Taylor v. Provan (Inspector of Taxes)
[1975] A.C. 194(Judgment by: Lord Simon of Glaisdale J.)
Taylor (Appellant)
and Provan (Inspector of Taxes) (Respondant)
Judges:
Lord Reid
Lord Morris of Borth-y-Gest
Lord Wilberforce
Lord Simon of GlaisdaleLord Salmon
Subject References:
Revenue
Income tax
Employment
Emolument
Canadian resident unpaid director of company in England
Special assignment involving travelling to England
Whether travelling expenses 'necessarily incurred' in performance of duties of office
Whether duties in respect of special assignment to be differentiated from duties as director
Whether payments in respect of duties performed in United Kingdom
Legislative References:
Income Tax Act 1952 - (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), ss. 156, 160(1); Sch. 9, para. 7 1
Case References:
Commissioner of Stamp Duties v. Atwill - [1973] A.C. 558; [1973] 2 W.L.R. 327; [1973] 1 All E.R. 576, P.C.
Cook v. Knott - (1887) 2 T.C. 246
Newsom v. Robertson - [1953] Ch. 7; [1952] 2 All E.R. 728; 33 T.C. 452, C.A.
Pook v. Owen - [1970] A.C. 244; [1969] 2 W.L.R. 775; [1969] 2 All E.R. 1; 45 T.C. 571, H.L.(E.).
Practice Statement (Judicial Precedent) - [1966] 1 W.L.R. 1234; [1966] 3 All E.R. 77, H.L.(E.).
Reg. v. National Insurance Commissioner, Ex parte Hudson - [1972] A.C. 944; [1972] 2 W.L.R. 210; [1972] 1 All E.R. 145, H.L.(E.).
Revell v. Elworthy Brothers & Co. Ltd. - (1890) 3 T.C. 12
Ricketts v. Colquhoun;. - [1925] 1 K.B. 725, C.A.;; [1926] A.C. 1; 10 T.C. 118, H.L.(E.)
Judgment date: 13 March 1974
House of Lords, UK
Judgment by:
Lord Simon of Glaisdale J.
My Lords, two main questions arise on this appeal: (I) were the payments (which have been described by my noble and learned friends) "emoluments" from any office or employment falling under Case II of Schedule E (see Finance Act 1956, section 10 (1), amending Income Tax Act 1952, section 156)?; (II) if so, were such emoluments immediately cancelled by the travelling expenses in respect of which they were paid, such expenses being deductible from the emoluments by virtue of paragraph 7 of Schedule 9 to the Income Tax Act 1952?
(I) Apart from section 160 of the Income Tax Act 1952, I should have thought that, in principle, the answer to the first question depends on the answer to the second. If the expense in respect of which the reimbursement is made is not deductible under paragraph 7, its reimbursement to the taxpayer would, in my view, be an emolument, making him so much better off than another employee or office holder who has to bear such an expense out of his own pocket. But in Pook v. Owen [1970] A.C. 244 a majority of your Lordships' House (Lord Guest, Lord Pearce, Lord Donovan) held otherwise. In Reg. v. National Insurance Commissioner, Ex parte Hudson [1972] A.C. 944 it was held that it would only in exceptional circumstances be proper to depart (under the Practice Statement of July 26, 1966 (Practice Statement (Judicial Precedent) [1966] 1 W.L.R. 1234) from a previous decision of your Lordships' House on a point of statutory construction. Were it not for section 160 of the Act of 1952 it would be necessary to determine whether this aspect of the decision in Pook v. Owen [1970] A.C. 244 produces such anomalies between the treatment of one taxpayer and another (i.e. such injustice) that it would be one of those exceptional decisions that your Lordships should reconsider notwithstanding that it turned on a point of statutory construction. However, such determination is unnecessary in the instant appeal, in view of section 160. [His Lordship read subsection (1) and continued:] The appellant taxpayer falls fairly and squarely within the words of this subsection. The sums in question in this appeal were paid to the taxpayer by a body corporate of which he was one of the directors: "director" being defined by section 163 (1) (a) to mean "in relation to a body corporate the affairs whereof are managed by a board of directors or similar body, a member of that board or similar body; ..."
It was argued for the appellant that the sums were not paid to him qua director, but in respect of his special assignment. But section 160 does not say that the sums referred to must be paid to a director qua director: its terms are general. The object of the provisions now consolidated in Chapter II of Part VI of the Income Tax Act 1952 must have been to obviate fiscal inequity through directors and high-paid employees receiving tax-free benefits in the form of expenses allowances and benefits in kind. It would defeat the object of these provisions, as well as reading into the subsection words which are not there, if it were open for a taxpayer who was, say, managing director, personnel director, sales director, export director, technical director or development director, to claim that his expenses allowance was with reference to his special responsibility. To escape the taxing provisions of section 160 (1) such persons must bring themselves within the proviso to that subsection, by showing that the expense in respect of which the sum is paid comes within the last limb of paragraph 7 of Schedule 9.
Counsel for the appellant argued that his reading of "qua director" into section 160 (1) was supported by proviso (b) to section 163 (3), which extends the provisions of Chapter II of Part VI relating to expenses allowances to cover employees paid £2,000 a year or more. Proviso (b) reads:
"(b) where a person is a director of a body corporate, all employments in which he is employed by the body corporate shall be treated as employments to which this chapter applies."
It was claimed that this proviso would be unnecessary if the special employments of a director were already within section 160. But the construction of a positive enactment by reference to a proviso calls for considerable caution (see Commissioner of Stamp Duties v. Atwill [1973] A.C. 558 and cases there cited). Provisos are often inserted ex abundanti cautela. That, indeed, seems to be the purpose of proviso (b) to section 163 (3).
II. The substantial question in this appeal is, therefore. whether the taxpayer can bring himself within the proviso to section 160 (1), which invokes the last limb of paragraph 7 of Schedule 9 - in other words, whether he can show that he, the holder of an office or employment of profit, was necessarily obliged to spend the money in question wholly, exclusively and necessarily in the performance of the duties of the office or employment. It has not been disputed that the appellant was "the holder of an office ... of profit" within the meaning of the rule, and no part of the argument before your Lordships has turned on the words "wholly" or "exclusively"; the question has been whether the expenditure was necessarily incurred within the meaning of the rule.
Paragraph 7 is in the same terms as earlier rules going back to 1853, the construction of which was authoritatively declared by your Lordships' House in Ricketts v. Colquhoun [1926] A.C. 1 - itself in line with earlier cases, Cook v. Knott (1887) 2 T.C. 246 and Revell v. Elworthy Brothers & Co. Ltd. (1890) 3 T.C. 12; and itself repeatedly followed. Its ratio decidendi and its relevance to the present appeal can only be fully appreciated if it is borne in mind that there was a dissenting judgment in the Court of Appeal by Warrington L.J. Warrington L.J. said [1925] 1 K.B. 725, 735-736:
"the words 'necessarily' and 'necessary' in the rule do not mean necessary or necessarily in the abstract, but they mean necessary in regard to the circumstances of the individual concerned, the holder of the office, ..."
If this were the correct construction, it would neatly cover the case of the instant appellant: he can, in my view, only succeed if it is the right construction. However, it was unanimously rejected in your Lordships' House. Viscount Cave L.C. said [1926] A.C. 1 , 4:
"... they must be expenses which the holder of an office is necessarily obliged to incur - that is to say, obliged by the very fact that he holds the office and has to perform its duties - and they must be incurred in - that is, in the course of - the performance of those duties."
Lord Blanesburgh said, at p. 7:
"... the language of the rule points to the expenses with which it is concerned being only those which each and every occupant of the particular office is necessarily obliged to incur in the performance of its duties - to expenses imposed upon each holder ex necessitate of his office, and to such expenses only."
Lord Blanesburgh went on to cite and expressly reject the passage from Warrington L.J.'s judgment which I have just quoted.
What Ricketts v. Colquhoun decided, therefore, was that, for expenses to be deductible, they must be the necessities of the office itself, so that it is the nature of the office which necessarily obliges the office holder to incur them; and that it is immaterial that they are necessary in regard to the circumstances of the individual concerned, however special - or even, I may add, unique - those circumstances may be.
Counsel for the taxpayer submitted that your Lordships should if necessary decline to follow Ricketts v. Colquhoun. To take this course it would first be necessary for your Lordships to be satisfied that Ricketts v. Colquhoun propounded an incorrect construction of the statutory provision. Of this I am myself very far from persuaded. But, in any event, no such exceptional circumstances exist in the instant case as would justify your Lordships in abstaining from following a previous decision of your Lordships' House on a question of statutory construction. On the contrary, there are a number of circumstances which indicate that Ricketts v. Colquhoun would be a most unsuitable decision for the exercise of your Lordships' powers under the Practice Statement of July 26, 1966 [1966] 1 W.L.R. 1234. The purely objective construction which found favour in Ricketts v. Colquhoun goes back to Cook v. Knott, 2 T.C. 246 in 1887; and in the words of Viscount Cave L.C. in Ricketts v. Colquhoun [1926] A.C. 1 , 5:
"Since that decision the rule has been re-enacted in the same terms, and I should hesitate long before overruling a decision which has stood for 38 years, and upon which subsequent legislation may have been based."
Since then Ricketts v. Colquhoun has itself stood for a further 48 years. A number of proposals have been made for modification of the rule as construed in Cook v. Knott, 2 T.C. 246 and Ricketts v. Colquhoun. It has, indeed, been modified in certain circumstances: see Income Tax Act 1952, section 159; Finance Act 1958, section 16; Finance Act 1965, section 15 (1) (b). The Schedule E code was revised by section 10 of the Finance Act 1956, after a Royal Commission had recommended a different criterion as to deductibility for expenses for the purpose of Schedule E. But Parliament did not take the opportunity of revising the rule contained in paragraph 7 as it had been interpreted in Ricketts v. Colquhoun - and as long ago as that case Scrutton L.J. indicated ([1925] 1 K.B. 725, 740) that any change must be for Parliament and not the courts. Presumably, no alteration was made because it was thought that no other rule had been propounded which would not produce unacceptable anomalies between different classes of taxpayer or incommensurate administrative burdens or ready avenues for avoidance of equitable tax liability. It is therefore, in my judgment, far too late, and would be quite inappropriate, for your Lordships to adopt Warrington L.J.'s construction of the rule, or any other than that laid down by your Lordships' House in Ricketts v. Colquhoun [1926] A.C. 1 .
But the appellant taxpayer's alternative - and indeed, main - contention was that Ricketts v. Colquhoun was distinguishable and that Pook v. Owen [1970] A.C. 244 was the governing authority. It is therefore incumbent to determine also what was the ratio decidendi of Pook v. Owen, in which Ricketts v. Colquhoun was distinguished.
Applying the rule in Ricketts v. Colquhoun [1926] A.C. 1 - i.e. that the obligation to incur the expenses of travelling in question must arise out of the nature of the office or employment itself, and not out of the circumstances of the particular person appointed to the office or employed under the contract of employment - two different classes of travelling expenses readily come to mind. The first is where the office or employment is of itself inherently an itinerant one. Examples are various sorts of inspector-ate (say of weights and measures or to check stock) or commercial travel or supervision of duties carried out by local subordinates. In such cases the taxpayer may well be travelling in the performance of the duties of the office or employment from the moment of his leaving home to the moment of his return there - a visit to any head office might well be purely incidental or fortuitous. The second class of case is where the taxpayer has two places of work and is required by the nature of his office or employment to travel from one to the other. The classic example (until the situation was governed by allowances) was the Member of the House of Commons: he was necessarily obliged to perform part of the duties of his office at Westminster and part in his constituency; so that travel between the two was an obligation arising by the nature of the office itself, and not by the circumstances of the particular Member - even though it may be assumed that, in the eyes of his electorate, he was the best person to be elected to the office. Another example might be a managing clerk of a solicitor who has offices in adjacent towns: the cost of travel from home to either would not be a deductible expense, since it would be an obligation arising out of his personal circumstances, having chosen to live where he has; but the travelling between the two offices would be an obligation arising by the very nature of the employment itself.
In my view, Dr. Owen in Pook v. Owen [1970] A.C. 244 was held to fall into this second category; and this was the ratio decidendi of the case. The rule in Ricketts v. Colquhoun could therefore be applied without disqualifying Dr. Owen's travelling expenses; so that Ricketts v. Colquhoun was distinguishable. Lord Guest said, at p. 256:
"In Ricketts v. Colquhoun there was only one place of employment, Portsmouth. It was not suggested that any duties were performed in London. In the present case there is a finding of fact that Dr. Owen's duties commenced at the moment he was first contacted by the hospital authorities. ... There were thus two places where his duty is performed, the hospital and his telephone in his consulting room. If he was performing his duties at both places, then it is difficult to see why, on the journey between the two places, he was not equally performing his duties."
Lord Pearce said, at p. 258:
"His duty to the hospital and the patient started on the telephone, and he was thereafter responsible to the hospital and the patient until he had dealt with the patient, whether he made his journey to the hospital in his own car or as passenger in a hired car."
Lord Wilberforce said, at p. 262:
"What is required is proof, to the satisfaction of the fact finding commissioners, that the taxpayer, in a real sense, in respect of the office or employment in question, had two places of work, and that the expenses were incurred in travelling from one to the other in the performance of his duties. In my opinion, Dr. Owen satisfied this requirement."
When my noble and learned friend said "in a real sense" he meant, I think, since he was distinguishing Ricketts v. Colquhoun [1926] A.C. 1 and had just referred to Newsom v. Robertson [1953] Ch. 7, not only that the double work-location must not be merely colourable, but also that the two places of work were a necessary obligation arising from the very nature of the office or the employment itself and not from the circumstances of the particular person appointed or employed.
Lord Donovan and Lord Pearson both dissented on this part of the case, holding that there were not in truth two places of employment, but only the hospital; and that the case therefore was indistinguishable from Ricketts v. Colquhoun. This also helps to define the ratio decidendi of the majority.
Only in one passage in the majority judgments can I find even a reference to the fact that it would have been difficult for the hospital committee to appoint other than a doctor with an existing practice of his own, which might be at some distance from the hospital. That is in the speech of my noble and learned friend, Lord Wilberforce [1970] A.C. 256 , 263; but, in my view, this would not be sufficient in itself to distinguish Ricketts v. Colquhoun, where the courts took cognisance of the fact that a recordership calls for special qualities and that all but a small minority of recorders were appointed from the ranks of barristers actively in practice in London.
It was claimed on behalf of the appellant that, like Dr. Owen was found to be, he also was contractually bound to work in more than one place - to do part of his relevant work in Canada or the Bahamas. I do not think that any contract was established on the evidence, and certainly none containing any such term: it is inconceivable that the appellant could have been held to have been in breach of contract had he done all the work of brewery amalgamation in England. At most there was an understanding that he would do as much of the work as possible where it suited him best to be at any particular time. His relevant work-location (and consequent travel) arose, in other words, from his personal circumstances, and not from the nature of the work objectively viewed. In any case, even if a taxpayer is contractually bound to work in two stipulated places, this does not conclude the matter. The commissioners would have to see whether the contract truly reflected the real nature of the job. Not only is this inherent in Ricketts v. Colquhoun; any other principle would allow of gross fiscal inequities - for example, between office holders, on the one hand, and those working under contracts of employment, on the other (whereas paragraph 7 stipulates for their like treatment), or between holders of newly or purposely created offices or employments, on the one hand, and holders of pre-existing or common offices or employments, on the other. The finding of fact in Pook v. Owen that the doctor was obliged by the nature of his employment to have two places of work is sufficient to distinguish that case from the instant, where there is a contrary finding.
If I have correctly interpreted Ricketts v. Colquhoun and Pook v. Owen, the special commissioners in the instant case have directed themselves correctly and have come to the right conclusion. In the case stated they cited the passage from the speech of my noble and learned friend, Lord Wilberforce, in Pook v. Owen which I have quoted ("What is required is proof [etc.]"). Correctly appreciating that my noble and learned friend's observations should be read in the light of Ricketts v. Colquhoun, the special commissioners then went on to cite from Lord Blanesburgh, in Ricketts v. Colquhoun, at p. 7:
"... the deductible expenses do not extend to those which the holder has to incur mainly and, it may be, only because of circumstances in relation to his office which are personal to himself or are the result of his own volition."
Directing themselves in the light of those two passages, so juxtaposed, the special commissioners concluded:
"Having considered the facts as a whole we are not satisfied that the appellant's offices in Toronto and Nassau were or should be regarded as places of work for the purposes of his special assignment and we have reached the conclusion that the travelling expenses in question arose, not from the nature of the appellant's office, but from circumstances personal to himself."
In my view, this conclusion not only is unimpugnable but was inevitable. Brewery amalgamation in England did not of its very nature require as an obligation that the taxpayer should work in Toronto or Nassau and travel to England from there.
I would therefore dismiss the appeal.