Taxing Perks and Interpreting Statutes: Pepper v Hart
| Date | 01 September 1993 |
| Published date | 01 September 1993 |
| Author | David Miers |
| DOI | http://doi.org/10.1111/j.1468-2230.1993.tb01898.x |
CASES
Taxing Perks and Interpreting Statutes:
Pepper
v
Hart
David
Miers”
Introduction
There are two kinds of perks: the licit and the i1liciL1 Licit perquisites can take a
variety of forms: the company car, private health care, cheap loans, the use of
assets owned by the employer, and subsidised travel and accommodation. They
also offer a variety of advantages. From the employee’s perspective, such perks
represent (since tax is payable on them) the purchase of benefits which they might
otherwise be unable to afford, or afford only at a cost to their disposable income
that would require saving elsewhere. From the employer’s perspective, it is often
more cost effective to provide a perk than an increase in salary that would, after
tax, allow the employee to purchase the perk in the retail market. This is especially
so where the employer wants the employee to have the perk, for example the
cottage on the estate whose responsibility it is for the employee to maintain,* in
order to do the job. Employers can buy in bulk and may, as in the case of fleet
purchasing of company cars, be able to exert considerable leverage on motor
manufacturers and traders
.3
Another significant saving for employers is the provision to their employees of
the service which they are in the business of providing; what Nicholls
LJ
(as he
then was) in the Court of Appeal referred to as ‘in-house’ as opposed to ‘external’
benefit^.^
Air and rail travel, and places at public schools and the like, are good
examples. Employees can be given free or reduced cost access to a service which
the employer has presumably costed on the basis that it is the non-employee user
who is paying. A train has to travel from Cardiff to London: the addition of a few
non-paying
BR
employees as passengers does not on the face of it affect the cost to
BR
of providing that service to the general public. The teachers at a public school
-
as in
Pepper
v
Hurt,5
which is the focus for this comment
-
may have the
opportunity to place their children there at a cost which is marginal to the school,
but is, of course, a considerable saving to them.
Perks have traditionally been used as the means for increasing an employee’s
total remuneration (and for distinguishing grades of employee) but without
*Professor of Law, Cardiff Law School.
I
am grateful to my colleague Philip Wylie, and to Howard Mellett of the Cardiff Business School, for their
comments on a draft of this note.
1
The illicit are arranged covertly and unilaterally by the beneficiary and can constitute a significant
drain on the victim’s economy; this is certainly true of employee theft in the retailing sector.
2
Verrigan
v
Brudy
[1988]
STC
91.
3
This leverage has its downside for taxpayers buying privately, since, in having to pay more for their
cars, they are in effect subsidising these employers. Under the
1993
Budget proposals, the scale rates
for company cars were increased by
8
per cent, thus bringing the taxable benefit closer to the cost of
providing the car. From
1994/95
the scales will be based on the manufacturer’s published list price
(not discounted values), which it is hoped ‘will eliminate a cause of distortions in the new car market,’
allowing private buyers to buy at a fairer price. See
[I9931
STI
430, 433.
[I9921 2
All
ER 824,
82731.
[1993]
1
All
ER 42.
4
5
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increasing his tax bill by a corresponding amount. But just as there is no such thing
as a free lunch (if it can be written off as a legitimate expense, then the lunch is
being subsidised by non-lunching taxpayers6), benefits in kind are not just a
matter of contractual arrangement, but have a public, and hence a political,
dimension. One important question is, how ought such benefits in kind to be
treated for tax purposes when in the hands of the employee?
Taxing Fringe Benefits
There are a variety of options. These may essentially be distinguished according to
whether the value of the benefit is to be determined as a matter of demand or a
matter of supply. As to the former, the value would be what it would cost the
taxpayer to buy (either new or second-hand) on the open market. As to the latter,
the choice lies between the full and the net or marginal cost of the supply of the
benefit. One obvious difficulty with the former is that it is not readily possible to
value some perks (eg living accommodation) at their open market value. Tax law
distinguishes three groups of fringe benefit. By virtue of
ss
141
-
146 of the
Income and Corporation Taxes Act 1988 (ICTA), a number of fringe benefits such
as living accommodation, travel vouchers and credit cards are taxable benefits to
all employees; although there are variations, the basis on which the emolument is
valued is the actual cost incurred in their supply. Second, by
ss
153-168 of
ICTA, all benefits that are provided by reason of their employment to directors and
to those until recently called ‘higher paid
employee^,'^
are taxed on the basis of
the cost of their supply (though what precisely constitutes ‘cost’ in these cases was
the point in issue in
Pepper
v
Hart),
except notably in the case of company cars,
petrol and mobile phones where the level of emolument is specified in annually
updated statutory tables. The benefits need not themselves be paid for by the
employer, though if they are there is an irrebuttable presumption that they are
provided by reason of the taxpayer’s employment.8 These sections catch such
benefits as the use of the employer’s assets, company cars and petrol, benefits
ancillary to the use of living accommodation, beneficial loan arrangements,
scholarship schemes, and shares. The principle is to tax all benefits, other than
those that are excluded or are charged elsewhere, that are provided, by reason of
the taxpayer’s employment, to the employee or her family. Finally, even if a
benefit is not caught by the statutory provisions, it may fall under the common law
rule that a benefit that is convertible into money or money’s worth is a taxable
emolument according to its second-hand value.9
~ ~ ~~ ~ ~
6
A
striking example of the implications of the fact that one taxpayer’s avoidance scheme is another
taxpayer’s tax increase can be seen in
Moodie
v
IRC
[1993] 2 All
ER
49. Here the House adopted the
later of two apparently conflicting decisions of its own
to
hold invalid for tax purposes a self-cancelling
avoidance scheme, Lord Templeman remarking (p 55e) that this would restore ‘justice between
individual taxpayers and
the
general body of taxpayers.
’
7
The threshold of the ‘higher paid’ employee is f8,500 (which is to be determined initially by assuming
that the taxpayer is a higher paid employee and applying the appropriate statutory rules and without
making allowance for any expense deductions). It is the government’s clear intention that all fringe
benefits should be brought within the charge
to
tax
irrespective of the taxpayer’s salary; see [1989]
STC 336.
8
ICTA,
s
168(3) (unless the employer is an individual and the benefits can be shown to have been
provided in the normal course of his domestic, personal or family relationships).
9
Tennant
v
Smith
[1892]
AC
150,
Williams
v
Rogerson
[1961]
1
All
ER
358.
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