Pepper (Inspector of Taxes) v Hart
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE NICHOLLS,LORD JUSTICE FARQUHARSON,LORD JUSTICE SLADE |
| Judgment Date | 13 November 1990 |
| Judgment citation (vLex) | [1990] EWCA Civ J1113-3 |
| Docket Number | 90/0987 |
| Court | Court of Appeal (Civil Division) |
| Date | 13 November 1990 |
[1990] EWCA Civ J1113-3
Lord Justice Slade
Lord Justice Nicholls
and
Lord Justice Farquharson
90/0987
CH 1959 P2569
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(REVENUE LIST)
(MR. JUSTICE VINELOTT)
Royal Courts of Justice
MR. STEPHEN OLIVER Q.C. and MR. JEREMY WOOLF (instructed by Messrs. Kenwright & Cox, Solicitors, London, Agents for Messrs. Jagger Son & Tilley, Solicitors, Birmingham B3 16X) appeared on behalf of the Appellant.
MR. ALAN MOSES Q.C. and MR. TIMOTHY BRENNAN (instructed by The Solicitor for Inland Revenue, London, WC2R 1LB) appeared on behalf of the Respondent.
This case concerns fringe benefits, as they are sometimes called, or more colloquially, "perks". Malvern College is a well-known independent school for boys. It was established in the middle of the last century, and was incorporated by royal charter in 1929. For some years, and in common with what happens in many other independent schools, masters at the school have not been charged the ordinary, full fees for the education of their sons at the school. To be admitted to the school sons of staff have to satisfy the same educational requirements as all the other boys, but at the discretion of the council of the school, staff of the school, including the bursar, are required to pay only a part, currently one-fifth, of the normal day boy or boarding fees. This concession is made because the school council is concerned that otherwise staff may be lost to competing schools which operate such a concession. With school fees as high as they are these days, this is a valuable concession. The question raised by these appeals is how this concession is to be quantified when calculating the income tax payable by the staff in respect of their remuneration.
Before the court are ten appeals. They all raise the same point. Nine of the appellants are assistant masters at the school or, in one instance, the personal representatives of an assistant master who has since died. The tenth appellant is the bursar. They have appealed against assessments to income tax under schedule E made in respect of one or more of the three years 1983/84, 1984/85, and 1985/86. In each case the appellant taxpayer had one or more sons in attendance at the school pursuant to the concessionary fees scheme in one or more of these years. Twelve boys altogether, nine of whom were day boys and three were boarders, are concerned in these appeals. At any given time not more than nine boys occupied places in the school pursuant to the scheme.
During the three years in question the total number of boys attending the school averaged just over 600, mostly boarders. Between 60 and 70 girls, from two local independent girls' schools, also received part of their education at the school, principally in the sixth form. Any additional costs to the school were covered by payments by the girls' schools. The presence of the sons of staff did result directly in some additional expense on items such as food, laundry and stationery. That expense was amply covered by the reduced fees paid by the staff. Over the three years in question these additional direct expenses varied between £385 and £430 per boy per year. The normal school fees, of which the staff paid twenty per cent, varied, in the case of boarders, between £4,675 and £5,300 per year and, in the case of day boys, between £3,360 and £3,825 per year. Further expense was incurred on some items such as music and handicrafts, as well as textbooks, which were charged separately to the parents, in amounts which covered their cost. These extras were also paid in full by the appellants.
Leaving aside these "additional direct expenses" and also these extra items, there remained all the other expenses of running the school: staff salaries, insurance, heating and maintenance of buildings, maintenance of grounds, remuneration of administrative and other staff, and so on. In the three years in question these general running expenses were of the order of £3 million per year. These expenses would have been the same even if the sons of staff had not attended the school: the presence of these boys did not increase these expenses, their absence would not have reduced them. In particular, no additional staff were employed in the school because of the presence of the sons of staff, and no fewer staff would have been employed had these boys not attended.
Nor is there any question of any boy under the concessionary fees scheme taking a place in the school which would otherwise have been filled by a boy paying full fees. The school's capacity was 625 boys. Thus in each of the relevant years the school was not full to capacity. No fee-paying boy who attained the school's educational requirements was refused admission for lack of space. Thus, had the sons of the staff with whom these appeals are concerned not been admitted as pupils at the school, the places in question would have been left empty.
The issue raised by these appeals is whether, in the circumstances outlined above, the "cost" of the benefit enjoyed by each appellant under the scheme comprised, as the appellants claim and the single special commissioner held, the amount of the additional, direct costs mentioned above or whether, as the Crown contends and as Vinelott J. held, it includes a rateable proportion of the expenses incurred in providing the school facilities enjoyed generally by all the boys. If the special commissioner is correct, no tax is payable by the taxpayers in respect of the benefits they enjoyed under the scheme, because the sums paid by them each year to the school exceeded the amount of those additional, direct costs. If the judge is correct, substantial amounts of tax are payable, because a rateable apportionment of the relevant expenses would produce a figure close to the amount of the ordinary school fees.
The relevant statutory provisions are to be found in chapter II of Part III of the Finance Act 1976, in particular, ss.61 and 63. Those two sections have now been replaced, with amendments immaterial for present purposes, by ss.154 and 156 of the Income and Corporation Taxes Act 1988. S.61 is the charging provision. It applies where a person is employed in "director's or higher-paid employment". Higher-paid employment means, after 1978, employment with emoluments at the rate of £8,500 a year or more (s.69(1), as subsequently amended). S.61 introduced into charge to income tax under Schedule E a wide range of benefits, where these are provided for the employee or members of his family or household by reason of his employment. The section treats as emoluments of the employee's employment "an amount equal to whatever is the cash equivalent of the benefit" (subsection (1)). With exceptions immaterial for present purposes, the section applies to services and benefits and facilities of whatsoever nature (subsection ( 2)). S.63 provides how the cash equivalent of benefits charged under s.61 is to be calculated. This is the key section on these appeals. Sub-sections (1) and (2) read:
"(1) The cash equivalent of any benefit chargeable to tax under section 61 above is an amount equal to the cost of the benefit, less so much (if any) of it as is made good by the employee to those providing the benefit.
(2) Subject to the following subsections, the cost of a benefit is the amount of any expense incurred in or in connection with its provision, and (here and in those subsections) includes a proper proportion of any expense relating partly to the benefit and partly to other matters."
The short issue on these appeals concerns the proper application of subsection (2) in these ten cases, where the sons of staff had the use of the school facilities at one-fifth of the normal fees.
Benefits in kind have been a feature of employment in this country for many years. For present purposes they can be divided broadly into two categories. First, there are those cases where the benefit provided to the employee is not directly related to any business being carried on by the employer. Perhaps the most common instance is the provision of a car by an employer who is not himself involved in the car industry. Private medical insurance is another example. For ease of reference I shall call benefits in this first category "external" benefits. The second category, which I shall label "in-house" benefits, consists of cases where an employer is carrying on a business, whether for profit or not, of providing goods or services or facilities and he permits his employees to acquire those goods or use the services or facilities at a reduced price. Examples of this are legion. Familiar instances which spring to mind at once are airlines, car manufacturers and retail shops and stores. Malvern College falls into this second category in respect of the concessionary fees scheme. Sometimes an employer provides both in-house and external benefits: an airline may provide air tickets for employees and their families free or at cut prices, and also a benefit such as the cost of subscription to a private medical insurance company.
When taxing these benefits in 1976, one obvious course which Parliament might have taken is to treat "the cash equivalent of the benefit" as the difference between the amount, if any, paid by the employee and the amount the employee would have had to pay in the ordinary course to acquire the goods or services himself had he wished to do so. That course Parliament eschewed. Parliament did not adopt a...
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