Heaton (Inspector of Taxes) v Bell

[1970] A.C. 728

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(Decision by: Lord Diplock)

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

Court:

Judges: Lord Reid
Lord 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 Diplock

My Lords, by the ingenious "Car Loan Service" which gives rise to this appeal the respondent's employers, whom I will call "the company," were able to provide their employees with motor cars for their personal and private use at a very advantageous weekly rate of hire the amount of which was debited to the employee's weekly wages. This they were able to do partly at the expense of the general body of taxpayers by deducting in the computation of their own profits for tax purposes the initial and annual allowances for depreciation of cars so hired out to their employees. The propriety of such deductions is not, however,in issue in the present appeal. What is in issue is whether Mr. Bell, an employee who availed himself of the "Car Loan Service," is entitled to exclude from his income assessable to income tax under Schedule E the weekly sum debited to his wages by the company for the use of the car supplied to him under the scheme.

The Crown claim that this sum is chargeable to income tax because it is included in "the full amount of the emoluments" from his employment (see Income Tax Act, 1952, section 156, Schedule El and Finance Act, 1956, Schedule II, ^[F2] 1). The expression "emoluments" is so defined in the Finance Act, 1956, as to include "all salaries, fees, wages, perquisites and profits whatsoever" and the Crown advance as alternative contentions: either that the sumsdebited to his weekly wages in respect of his use of the car were a part of his "wages" which were allocated to the discharge of a debt due by him to his employers under a contract of car-hire collateral to his contract of employment, or that the use of the car was a "perquisite" or "profit" from his employment in respect of which those sums are the amount on which he is assessable to tax.

I agree with those of your Lordships who are of opinion that the only proper inference to be drawn from the facts and documents relating to Mr. Bell's participation in the "Car Loan Service" which are disclosed in the special case, is that the agreement which he made with the company collateral to his contract of employment with them, was that he should pay to the company a weekly sum for hire of the car and that the company should deduct and retain that sum out of his weekly wages so long as he continued to hire the car from them. The only reference to the hire charge which is to be found in the formal documents relatingto the "Car Loan Service" is a provision in the conditions forwarded to him with an application form which reads "An amended wage basis will come into operation if the application is accepted." This is an ambiguous expression and the word "basis" is otiose if all it means is that the applicant's contract of employment will be varied by the substitution of a different wage from that which previously constituted the consideration for his services. The written documents issued by the company and executed by them and Mr. Bell, which included, in addition to the conditions and the application form, a so-called "Memorandum of Terms of Service" incorporating what are conceded to be, in part at any rate, sham provisions, do not contain the full terms of the agreement between them and in particular do not provide what the "amended wage basis" was to be. What they in fact agreed on this essential term can only be inferred from what they did in the performance of the agreement. The weekly payslips issued by the company to Mr. Bell thereafter and receipted by him, disclose that he continued to be credited with flat rate wages, overtime and shift premiums and bonuses for the hours he worked at precisely the same rates as previously. These were, no doubt, those applicable to craftsmen of his grade under national or shop agreements. But he was debited with a weekly sum for the hire of the car, though no description of what it was appeared upon the payslip. When he was absent sick no deduction was made.

In my view, the overwhelming inference is that the true agreement between him and the company was that the wages constituting the consideration for his services under his contract of employment should remain unchanged but that the company should be entitled each weekto recoup themselves out of his wages, but not from any other source, the amount of his liability to them under his collateral agreement for the hire of the car. This inference is not, in my view, weakened by the fact that this debit against the wages credited to him was made before arriving at a figure described as "taxable gross wage" and that the amount subsequently deducted for P.A.Y.E. is calculated on this latter figure. Whether or not both parties thought that Mr. Bell could escape liability for income tax upon the amount debited against his wages is nihil ad rem aut regem. What this appeal is about is whether they were right in so thinking. In my view, they were not.

But I should not wish to decide the present appeal upon this narrow ground of construction only. The alternative contention of the Crown, that the use of the car was a "perquisite" or "profit" from Mr. Bell's employment and as such assessable to tax, attacks the substance of the transaction rather than its form and in these days of multifarious "fringe benefits" in contracts of employment it is this contention which is the important one in this appeal.

For the purpose of this part of my judgment I will therefore assume that the construction placed by my noble and learned friend, Lord Reid, upon the agreement between the company and Mr. Bell relating to the use of the car is right and that, contrary to the view which I have so far expressed, Mr. Bell upon entering into the scheme agreed to serve his employers for such period as they would afford him the free use of a car, at a wage less than his former wage by an agreed amount.

For my part, if it were permissible to confine myself to a consideration of the relevant words in the current Statutes (namely the Income Tax Act, 1952, and the Finance Act, 1956), by which income tax under Schedule E is currently charged, I should have little hesitation in deciding that the free use of a car for his own purposes provided to an employee by an employer by reason of his employment was a perquisite from that employment and that the full amount of that perquisite on which tax is chargeable was the amount of money which the employee would have had to pay upon the open market for a right to use a car on similar terms as to its user. I have no doubt that the man in the street would call the benefit of the use of the car, if not a "perquisite" at any rate a "perk."

But it is I fear too late to read the relevant words of the current legislation in what I should regard as being their current acceptation. In Tennant v. Smith [1892] A.C. 150 the House of Lords placed a judicial gloss upon the word "perquisite" appearing in the corresponding sections of the Income Tax Act, 1842, by confining it to actual money payments and to benefits in kind variously described by Lord Halsbury L.C., at p. 156 as "capable of being turned into money," by Lord Watson, at p. 159 as "that which can be turned to pecuniary account," by Lord Macnaghten, at p. 163, as "payments convertible into money" and by Lord Hannen, at p. 165, as "that which could be converted into money." Lord Halsbury and Lord Watson expressly founded their conclusion upon the presence in the definition of "perquisite" in the statute they were construing of the adjective "payable" qualifying the "perquisites" to be assessed under that Act. But Lord Macnaghten and Lord Hannen did not base their gloss upon the meaning of "perquisite" on this narrow ground. In the Income Tax Act, 1918, the relevant sections were re-drafted and in the process the word "payable"disappeared, but this professed to be a consolidation Act and the presumption is that the change in wording was not intended to give to the new enactment a meaning different from that of the enactment which it replaced. Further changes in drafting and arrangement which were made by subsequent legislation, including the Income Tax Act, 1952, and the Finance Act, 1956, which are applicable to the present appeal, have not, in my view, affected the meaning which the word "perquisite" bore in the Income Tax Act, 1918. I think that it must be accepted that "perquisite" in each of these subsequent statutes still means what it meant in the Income Tax Act, 1842.

The benefit in kind which it was contended in Tennant v. Smith was a "perquisite" arising in the course of the taxpayer's employment was the residence by a bank manager in a house on the bank's premises in respect of which it was conceded that his employers were liable to income tax under Schedule A, and in which he was required to reside by the terms of his contract of employment. His residence there thus formed part of the services which he undertook to render to his employers under his contract of employment and not a benefit granted to him by them as a consideration for his services. Upon its facts Tennant v. Smith is thus clearly distinguishable from the present case. Mr. Bell was under no duty to his employers to use the car provided for him under the car loan scheme. His use of it formed no part of the services rendered to his employers under his contract of employment. His right to use it was a benefit granted to him by them as a consideration for his services. Nevertheless Tennant v. Smith was not decided, as in my view it might have been, upon this obvious ground which distinguishes it from the present case but upon the ground that the benefit of residence in the bank house was not a "perquisite" because of its inconvertibility into money - a concept which each of their Lordships expressed in the slightly different words to which I have already referred.

The judicial gloss placed on the expression "perquisite" in Tennant v. Smith has been consistently accepted by the courts in subsequent cases and in particular by your Lordships' House in Abbott v. Philbin [1961] A.C. 352. It would not, in my view, be right after this lapse of time to challenge its correctness, but it is at least permissible to inquire: what exactly does it mean?

In any such inquiry one must strive to avoid the all too tempting error of construing the actual words used in the speeches of the individual Lords of Appeal to express the concept which they had in mind as if those words formed part of the statute itself. What one is seeking are the characteristics of the taxable benefit in kind which are alluded to by those words. The underlying reason, as I think, for ascribing to the word "perquisite" in the Income Tax Acts a more restricted meaning than in ordinary speech is the simple notion that since income tax is payable in money, Parliament cannot have intended to exact it from employees in respect of benefits in kind from which the employee cannot himself by dealing with, forgoing or disposing of the benefit raise money to pay the tax.

It was conceded on behalf of the respondent that if Mr. Bell had been able to permit another person to use the car he might have raised money by hiring it out and the benefit would in that case possess the characteristics of a taxable perquisite. But it was contended that since he had contracted with the company "not to permit anyone other than myself to drive or use the car except in an emergency" this means of raising money by dealing with the benefit was not open to him. This contention raises one of the questions which in his speech in Abbott v. Philbin Lord Radcliffe (at p. 378) specifically mentioned as left open by the decision in Tennant v. Smith [1892] A.C. 150: "Must the inconvertibility arise from the nature of the thing itself, or can it be imposed merely by contractual stipulation?" It is not, I think, necessary to answer that question in the present appeal, which I am content to dispose of on simpler grounds, but it must not be supposed that I assent to the proposition that a benefit in kind can escape all charge to tax as a perquisite by limitations upon the employee's right to deal with it imposed by a contract collateral to his contract of employment into which he enters of his own volition.

By the terms of his agreement with the company under which he received the benefit in kind which the Crown seek to tax, namely, the free use of a car, Mr. Bell on giving two weeks' notice could surrender it and upon doing so would become entitled to be paid by the company a new weekly wage greater by the agreed amount by which his former weekly wage had been reduced when he joined the car loan scheme. In this way, say the Crown, the benefit could be converted into money or turned to pecuniary account during the year of assessment - and this sounds remarkably like common sense. As such it commended itself to Ungoed-Thomas J. on the contrary, says the respondent, when the notice expires the benefit vanishes. There is nothing left to be converted into money. It is an irrelevant coincidence that upon the disappearance of the benefit I become entitled to resume my employment at a higher money wage.

This argument, although accepted as valid by the Court of Appeal, is altogether too subtle for me. It is really no more than a linguistic one about what "convertible into money" means; and had these words been used in the taxing statute, we might have been driven to embark upon this sterile exercise. But they do not appear in any statute. They are to be found in a lengthy speech of Lord Macnaghten in Tennant v. Smith from which they have been often borrowed by judges in later cases as a convenient way of alluding to one characteristic of a benefit in kind enjoyed by an employee by reason of his employment which was absent in the benefit under discussion in Tennant's case, but is requisite to render the benefit taxable.

Their Lordships in Tennant v. Smith were not directing their minds to benefits in kind which an employee at his option could surrender or reject in favour of a money payment. I find nothing in their speeches to indicate that, if Mr. Tennant had had an option instead of living in the bank house to live elsewhere and receive a higher salary, they would not have held that the benefit of free residence was chargeable to tax; and in so far as their decision was based upon considerations of the general policy of the Income Tax Act, 1842, I find nothing to suggest that they intended to exclude from "perquisites" chargeable to tax benefits in kind which enable the employee to put money into his pocket by forgoing them even though he cannot otherwise deal with or dispose of them.

I accept, therefore, the contention of the Crown that the free use of a car for his own purposes under the company's car loan scheme was a "perquisite" from his employment in respect of which Mr. Bell was chargeable to Income Tax under Schedule E, because if he had chosen to forgo it he could have received a higher money wage in its stead.

The remaining question is: What is the full amount of the perquisite on which he should be assessed? The Crown do not seek to assess it at a higher figure than that of the reduction in the weekly wage which he agreed to accept so long as he retained the use of the car. Accordingly, there is no evidence of any higher weekly sum which Mr. Bell would have to pay on the open market for a right to use a car on similar terms. This makes it unnecessary to consider whether Wilkins v. Rogerson [1961] Ch. 133 was rightly decided. The full amount of the perquisite was at least that sum of money which Mr. Bell could have received had he chosen to forgo the use of the car.

Ungoed-Thomas J. reduced the assessment by excluding the amount of the reduction in Mr. Bell's weekly wage for the two weeks which would have elapsed between his giving notice terminating the agreement for use of the car, and his receiving the higher weekly wage. The ground on which he did this is not wholly clear, but the exclusion of a sum representing the reduction in wages for these two weeks has been justified before your Lordships' House on the ground that Mr. Bell, having entered into the agreement, could not have entitled himself to receive a higher wage in lieu of the use of the car during this two week period. For my part, I cannot accept this argument. From 1954 onwards when the car loan service was first introduced, Mr. Bell had the option either to forgo the benefit and accept a higher money wage instead or to accept the benefit and forgo the highermoney wage. Until 1961 he chose to forgo the benefit and accept the higher money wage. He could have continued to do so. If he had, he could have received a higher money wage throughout the whole period of the agreement. When an employee has chosen to accept a benefit in kind from his employer instead of money it does not lose its characteristic as a "perquisite" during the minimum period in any year of assessment for which by his previous choice he has committed himself to accept it.

I would, therefore, assess the full annual amount of the benefit at the total amount of the higher wage which he would have received during the year if he had not entered into the car loan scheme.

I would allow the appeal and restore the judgment of Ungoed-Thomas J. with the variation that the value of the perquisite to be included in the assessment should be the full amount debited to the taxpayer's wages in respect of the use of the car during the respective years of assessment.

Appeal allowed.

Solicitors: Solicitor of Inland Revenue; Biddle & Co. for Hepworth & Chadwick, Leeds.