can obtain a suit" then if the perquisite is the offer there is nothing to be assessed for the right cannot be sold.

Ede v. Wilson & Cornwall [1945] 1 All E.R. 367 is precisely the case that Wilkins v. Rogerson would have been if the facts in the latter case had been that the suit was given on condition that it was not to be sold for a year after receipt. Despite the condition the suit is saleable at once as were the shares in Ede albeit the sale might lead to the employee's dismissal.

As to Hartland v. Diggines [1926] A.C. 289, it is not an exception to the principle of Tennant v. Smith [1892] A.C. 150. There, there was a money payment - a profit - rather than a perquisite. The payment of a debt is a profit. It is plainly distinguishable from the present case.

In Abbott v. Philbin [1961] A.C. 352 there is nothing which casts any doubt on the essential principle established by Tennant v. Smith.

Nicoll v. Austin, 19 T.C. 531 is akin to Hartland v. Diggines. In both these cases the benefit was the discharge of a liability resting on the employee.

The Crown have contended that the benefit here was the entirety of the contract. That cannot be so. The contract of employment cannot itself be the salary, wages, perquisite or profit; it is but the source of the same. The question is: what is the relevant benefit, perquisite or profit that was provided by the contract that was supplemental to the taxpayer's contract of employment?

The benefit is described in a document misleadingly entitled "Memorandum of terms of service" which is, in fact, a memorandum of the terms on which the car may be used. The memorandum gave the employee a restricted user for an unlimited period until terminated by 14 days' notice. The bargain was that until either party gave to the other 14 days' notice the respondent was to receive a lesser wage and use of the car but after the expiration of the period of notice the respondent was entitled to a higher wage.

If the respondent gives up his use of the car he is not turning the benefit into money for he has had the benefit by enjoying the use of the car. By returning the car the benefit thereupon ceases. His higher wage will be taxed as usual under the P.A.Y.E. system. The extra wages that he thereby receives are received in exchange for the future benefits he would have received from the use of the car.

Desmond Miller Q.C. replied.

Their Lordships took time for consideration.

March 12, 1969.

Lord Reid - My lords, the question of general importance in this case relates to the proper method of taxing perquisites. The respondent is a craftsman. His employers introduced a scheme under which they provided private cars for certain classes of their employees at moderate cost to them. A man who took advantage of the scheme, which was optional, could use the car to travel to and from his work but he was under no obligation to do so; and he could use thecar otherwise in any way he chose provided that he drove it himself. We are not concerned with the effect of this scheme on the tax position of the employers. The respondent is assessed to income tax under Schedule E and the question which the Special Commissioners had to determine was whether sums of £2 10s. per week and later of £2 18s. per week "being the amount of car loan scheme adjustments" were correctly included in computing the amount of his emoluments. The commissioners held that "the use of the car is not in our view money's worth" and that therefore these sums were not part of the respondent's emoluments. Their decision was reversed by Ungoed-Thomas J. but restored by the Court of Appeal.

The first question to be decided is the true construction of the agreement made between the respondent and his employers when he came into the scheme. This agreement is not embodied in any document and its terms must be inferred from what the parties said and did. The appellant says that there was no variation of the existing wage and that the respondent merely authorised his employers to deduct from that wage the weekly sum which he had to pay them for the use of the car which they provided. If that is right then no question as to perquisites arises. It is wellsettled that a taxpayer's liability to tax on his emoluments is not diminished by the fact that he has authorised his employer to make a deduction from his wages or salary before paying it to him and to apply the part deducted in an agreed manner. What he chooses to do with the wage or salary to which he is entitled is of no moment.

But the respondent says that that is not what the parties agreed. He says that he agreed to accept a reduced wage and that as a counterpart his employers agreed to give him the use of a car. If that is right then he became entitled to two things - first the reduced wage and secondly the use of the car. Then the question arises whether the use of the car was a perquisite within the meaning of the Income Tax Acts so that he had to pay tax in respect of it. All the learned judges in the courts below have held that this was what was agreed. But they differed as to whether the right to use the car was a taxable perquisite; Ungoed-Thomas J. held that it was but the Court of Appeal held that it was not.

The only documents we have which were made before the agreement are a letter from the managing director setting out the conditions of the scheme, an application by the respondent to join the scheme dated February 10, 1961, and a so called "Memorandum of terms of service" signed by the respondent on March 3, 1961 on or about that date the respondent selected an Austin A40 De Luxe car and it was handed over to him on May 30, 1961. The employers' cashier was then told to make "the necessaryweekly reduction" and when the respondent received his next weekly wage on June 2, this was incorporated in the pay slip which he then signed.

We do not have that pay slip but another of June 5, 1964, is admittedly in the same form and in my view that clearly shows that both parties were proceeding on the assumption that their agreement was in the form for which the respondent now contends. His former wage had been made up of a number of elements including flat rate, overtime and bonuses. That was his taxable wage and in order to reach the net wage which he received in cash, it was necessary to deduct various items including P.A.Y.E. tax. If the appellant is right the taxable wage remained the same after the respondent came into the scheme and thepayment for the use of the car should have appeared as one of the deductions made from it. But if the respondent is right and he agreed to forgo a part of his old wage and accept a smaller wage, then the sum which he agreed to forgo was an element in calculating the new wage and must be taken into account in calculating what was now his gross or taxable wage. The pay slip shows that this is what was done. For the week in question the amount which he had agreed to forgo in respect of his right to use the car was taken into account before reaching the taxable gross wage. If the parties had thought that the agreement meant what the appellant now says it means the taxable gross wage would have been larger and the deduction for P.A.Y.E. would therefore also have been larger. And all the other evidence corroborates the fact that throughout the parties acted on the assumption that the agreement regarding the use of the car was in the form for which the respondent now contends.

One might think that, where an agreement is not in writing but has to be spelled out of facts and circumstances, it ought to be relevant to take into account the actions of the parties after the date of the agreement. But I shall accept the view that as yet that is not the law, for in this case a consideration of what occurred before the date of the agreement leads me to the same conclusion.

The most important indication of what was intended was condition 6 appended to the managing director's offer: "an amended wage basis will come into operation if the application is accepted." I do not see how this can be reconciled with the appellant's contention that under the agreement made by the acceptance of the respondent's application the wage was to remain exactly the same. If the agreement was thatthere should be an "amended wage basis" then it seems to me that an amendment of the wage basis must result in a different wage, for the "wage basis" must mean the basis on which the amount of the wage was calculated. The only other documents are the application form which throws no light on the matter, and the "Memorandum of terms of service." It is true that the contents of this document do not assist, but, if the appellant is right and the agreement as to the use of the car had nothing to do with the terms or service, I find it difficult to account for this heading. It seems to me to be an indication that before the agreement was made the parties thought that it would affect the terms of service. And there is one other matter to be considered. Normally, if the employee agrees that the employer is to deduct part of his wage and apply it in an agreed way, that means that the employer will pay the part deducted to some third person or into some fund. But here, if this was an agreement to deduct part of the respondent's wage the employer simply put the part deducted back into his own pocket. It seems to me a very artificial conception that the employer first puts the wage on the table and then simply takes part of it back again. It is a much more natural interpretation to say that the parties agreed that the employer should pay a smaller wage. I am therefore of opinion that in this matter the Court of Appeal were right.

If that is right then after the agreement was made the respondent was entitled to two things, the reduced wage and the right to use the car. It is then necessary to consider whether that right was taxable. If it was, it could only be because it was a "perquisite" within the meaning of the Income Tax Acts. Perquisites have been taxable at least since the Income Tax Act, 1842, and it is necessary to examine the legislation to see what is meant by a "perquisite." I shall examine the Income Tax Act, 1918, where the relevant provisions were in substantially the same form as in the 1842 Act, because since 1918 there have been two alterations neither of which can possibly have been intended to introduce a fundamental change of the meaning of "perquisite." one was a repeal in 1922 consequent on the abolition of the three years average, and the other was an alteration of phraseology made in the 1952 consolidation.

Schedule E of the 1918 Act provided that tax should be charged in certain matters "for every twenty shillings of the annual amount thereof," and one goes to the Rules applicable to Schedule E for particulars. Rule 1 provides for tax under this schedule "in respect of all salaries, fees, wages, perquisites or profits. ..." "Perquisites" is not defined, but Rule 4 provides

"(1)

Perquisites may be estimated either on the profits of the preceding year, or on the average for one year of the amounts of the profits thereof in the three preceding years ...

(3)

Perquisites shall be deemed to be such profits as arise in the course of exercising an office or employment from fees or other emoluments."

Income Tax is a tax on income and income means money income. The words profits and gains are used throughout the legislation in reference to sums of money. And the passage which I have quoted appears to me to indicate that perquisites here must mean money perquisites, if profits means money profits. There is no provision for the valuation in money of other kinds of advantages which one might call perquisites. In 1842 income tax was at the rate of a few pence in the pound, "fringe benefits" were unknownfor there was no incentive to create them, and it appears to me to be clear that there was no intention to saddle the commissioners with the difficult and at that time unprofitable task of putting a money value on advantages arising out of the employment which did not sound in money. But the division between money and that which can readily be used to produce money is thin. A cheque is not money but it would be absurd to suppose that payment by cheque instead of in legal tender could make any difference. And it would be almost equally absurd to suppose that a transfer of shares which can immediately be sold to produce money should not be regarded as a money perquisite.

This was recognised in the leading case of Tennant v. Smith [1892] A.C. 150. Lord Halsbury L.C., at p. 156, having said that the Act refers to money payments, used the phrase "capable of being turned into money." Lord Watson, at p. 159, referred to things a person "can dispose of to his advantage" and further referred to "money-or that which can be turned to pecuniary account." Lord Macnaghten, at p. 163, referred to "money payment or payments convertible into money"; and he pointed out, at p. 164, that the tax is "on what comes in - on actual receipts ... not on what saves his pocket, but on what goes into his pocket." The appellant says all this was obiter and possibly it was. But its authority has been recognised for three-quarters of a century: it was recognised by this House in Abbott v. Philbin [1961] A.C. 352: and even if I had doubts about it, which I have not, I would think it must stand.

The appellant argues that "perquisites" has a meaning wider than money perquisites, and tax is assessable on the value of the perquisite and not merely on the money which the recipient could get by dealing with it. "Value" is an elusive word: it may mean market value, it may mean value in money to the owner, or it may have other meanings like the value of the work necessary to produce it or even sentimental value. No one suggests that here itmeans sentimental value and I do not think that the appellant argued that it means cost of production - for that may have no relation to the present value of the thing or right to anybody. And the appellant rightly declined to argue that it means value to the owner, for that was expressly disapproved in Tennant's case [1892] A.C. 150 and would often be almost impossible to assess. I think that in the end counsel argued for market value. If the recipient of the perquisite could immediately sell or assign it that is the same thing as the money equivalent approved in Tennant's case. But what if he could not? A good example is to be found in Wilkins v. Rogerson [1961] Ch. 133. There the perquisite was the right to get a suit of clothes without payment from a particular tailor - or it may have been the suit of clothes itself. The recipient could not sell or assign the right to get the suit: if he had been entitled to do that the money equivalent would have been almost as much as the tailor's price. But he could sell the suit once he got it: but then it would only have a secondhand value, in that case about a third of the tailor's price. The Court of Appeal held that he could not be assessed to tax on the tailor's price or on the value of the suit to him but only on the secondhand value. The appellant argued that that case was wrongly decided. In my opinion the decision was right.

As I understood it, the argument with regard to the present case was that we should value the right to use the car on the untrue assumption that the respondent could assign his right to use the car to the highest bidder, and that if he did so the employers would not exercise their right to terminate this right on fourteen days' notice: but as there was no evidence as to what anyone else would pay for the right we should take the weekly sum which the respondent was willing to forgo in wages as the best evidence of market value. I have no hesitation in rejecting that argument. Not only is it inconsistent with what I hold to be the true meaning of the Acts and with the whole course of authority, but it could lead to most unfair results. Any right or property has different values for different people: if put up to auction many people bid at first but one by one they drop out when the bids of others go beyond its value to them, and the highest bid, the market value, is the value to one alone of all the bidders. Why should a man who finds it only just worth while to accept an unassignable perquisite on favourable terms be taxed on something far above its value to him or what he would have been willing to pay for it? Parliament may see fit to make such an enactment in special cases, as it did in Part IV of the Income Tax Act 1952, but I am satisfied that that is not the meaning of the general provisions with regard to perquisites.

I am not sure whether in the end counsel supported the argument that the fact that the respondent was willing to forgo a part of his wages to get the perquisite got rid of any difficulty in determining its value to him and that therefore in this case he could be assessed on the value of the perquisite to him. But if the general rule is that the value of a perquisite to the particular recipient is not a basis of assessment consonant with the provisions of the Act, it cannot in my view be right to make exception in cases where it is easy to prove that value. Just how easy must that proof be in order to take the case out of the general rule? In my judgment the recipient of a perquisite other than a sum of money can be assessed, and can only be assessed, on the amount of money which he could have obtained by some lawful means by the use or in place of the perquisite.

I say by lawful means because I can see no ground for the Revenue being entitled to disregard a genuine condition restricting the recipient's right to use or dispose of the perquisite. But of course if any restrictive condition is a sham or inserted simply to defeat the claims of the Revenue it can be disregarded.

So the question is - what could the respondent have done to turn his right to use the car to pecuniary account? Admittedly he could not assign it and he could not get money so long as he kept the right. But he could have surrendered the right and if he had done so the agreement provided that his wage would be increased. So why should he not be taxed on the amount of increased wages which he had it in his power to get by making that surrender?

The respondent argues that there is a fundamental difference between assigning a right on the one hand and surrendering it on the other, because in the one case the right continues to exist, whereas in the other it does not. I cannot see that this makes any difference. In both cases the result of the operation is that he no longer has the right but he has money instead. That seems to me to be well within the principle recognised in Tennant's case [1892] A.C. 150, and indeed within the words used in this House. By surrendering the right he has disposed of it to his advantage, he has turned it to pecuniary account, and as a result of the surrender money comes in and goes into his pocket.

So it appears to me that we must ask what money would have come in and gone into his pocket if he had surrendered his right to use the car? Under the agreement he had to give fourteen days' notice if he wished to surrender his right to use the car. So when are we to suppose him to have given this notice? Each year of assessment stands by itself. In the present case the assessment is for the year 1963/4. If we suppose him to have given notice on the first day of that year of assessment then he was only entitled to the increased wage for fifty weeks of that year of assessment. But if we suppose him to have given notice at an earlier date he would have been entitled to the increased wage for the whole year. Unfortunately counsel for the appellant were extremely reluctant to argue the case on the basis that what is assessable is the money which he could have got by surrendering the perquisite, and no argument was submitted on this question. So I think that the only course open is to leave that point undecided and open to argument in future cases and to restore the judgment of Ungoed-Thomas J. who held that the proper basis of assessment was the increase of wages to which the respondent would have been entitled during the year of assessment if he had chosen to surrender his right to have the car on the first day of that year. I would allow this appeal and restore the order of Ungoed-Thomas J.