Heaton (Inspector of Taxes) v Bell

[1970] A.C. 728

---

(Judgment by: Lord Hodson)

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

Court:

Judges: Lord Reid
Lord Morris of Borth-y-Gest

Lord HodsonLord 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

---

Judgment by:
Lord Hodson

My Lords, the respondent, Mr. Bell, is a machine minder who has been employed by a company called John Waddington Ltd. since about the year 1948. In 1954 the company introduced a voluntary car loan scheme for the benefit of employees who earned less than £2,000 a year and were not directors of the company. Mr. Bell received an invitation to join the scheme and attended a meeting at which the scheme was discussed but did not join it until 1961. Enclosed with the invitation was a list of conditions relating to the car loan service. These provided that the company would loan, insure and tax a car for each year of the service, that the user would sign a simple agreement and provide his own petrol, oil and running maintenance. Condition 6 reads:

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

Condition 9 reads:

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

On February 10, 1961, the respondent applied to join the scheme and, on March 3, 1961, signed a form which reads as follows:

"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."

There is no other evidence of the terms of the arrangement which the respondent made with the company for the loan of the car, although there are internal office communications showing that, as from June 2, 1961, when he received the car, sums described as "wage reductions" were subtracted from his wages each week. These items were fixed first at the rate of 49s. a week, increased to 54s. 6d. on April 6, 1962, changed to 50s. on June 1, 1962, to 58s. on June 7, 1963, and to 53s. 6d. on June 5, 1964.

The respondent was assessed for income tax under Schedule E, Income Tax Act, 1952, for the year 1963-64, and the question is whether the sums of £2 10s. a week up to May 31, 1963, and £2 18s. a week subsequently were correctly included in computing the amount of his emoluments within the meaning of paragraph 1 of Schedule 5; emoluments by definition including all salaries, fees, wages, perquisites and profits whatsoever.

His wages were shown each week on a pay-slip and his pay-slip for the week ending June 5, 1964, was taken as an example of the way in which the company calculated the wages of its employees. The pay-slip shows that the wage is calculated in order to arrive at what is described as the taxable gross wage (which would be the figure on which P.A.Y.E. was calculated) by adding together items into which the weekly wage was split. This produces a total of £30 15s. 6d. and excludes from the addition the £2 13s. 6d. attributable to the car loan scheme payments. If the sum of £2 13s. 6d. had not been excluded the total would have been £33 9s. 2d., the total wage to which Mr. Bell was entitled had he not agreed to the application of the sum of £2 13s. 6d. under the car loan service scheme.

It is argued that the use of the phrase "an amended wage basis" in the conditions which the company put forward points to a reduction in wages during the operation of the scheme in the case of each individual rather than a deduction from his wages applied at his request in a particular manner.

In my opinion, there was no change in the terms of the employment of the respondent in any real sense at any time. During the operation of the scheme there was an allocation for the purposes of the scheme of wages already earned and not, in my opinion, a fresh contract of employment at a reduced wage. This is no less true although the alteration is made through the employer by returning the money to him. The allocation is for the specific purpose of the scheme made at the request of the employee and is to be treated as a deduction from his gross wage. I do not think any other conclusion is to be drawn from the ambiguous phrase "amended wage basis." The basis was not amended. It remained the same throughout. The variation which took place during the operation of the scheme was in the amount applied by the employee out of his wages.

I have referred to what I regard as the real facts of the case, for it appears that the learned judge may have attached undue importance to the words "an amended wage basis will come into operation if the application is accepted," as indicating that a different calculation of the gross wage itself would occur. In reaching his conclusion he cited a passage from a judgment of Rowlatt J. in Machon v. McLoughlin (1926) 11 T.C. 83, 90, in which he 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 I pointed out before, it may be a question of words. ... I do not think there is very much to show that it is not a question of words."

Rowlatt J. made, as we all know, a great contribution to the law at a time when revenue cases began to be numerous under the weight of increased taxation following upon war necessities. I cannot think that he could have meant to say anything to suggest that words could be used legitimately to obscure or to distort the facts. Indeed, here the words used by the parties are not of assistance to the respondent. I have quotedin full the so-called memorandum of terms of service which he signed. It is not very helpful and is to a large extent meaningless. There are no terms of employment mentioned in the memorandum. He was not bound to make use of the car for the more efficientdischarge of his duties or under any obligation to use the car at all. There are no documents and no other facts which, to my mind, lend support to the case put forward by the respondent that the wages to be assessed were other than his gross wages before deduction in respect of his participation in the car loan scheme.

This disposes of the matter, but I will add my opinion on the second point in the case, which depends on whether the benefit which the respondent received in the form of the use of the car was a "perquisite." It would at first impression appear to me to be an obvious perquisite. I have, however, been persuaded that the answer is not as simple as it seems. I am satisfied on consideration of the judgment in Tennant v. Smith [1892] A.C. 150, and the whole tenor of the relevant legislation, that the teaching of that case, confirmed as it was by your Lordships' House as recently as 1961 in the case of Abbott v. Philbin [1961] A.C. 352, compels me to the same conclusion as that reached by the Court of Appeal. Income tax being a tax on income, it follows that a perquisite is not taxable as income unless it is capable of being turned into money. It is this question which must be answered and I cannot escape from the conclusion that the use of the motorcar is not convertible into money for it cannot be so converted in the ordinary sense of the word by sale or assignment to another (cf. Wilkins v. Rogerson [1961] Ch. 113 where the suit of clothes was capable of being so converted and was, I think, correctly regarded as a perquisite). True that no further deduction would be made from the respondent's wages after he had, by giving notice, terminated his agreement for the use of the car. I cannot, however, for that reason agree that, in any true sense, he could convert the use of the car into money. He could give it up but that appears to me to be a different thing. I am in agreement with the unanimous judgment of the Court of Appeal on this point, but for the reasons I have given I would allow the appeal on the first ground put forward by the appellant, namely, that the emoluments of the respondent, taxable under Schedule E, were his gross wage before deduction of any sum in respect of his right to participate in the car loan scheme.